Capital Formation, Green Innovation, Renewable Energy Consumption and Environmental Quality: Do Environmental Regulations Matter?

The world economy continues to witness a steady rise in carbon emissions, which makes it challenging to fulfill the terms of the Paris agreement on reducing greenhouse gas emissions. In this context, countries worldwide enact environmental regulations to curtail environmental pollution to promote sustainable development. However, the importance of environmental regulations has not been fully validated in the previous literature. In addition, the concurrent roles of capital formation, green innovation, and renewability cannot be overlooked. Against this backdrop, this study selects data from G7 countries from 1994 to 2019 to explore the effect of environmental regulations, capital formation, green innovation, and renewable energy consumption on CO₂ emissions. In order to achieve the above research objectives, we employ the Method of Moments Quantile Regression (MM-QR) for empirical analysis. The results reveal that capital formation significantly enhances environmental quality by reducing CO₂ emissions across all quantiles (10th-90th). Environmental regulations show a significant and negative impact on CO₂ emission mainly at the middle and higher emissions quantiles, while the effect is insignificant at lower quantiles (10th). Moreover, green innovation and renewable energy consumption mitigate CO₂ emissions across all quantiles (10th-90th), while economic growth deteriorates environmental quality in G7 countries. The panel granger causality results indicate the unidirectional causality running from capital formation, environmental regulations, and renewable energy towards CO₂ emissions, which implies that any policy related to these variables will Granger cause CO₂ emissions but not the other way round. Based on the findings, important policy implications are proposed to promote sustainable development in G7 countries.