Sustainable Development and Climate Finance in Shaping CO2 Emissions: A Heterogeneous Panel Analysis Across Economies

This study investigates how climate finance influences CO2 emissions, emphasizing the pivotal role of sustainable development as a transmission pathway. To account for heterogeneity in economic level, policy frameworks, energy dependence, and environmental governance, the study uses a full sample of 73 countries from 1990 to 2023, and differentiates between 37 OECD and 36 non-OECD countries. Empirical results of both Common Correlated Effects Pooled (CCEP) and Common Correlated Effects Mean Group (CCEMG) estimators show that both climate finance and sustainable development significantly reduce CO2 emissions. This result is confirmed for both OECD and non-OECD countries. Additionally, renewable energy enhances environmental quality since it significantly lowers CO2 emissions, while total energy consumption increases it. Finally, the results confirm the Environmental Kuznets Curve (EKC) theory since GDPG increases CO2 emissions while the GDPG squared decreases it. These findings offer actionable insights for policymakers aiming to enhance the effectiveness of climate finance in fostering sustainable, low-carbon development.