Exploring the nexus between renewable energy consumption, ores and metals exports, and foreign direct investment: Evidence from Iceland

Iceland stands at the forefront of renewable energy utilization and green metal production, showcasing how clean energy can support sustainable industrial growth while aligning economic and environmental goals. This study examines the asymmetric and dynamic relationships among Renewable Energy Consumption (REC), Ores and Metals Exports (OME), Foreign Direct Investment (FDI), and Greenhouse Gas Emissions (GHG) in Iceland over the period 1990–2023. Using a balanced dataset and a mix of econometric techniques—including the Toda-Yamamoto Granger causality test, Autoregressive Distributed Lag (ARDL) cointegration, and Nonlinear ARDL (NARDL) modelling—we investigate both linear and asymmetric effects across short- and long-term horizons. The Toda-Yamamoto results indicate significant Granger-predictive flows from REC and FDI to OME, and from FDI to REC. The long-run ARDL estimates reveal that a 1 percentage point increase in renewable energy consumption (REC, %) reduces greenhouse gas (GHG) emissions (tons per capita) by 0.417 tons of CO 2 equivalent. Conversely, ores and metals exports (OME, % of merchandise exports) and foreign direct investment (FDI, % of GDP) exert a positive effect on emissions, with a 1 percentage point increase in OME and FDI raising GHG emissions by 0.347 and 0.093 tons of CO 2 equivalent per capita, respectively. Complementing these findings, the NARDL analysis reveals important short-run asymmetries. Notably, positive shocks in REC are significantly and positively associated with OME in the short run, while negative shocks are statistically insignificant, indicating an asymmetric short-run response. For the OME–GHG nexus, negative changes in GHG are associated with a short-run reduction in OME, highlighting the vulnerability of export performance to emission contractions. In the case of FDI, negative shocks exert a more consistent and significant effect on OME across multiple lags, suggesting that declining foreign investment may hinder clean production capabilities. Where bounds test results fall in the inconclusive zone, long-run claims are confined to specifications with well-established error correction, and emphasis is placed on the confirmed short-run asymmetric dynamics. The novelty of this work lies in explicitly examining these asymmetric and dynamic interactions among REC, OME, FDI, and GHG emissions in Iceland, which complements and extends prior studies that mostly focus on symmetric or linear relationships. Overall, the findings underscore the need for asymmetric, targeted policy responses to support Iceland's transition toward sustainable growth. By leveraging renewable energy and strategic foreign investment, Iceland can enhance its export potential while minimizing environmental trade-offs, providing both theoretical insights and practical implications for green industrial development.