Threshold effects of income and governance on green transition and sustainable economic development : a dynamic panel analysis

Abstract

Despite the increase in international efforts towards green transition, the empirical relationship between green innovation, renewable energy use, energy efficiency, and sustainable economic development continues to be debated. The existing literature examines green transitions narrowly, relying on environmental indicators like carbon emissions and ecological footprint. Most studies follow a single-strategy approach when investigating green transition-sustainability outcomes, without exploring how different economic structures shape those outcomes. However, there is a lack of understanding of how the green strategies build sustainable wealth across structurally diverse economies, thus leaving a gap in the literature. This study investigates the impact of green innovation, renewable energy use and energy efficiency on the sustainable economic development within a panel of 61 countries from 2010 to 2021 using adjusted net savings as the wealth-based indicator. The study uses a baseline two-step System GMM estimator to capture the unconditional average effects of the variables. The study further adopts the dynamic panel threshold framework of Seo and Shin (2016) to estimate the income and governance quality thresholds. The baseline results indicate that green innovation and renewable energy are positively related with adjusted net savings, while higher energy intensity is negatively linked to the adjusted net savings, though none of these coefficients attains statistical significance in the pooled model. The income threshold model identifies a threshold at approximately USD 45,154 GDP per capita (constant 2021 PPP) below which green innovation and renewable energy significantly reduce adjusted net savings while energy-intensive production supports genuine wealth accumulation. Above the threshold, all three relationships reverse, with green innovation and renewable energy generating positive and significant contributions to sustainable wealth accumulation while energy inefficiency becomes a significant constraint. The governance quality threshold model finds a threshold of 0.775 units on the World Governance Indicators composite scale, which yields coefficient reversals for green innovation and renewables that are larger in magnitude than the corresponding coefficient reversals in the income threshold model. Energy efficiency does not yield statistically significant results for governance regimes. Results from robustness checks based on development group subsamples and alternative governance indicators largely support the main findings. The research uncovers three insights. First, the analysis of all three green transition variables within the income and governance thresholds is novel. Second, the findings indicate that governance quality constitutes a stronger determinant than income level in shaping the sustainability returns to green innovation and renewable energy. Third, adjusted net savings offers richer and more policy-relevant insights than conventional environmental indicators for threshold-based analyses, with direct implications for designing differentiated climate finance strategies and sustainability policies across different country contexts.