Rethinking Factor Inputs in Green Economy Growth: Capital, Labour or AI?

As climate change and resource scarcity intensify, the pursuit of green economic growth has become a central policy priority across Europe. Understanding how different factors, particularly digitalization, institutional adaptation, and technological progress, interact to shape eco-productivity is essential for guiding sustainable transformation. This study explores the evolving dynamics of green economic growth across European countries, emphasizing the importance of technological change, institutional adaptation, and digital integration in driving sustainable development. While the literature has advanced the measurement of eco-productivity, gaps remain in understanding how digital capital interacts with traditional productivity models and environmental efficiency components. This research aims to address these gaps by evaluating green growth trajectories via a combination of entropy-based undesirable composite indicators and total factor productivity change (TFPCH) under both baseline and digital model specifications. Using panel data from 2005-2023, the study applies decomposition techniques to assess technological progress (TECH) and efficiency change (TECCH), complemented by nonparametric tests to determine statistical significance. The results show a general decline in environmental burdens across most EU countries, alongside modest but heterogeneous improvements in green productivity. While the TFPCH indicator remained stable between models, notable divergences emerged in its components: the digital model reported lower TECH values, indicating slower frontier advancement, but higher TECCH values, suggesting stronger catch-up dynamics when digital capital is accounted for. Countries such as Sweden, Finland, and Estonia led in reducing undesirable outputs, whereas others, including Poland, Ireland, and Ukraine, presented persistent challenges in improving relative eco-efficiency. These findings contribute to a deeper understanding of the structural factors underlying green growth and reveal the transformative potential of digitalization when appropriately integrated. The study concludes that while green economic growth is underway in many European regions, its pace and composition vary widely, requiring targeted policy responses.