The dynamics of green innovation and environmental policy stringency in energy transition investments

This paper investigates the impact of Green Innovation (GI) and Environmental Policy Stringency (EPS) on Energy Transition Investments (ETIs) across 16 countries from 2004 to 2019. Using a nonparametric local linear dummy variable estimation (LLDVE) method, we analyze how technological innovation and policy environments influence green investments while controlling for economic factors such as real GDP and population. This approach captures non-linear relationships and time-varying effects between variables, providing a nuanced perspective on their interplay. The study offers a novel contribution by investigating the combined effects of GI and EPS on ETIs, a relatively underexplored area in the literature. Our findings reveal a positive and stable relationship between EPS and ETIs, with a notable increase after 2012, suggesting the success of environmental policy design. In contrast, the impact of GI on ETIs exhibits a time-varying relationship, with a significant decline after 2014, likely due to the maturity of certain green technologies. This research extends the application of Endogenous Growth Theory and Diffusion of Innovation Theory by demonstrating how national investments in GI drive technological advancements and support energy transitions. Furthermore, it emphasizes the importance of a balanced approach, where well-designed policies complement innovation to accelerate the global energy transition. These insights offer valuable implications for policymakers and investors aiming to achieve global sustainability targets.