Effects of domestic material consumption, renewable energy, and financial development on environmental sustainability in the EU-28: Evidence from a GMM panel-VAR

Abstract

Despite the high commitments of the European Union (EU) member countries toward achieving the sustainable development goals (SDGs), on average, the region has reportedly under performed in the area of ensuring sustainable production and consumption. This paper uses the Generalized Method of Moments (GMM) estimation of panel vector autoregressive (PVAR) with impulse response functions (IMFs) to assess the effects of domestic material consumption, renewable energy, financial development, and greenhouse gas emissions on environmental quality in the EU-28 countries based on the panel data for the period 2000:Q1e2017:Q4. The empirical results reveal that the shocks to domestic material consumption, renewable energy, economic growth, financial development, and greenhouse gas emissions affect the drives towards a sustainable environment. Particularly, the shocks to renewable energy and financial development improve environmental quality, while the shocks to domestic material consumption and greenhouse gas emission deteriorate environment quality. The shock to economic growth improves environmental quality up to the 4th horizon after which it begins to deteriorate environment quality. Furthermore, the panel causality results indicate bidirectional causality between greenhouse gas emissions and the rest of the variables except renewable energy, which is unidirectional. The causality between economic growth and renewable energy, economic growth and financial development, and financial development and renewable energy has a feedback effect while a unidirectional causality flows from economic growth to domestic material consumption. These findings have implications for sustainable production and consumption.