Does exports diversification and environmental innovation achieve carbon neutrality target of OECD economies?

ABSTRACT

Achieving carbon neutrality is of great importance to many developed and developing countries around the globe. Global warming is one of the leading issues caused by human activities. To cope with environmental challenges, and to achieve carbon neutrality, fiscal decentralization and eco-innovation are promising strategies that can also enable countries and local governments to pursue visible economic growth. This study investigates the role of export diversification, environment-related technological innovation, and fiscal decentralization in effectively achieving carbon neutrality target for 37 OECD (Organization for Economic Cooperation and Development) economies from 1970 to 2019. For empirical analysis, it uses second-generation tests that deal with heterogeneity and cross-sectional dependence issues. To this end, this study employs updated cointegration techniques. The augmented mean group (AMG) approach is used to examine the long-run dynamic equilibrium among the variables of interest. The findings indicate that export diversification and fiscal decentralization followed by GDP growth affect carbon dioxide emission positively. While renewable energy consumption and environment-related technological innovation assure environmental improvement. Additionally, short-run causal and unidirectional links are found running from fiscal decentralization, export diversification, and environment-related technological innovation to carbon emissions. Our findings suggest that OECD partner countries need to be careful while devising fiscal decentralization and export diversification policies. They should increase the share of renewable energy, and expand environment-related technological innovation. Such strategic efforts would direct the OECD countries to meet the climate change mitigation agenda of sustainable development goals.