Impact of green and energy efficiency policies on environmental sustainability: Evidence from dynamic panel threshold model

Abstract

This paper investigates the effectiveness of green and energy efficiency policies in improving environmental quality across a group of 63 countries during the period 2006–2019. To achieve this, the study first develops a set of new green and energy efficiency policy indices (including a global index and sub-indices based on financial, regulatory, and strategic energy efficiency policies) using Sarma's (2008) technique and by utilizing data from the International Energy Agency's Policies database. Second, the study examines the impact of these green and energy efficiency policies on environmental quality, analyzing different types of policies and environmental degradation indicators for lower- and upper-middle-income countries as well as higher-income countries.Empirical results indicate that the dynamic panel threshold model outperforms the linear dynamic static panel threshold model for both groups of countries. Specifically, the findings show that exceeding certain threshold levels of green and energy efficiency policies enhances environmental quality, as demonstrated by reductions in carbon emissions, ecological footprints, and improvements in the load capacity factor. Notably, the results reveal that lower- and upper-middle-income countries have relatively lower threshold values compared to higher-income countries. This suggests that further policies in high-income countries may result in diminishing returns. However, significant “low-hanging fruit” opportunities for low- and middle-income countries were found. Several recommendations are discussed to maximize the benefits of these policies.