GREEN FINANCE AND ENVIRONMENTAL OUTCOMES: EVIDENCE FROM EU COUNTRIES

Abstract

The urgent challenge of climate change has underscored the importance of mobilizing financial resources toward sustainable development, with green finance emerging as a critical mechanism for channeling investment into renewable energy and ecological protection. This study investigates the role of green finance in mitigating environmental degradation across 27 European Union countries from 2018 to 2023. Drawing on environmental economics, sustainable finance theory, and the diffusion of innovation framework, the research evaluates the impact of four key instruments, green bonds, green loans, renewable energy subsidies, and project implementation, while controlling for economic development. Employing both fixed-effects regression and dynamic generalized method of moments estimation, the findings demonstrate that renewable energy subsidies and the number of green projects are significantly associated with reductions in carbon dioxide emissions, confirming their effectiveness in driving measurable environmental outcomes. Economic development also exerts a negative influence on emissions, supporting the Environmental Kuznets Curve hypothesis. In contrast, green bonds exhibit only marginal significance, reflecting long gestation periods before environmental benefits materialize, while green loans unexpectedly show a positive relationship with emissions, raising concerns about misallocation and greenwashing. The results highlight that the effectiveness of green finance depends not solely on the scale of investment but on governance quality, oversight mechanisms, and the translation of financial flows into tangible renewable infrastructure. The study concludes that while green finance holds considerable promise, its impact on environmental degradation is uneven, requiring stronger monitoring frameworks, targeted subsidies, and verifiable project outcomes to ensure meaningful contributions to climate objectives and sustainable growth.

Keywords: Green Finance, Environmental Degradation, Renewable Energy Subsidies, European Union