Three essays on policy uncertainty, institutions, and decarbonization

Abstract

Accelerating the energy transition, particularly in the renewable energy sector, is a critical global challenge as climate change progresses and economic policy uncertainty increases in both developed and developing economies. The purpose of this study is to examine the relationships among economic policy uncertainty (EPU), institutional quality, renewable energy innovation, and renewable energy investment, and to assess their effects on environmental outcomes across a balanced panel of 31 countries from 1998 to 2023. The study consists of three empirical essays employing GMM, MMQR, and FMOLS to examine these relationships. The first essay shows that EPU is negatively associated with innovation in renewable energy; the findings further reveal that institutional quality intensifies, rather than weakens, the negative association between economic policy uncertainty and renewable energy innovation, and these negative effects are more pronounced in economies with stronger institutional quality and higher levels of economic growth. The second essay shows that the higher the EPU, the lower the CO2 emissions, but this appears to be due not to structural decarbonization but to a decrease in economic activity. The findings also indicate that this emission-reducing effect is much smaller in developing countries with low institutional quality, and weak governance itself leads to more environmental degradation. The findings of the third essay show that renewable energy investment is negatively associated with CO2 emissions. In contrast, renewable energy innovation is positively associated with CO2 emissions in both the short-run and long-run estimations, suggesting that the expected environmental benefits of renewable energy innovation have not yet been realized over the study period. Democratic governance is negatively associated with CO2 emissions in the long run. The results indicate that energy investment and innovation are not the only prerequisites for advancing decarbonization; stable policy environments and strong institutional structures are also important enablers. The study presents a novel analytical framework that integrates energy economics, institutional theory, and environmental policy, and provides empirical findings to support policy recommendations for governments aiming to achieve both clean energy transitions and long-term environmental sustainability across heterogeneous economic and institutional contexts.