The role of urbanization and land use in advancing EU decarbonization goals – New insights from heterogenous panel models

This study investigates the determinants of CO₂ emissions in the European Union by extending the conventional energy-economy-emissions nexus to include urbanisation and land use, land use change and forestry (LULUCF). While previous studies have examined these dimensions separately, no study has simultaneously integrated both variables alongside energy and economic determinants within a single heterogeneous panel framework for all 27 EU member states. Using panel data from 27 EU Member States for the period 2000–2021, we employ a two-stage instrumental variables (2SIV) estimator with common factors and common correlated effect estimator (CCE) to capture both short- and long-run effects while accounting for heterogeneity and cross-sectional dependence. Our results confirm that energy consumption per capita is positively associated with CO₂ emissions, while the share of renewable energy contribute to emission reductions across all model specifications. The effect of GDP per capita on emissions is heterogeneous across member states, reflecting different stages of economic development and energy transition. Importantly, urbanisation and LULUCF have heterogeneous impacts: urbanisation increases emissions in some Member States while reducing them in others, and LULUCF acts either as a carbon sink or source depending on national land management practices. The findings underline the need for tailored and integrated policy responses that align spatial planning, energy transition and land use governance at the member state level.