The Impact of Renewable Energy Use, Financial Development, and Industrialization on CO 2 Emissions in Middle-Income Economies—A GMM-PVAR Analysis

Middle-income economies contribute significantly to global CO 2 emissions as they pursue economic development, creating an urgent need to understand emission drivers. This article investigates the impact of renewable energy use, financial development, and industrialization on CO 2 emissions in 71 middle-income countries (32 upper-middle income, 39 lower-middle income) between 2002 and 2020. We used the advanced Generalized Method of Moments Panel Vector Autoregression (GMM-PVAR) approach to address endogeneity and reveal complex relationships among the variables. Our findings revealed that renewable energy utilization had no substantial influence on emissions reduction in either upper- or lower-middle-income countries, challenging conventional policy assumptions. Financial development consistently reduces emissions across both income groups (−0.08% and −0.06%, respectively). Industrialization has heterogeneous effects, increasing emissions by 2.03 percent in upper-middle-income countries and with no effect in lower-middle-income countries. Granger causality tests illustrated a bidirectional relationship connecting CO 2 emissions and financial development, whereas no causal link was found between CO 2 emissions and renewable energy use. These findings prove the importance of coordinated policies that strengthen financial systems and sustainable industrial practices.