Geopolitical risk and energy transition: Financial and regional interdependencies in Europe

This study investigates how geopolitical risk influences environmental degradation in 17 European countries between 2000 and 2025, using Lewbel 2SLS, two-step GMM, fixed effects panel threshold model, and spatial econometric techniques. These methods allow the analysis to capture linear, nonlinear, and spatial spillover effects. The results show that geopolitical risks significantly exacerbate environmental degradation, regardless of whether financial development (FinD), financial institutions (FinI), or financial markets (FinM) are considered. The threshold analysis indicates that geopolitical risk begins to significantly affect CO 2 emissions when FinD exceeds 0.832, FinI exceeds 0.845, and FinM exceeds 0.602. For the ecological footprint, the respective thresholds are 0.731, 0.755, and 0.772. The Moran’s I test reveals spatial clustering of environmental degradation in earlier years (2000–2010), while negative values in later years (2015–2025) indicate spatial dispersion, with high-degradation countries neighbouring low-degradation ones. The Spatial Durbin Model confirms both direct and indirect effects of geopolitical risk on environmental degradation. The results show a direct impact of 0.143 (0.018) units on CO 2 emissions (ecological footprint) in the countries experiencing the effect, and a spillover impact of 0.129 (0.010) units on their neighbouring countries. These findings underscore the complex spatial and financial dynamics of environmental degradation and highlight the need for regionally coordinated and financially informed policies to address the environmental consequences of geopolitical instability.