Drivers of carbon productivity in Europe: the roles of sustainable energy transition, environmental taxation and foreign direct investment

This study investigates the relative impacts of sustainable energy transition, environmental taxation, and foreign direct investment on achieving low-carbon growth in European Union (EU) countries. Carbon productivity is employed as an indicator of the carbon efficiency of economic activity within the broader context of low-carbon growth. In addition to the main explanatory variables sustainable energy transition, environmental taxes, and foreign direct investment trade openness and financial development are incorporated into the analysis as control variables. The study utilizes annual data for EU countries and applies the Augmented Mean Group (AMG) and Common Correlated Effects Mean Group (CCEMG) estimation techniques, which account for cross-sectional dependence and slope heterogeneity across countries. The empirical findings show that sustainable energy transition significantly increases carbon productivity, whereas environmental taxation and trade openness reduce it. The effects of foreign direct investment and financial development are statistically insignificant. The results indicate that sustainable energy transition is positively and consistently associated with carbon productivity, whereas environmental taxation is negatively associated with it and foreign direct investment shows no statistically significant relationship.