Climate finance, innovation, and the low-carbon transition in Portugal: Evidence from a nonlinear ARDL approach

Balancing economic development with environmental sustainability remains a critical challenge for many European economies pursuing low-carbon transitions. Although Portugal has made substantial progress in renewable energy deployment and technological innovation, the environmental impacts of economic growth, urbanization, and trade openness remain complex. They may exhibit asymmetric responses to policy and market shocks. Therefore, this study investigates the asymmetric and dynamic relationships among urbanization (URB), trade openness (TRD), economic growth (EG), renewable energy (RE), innovation (INNO), and carbon dioxide (CO₂) emissions in Portugal using the Nonlinear Autoregressive Distributed Lag (NARDL) framework. Annual time-series data covering the period 1990–2023 were employed to examine both long-run and short-run asymmetries in the environmental effects of these macroeconomic factors. The empirical findings reveal that positive shocks in EG and URB significantly increase CO₂ emissions, whereas increases in RE consumption and INNO substantially reduce environmental degradation. TRD exhibits mixed effects; while trade expansion initially increases emissions through higher production activity, it contributes to long-run emissions reductions through technology diffusion and cleaner trade composition. The results further indicate that negative shocks to RE and INNO have disproportionately adverse environmental consequences, highlighting the fragility of sustainability gains. These findings demonstrate Portugal’s progress in aligning economic development with RE transition and INN-driven climate strategies. The study provides novel evidence on the asymmetric effects of economic and policy shocks on environmental quality. It offers policy recommendations that support the achievement of Sustainable Development Goals (SDGs) 7, 9, 11, and 13.