The impact of foreign direct investment and renewable energy on carbon emissions in OECD countries: an empirical analysis in the context of the pollution halo hypothesis

This study examines the long-run effects of foreign direct investment (FDI), renewable energy production (RESOUT), gross capital formation (INV), and economic growth (GDP) on carbon dioxide (CO2) emissions in 23 OECD countries over the period 1985-2024 using a panel data framework. The long-run coefficient estimates derived from the Panel Augmented Mean Group (AMG) estimator indicate that FDI exerts a statistically significant negative effect on CO2 emissions at the 10% level. This finding supports the Pollution Halo Hypothesis (PHE), which suggests that foreign direct investment can contribute to improvements in environmental quality, at the stated significance level. RESOUT is found to reduce CO2 emissions, whereas economic growth increases them. Gross capital formation does not exert a statistically significant effect. The empirical framework reveals unidirectional causality running from FDI, GDP, and INV to CO2 emissions, alongside a bidirectional causal relationship between RESOUT and CO2 emissions. Furthermore, these explanatory variables jointly Granger-cause CO2 emissions, establishing a collective causal linkage that is inherent in the model’s structure. Overall, the findings indicate that GDP continues to intensify environmental pressure in OECD countries, while RESOUT and FDI have the potential to improve environmental quality.