Can Financial Development and Renewable Energy Drive Production‐Based and Consumption‐Based Carbon Emissions Reductions in <scp>E7</scp> Economies?

ABSTRACT The growing intensity of climate change calls for a more comprehensive understanding of how energy use and financial systems influence global carbon emissions. So far, existing research and policy efforts have mainly focused on production‐based emissions (PCO2). However, consumption‐based emissions (CCO2) and the moderating role of financial development (FD) in conjunction with renewable energy consumption (REC) remain comparatively less explored. This limited attention creates a clear gap in understanding the full scale and sources of emissions and makes it important to adopt an integrated approach that considers both production and consumption perspectives along with financial dynamics. Against this backdrop, the present study examines the joint impact of renewable energy and financial development on both PCO2 and CCO2. For this purpose, the study gathers the data across top seven emerging economies over the period of 1990 to 2023. The Cross‐Sectionally Augmented Autoregressive Distributed Lag (CS‐ARDL) model was applied to estimate the results. The findings of the study show that renewable energy reduces both types of emissions. However, a stronger effect was observed in the reduction of CCO2. Financial development on its own does not show a consistent or strong impact on emissions' reduction. However, when financial development interacts with renewable energy, it strengthens emission reduction by channeling capital toward green technologies and clean energy projects. These findings provide new empirical insight into how financial structures can transform from drivers of pollution to instruments of sustainability.