Dynamic relationship among environmental regulation, innovation, CO2 emissions, population, and economic growth in OECD countries: A panel investigation

Abstract

Abstract Promoting green innovation and regulating emissions through carbon pricing are the two fundamental driving forces of climate change policies on carbon abatement. However, the existing body of empirical evidence focusing on these inter-linkages is rather meager. Such evidence is also inconclusive in the context of the Organization for Economic Co-operation and Development (OECD) countries. This study, therefore, examines the effects of environmental regulation and innovation on the carbon emission reduction of OECD countries during the period 1999–2014. On the basis of the “stochastic impacts by regression on population, affluence, and technology” (STIRPAT) model, this study also develops a new model called “stochastic impacts by regression on population, affluence, regulation, and technology” (STIRPART) to extend the analysis on the evaluation of factors influencing carbon emissions. In addition, the effects of environmental regulations and environmentally friendly technologies are empirically tested by using panel fixed-effects, random-effects and Generalized Method of Moments (GMM) models with the Driscoll–Kraay corrected robust standard errors that tackle cross-sectional dependence and time and panel fixed effects. Results indicate that a 1% increase in environmentally friendly patent reduces carbon emissions by 0.017%, and a 1% increase in environmental tax revenue per capita reduces carbon emissions by 0.03% for OECD countries. The current contribution aims to optimize market-based instruments, such as patents and carbon pricing, for the implementation of efficient and cost-effective climate change policies.