Green finance as a policy transmission channel for low carbon transition in Europe and Africa and the role of capital allocation efficiency and financial development

Green finance is increasingly used to mobilise capital for low-carbon transition, yet its relationship with renewable-energy outcomes may depend on financial, institutional, and structural conditions that differ across countries. This study examines green finance as a policy transmission channel associated with low-carbon transition in a balanced panel of 25 European and 25 African countries over 2000–2024 (1,250 country-year observations). Low-carbon transition is measured by renewable energy consumption, with renewable electricity output used as an alternative outcome, and capital allocation efficiency, financial development, institutional quality, economic development, and industrial structure are examined alongside green finance. Two-way fixed effects with Driscoll–Kraay standard errors, dynamic System GMM, panel threshold regression, and country-grouped XGBoost with SHAP interpretation are employed. Green finance is positively and significantly associated with low-carbon transition in the fixed-effects and System GMM models, in both institutional-quality threshold regimes, and under the alternative outcome. Capital allocation efficiency is positive but insignificant, whereas financial development is positive and significant only in the baseline and dynamic models. Institutional quality conditions the green finance relationship nonlinearly: interaction models indicate positive moderation, but the threshold model shows a smaller green-finance coefficient above the estimated threshold. Economic development and industrial structure are specification-sensitive, and slope-homogeneity tests reveal significant cross-country heterogeneity. Country-grouped XGBoost attains an out-of-fold R² of 0.509, indicating meaningful but incomplete generalisability to unseen countries. Green finance therefore shows the most consistent association with renewable-energy-based transition, supporting context-sensitive sustainable-finance policies across European and African economies. Clinical trial number Not applicable.