Financial, innovation and fiscal drivers of ecological efficiency across Western and Eastern European Union member states

Abstract This study quantifies how green finance, financial development, green technology innovation efficiency and environmental taxes shape ecological efficiency in the European Union, and tests whether these effects differ between Western and Eastern member states. The sample covers all 27 member states over 2000–2023, giving 648 country-year observations. Ecological efficiency is measured by a dynamic slack-based measure model that treats reused water and waste incinerated for energy recovery as carry-overs, and green technology innovation efficiency by a slack-based measure model. The second-stage model regresses the logarithm of ecological efficiency on the logarithms of the four drivers, controlling for trade openness, industrial structure, human development and urbanization, and is estimated by feasible generalized least squares; robustness is assessed by system generalized method of moments, censored and bootstrapped truncated regressions, estimators robust to cross-sectional dependence, and specifications without controls. Mean ecological efficiency is 0.790, with Luxembourg, Germany and Italy highest and Bulgaria, Slovakia and Hungary lowest, and Eastern scores remain persistently below Western scores. Green finance, financial development and environmental taxes raise ecological efficiency in the full sample and in the West, whereas in the East these effects are statistically indistinguishable from zero and green technology innovation efficiency is negative. Policy should therefore be differentiated: the West should scale green bond markets and raise carbon prices, while the East should redirect cohesion funds into green investment banks, phase environmental taxes with revenue recycling, and finance technology transfer and green skills so that innovation inputs are converted into measurable efficiency gains.