In the 1990s, Central European countries underwent a significant economic transformation following the collapse of the Soviet Union and the end of communist regimes. These countries transitioned from centrally planned economies to market-oriented systems, implementing various reforms such as privatization, liberalization, and deregulation to stimulate economic growth, attract foreign investment, and integrate into the global economy. There was notable progress in financial development. These countries implemented reforms to establish modern financial systems, including the privatization of state-owned banks, the development of capital markets, and the enhancement of regulatory frameworks, which contributed to the growth of the banking sector, increased access to financial services, and facilitated investment and economic growth. Currently, Central European countries are experiencing a significant digitalization process. There is a growing adoption of digital technologies across various sectors, including e-commerce, digital government services, and digital infrastructure development, aiming to enhance efficiency, innovation, and connectivity. It should be added that nowadays the new media environment, which has a prevalence of digital technologies, significantly influences corporate green technology innovation, especially among heavily polluting industries, by motivating enterprises to adhere to stakeholder demands and enhance their green technological advancements, according to a study by Li et al. [1
]. Moreover, Europe is entering a phase of both climate neutrality and digital supremacy. An important aspect in this regard is the increase in the consumption of energy from renewable sources. The objective is to position the European industry as a frontrunner in this era of transition.
The research goal of this study is to examine the relationship between environmental quality and digitalization, renewable energy consumption, financial development, and economic growth in Central European countries. Data spanning from 1995 to 2019 were utilized, focusing on eleven Central European countries, namely Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia. The independent variable was CO2 emissions per capita, while the independent variables encompassed the degree of digitalization, renewable energy consumption as a share of total final energy consumption, GDP per capita, and the Financial Development Index. To achieve this research goal, the methodology includes several steps. Firstly, cross-section dependence tests and slope homogeneity tests are conducted to investigate the potential cross-sectional dependence among the variables and assess the equality of the slopes. Secondly, the unit root and cointegration tests are employed to analyze the stationarity properties of the variables and investigate their long-term equilibrium relationship. Finally, the estimation of long-term effects and causality tests are conducted to assess the magnitude and significance of the established relationships and explore the direction of causality.
The intricate interplay among renewable energy consumption, digitalization, and financial development across diverse national contexts, as unfolded in the present research, elucidates crucial insights into their collective and individual impacts on environmental quality. In nations like the Czech Republic, Hungary, Latvia, and Slovakia, where renewable energy consumption and digitalization have demonstrated substantial potential in mitigating CO2 emissions and enhancing environmental quality, respectively, the research underscores the pivotal role of embracing technological and digital advancements. Simultaneously, the variegated influence of financial development—being both a conduit for enhancing environmental quality in contexts like Lithuania and Latvia and a potential detractor in nations such as Bulgaria, Croatia, Estonia, and Slovenia—emphasizes the necessity to scrutinize and navigate the economic, policy, and regulatory frameworks judiciously. This research, while illuminating the multifaceted relationships among the explored variables, stands instrumental in guiding policy making and strategic development aimed at environmental sustainability. It has the potential to fortify strategic decision making, assist in structuring more efficacious policies, and inspire further research that might delve deeper into the nuanced mechanisms through which digitalization and financial development can be harnessed to optimize the environmental impacts of renewable energy consumption, thereby propelling nations towards their sustainability objectives.
This paper follows a structured outline. It begins with an introduction, providing an overview and stating the research objectives. The literature review section delves into the existing research on the connection between digitalization, renewable energy consumption, and environmental quality, as well as the relationship between financial development and environmental degradation, identifying gaps in the knowledge. The methodology section outlines the data collection process, the model employed, and the empirical procedures utilized in the analysis. The results and discussion section presents the findings, analyzes their implications, and compares them to prior research. Finally, the paper concludes with a summary of the main findings, potential policy recommendations, and suggestions for future research.
4. Results and Discussion
In this section of the research, empirical findings regarding the impact of digitalization, financial development, and renewable energy consumption on environmental quality in Central European countries are presented. Table 2
presents the descriptive statistics and correlation analysis of the variables utilized in the research.
The study outcomes underscore a discernible positive connection between environmental quality and economic growth, financial development, and digitalization. Fortunately, the data reveal a tenuous positive correlation between carbon dioxide emissions (CO2) and digitalization (DIG), represented by a correlation coefficient of 0.0743. This suggests that despite there being a mild concurrent increase in both parameters, the relationship they share is relatively weak, indicating that the rise in digitalization does not significantly contribute to an upswing in CO2 emissions. Optimistically, an inverse relationship was observed between renewable energy consumption and CO2 emissions, fostering hope for a greener, sustainable future wherein an augmentation in renewable energy usage might potentially curb CO2 emissions. The strongest relationship within the examined parameters exists between digitalization and economic growth, boasting a substantial positive correlation coefficient of 0.8531. This significant figure intimates that as digitalization proliferates, there tends to be a concurrent surge in economic growth, showcasing a robust synergy between the advancement in digital technology and economic prosperity. This relationship suggests that fostering digitalization could potentially be a catalyst for stimulating economic growth.
The results from the cross-sectional dependence tests, as indicated in Table 3
, provide strong evidence of cross-sectional dependence among the variables. All four tests (Breush-Pagan LM, Pesaran scaled LM, Bias-corrected scaled LM, and Pesaran CD) display highly significant results at the 1% level. These findings suggest that the variables are interrelated and influenced by common factors or spatial dependencies. It is imperative to account for the presence of cross-sectional dependence when analyzing or modeling these variables to ensure accurate and robust results.
In the conducted research, the Blomquist and Westerlund slope homogeneity test, a pivotal statistical tool in discerning the nature of relationships between variables in a model, was employed, with the findings illustrated in Table 4
. A crucial result from this test is the rejection of the null hypothesis (H0
), which posited the presence of slope homogeneity within the model. The negation of this hypothesis thereby signals a significant incidence of slope heterogeneity in the developed model. This heterogeneity implies that the relationships between the variables are not uniform, with different variables potentially having varying degrees of impact and interactions with each other. Consequently, it becomes imperative to integrate this insight into the subsequent analyses.
presents the results of the CADF (Cross-sectional Augmented Dickey–Fuller) and CIPS (Cross-sectional Im, Pesaran, and Shin) unit root tests. The test results indicate that all variables are non-stationary, as evidenced by the highly significant CADF test statistics. After taking the first difference, all variables become stationary, as indicated by the highly significant CADF and CIPS tests statistics for the first difference. These results suggest that differencing the variables can eliminate non-stationarity and help establish stationary time series, which are important for further analysis and modeling.
presents the results of the Westerlund–Edgerton LM Bootstrap [44
] cointegration test. Given the presence of cross-section dependency between the series, it is important to consider the Bootstrap-p
value. In the context of the model developed in this study, since the Bootstrap-p
value is greater than 0.05, the null hypothesis (H0
) of the Westerlund–Edgerton LM Bootstrap test is accepted. These findings indicate that the variables exhibit a co-movement in the long run, suggesting the presence of a cointegration relationship among them.
provides an analysis of the cointegration direction and coefficient estimation of the model using the AMG estimator. The analysis of the panel data reveals a statistically significant negative relationship between digitalization, renewable energy consumption, and carbon emissions, at a significant level of p
< 0.01. This finding elucidates that advancements in digitalization and an uptick in renewable energy consumption reciprocally foster a positive influence on environmental quality in Central European countries. This can potentially signify a promising transition towards a more sustainable paradigm, wherein technological progression and renewable energy harnessing work synergistically to curb carbon emissions. Our findings align with similar conclusions found in studies on European countries. Haller et al. [9
] found that the volume of greenhouse gas emissions is significantly impacted by digitalization and renewable energy consumption. The papers by Ha et al. [10
], Thanh et al. [12
], and Martínez et al. [13
] collectively support the notion that digitalization has positive effects on various aspects of sustainability within the European Union countries.
Furthermore, the study establishes a positive relationship between economic growth and carbon emissions in the Central European region. Specifically, an increase in GDP per capita is associated with higher carbon emissions per capita. These findings are consistent with previous research, such as Baloch et al. [49
] and Majeed and Mazhar [50
], while contrasting with the findings of Khan et al. [28
]. Similarly, the panel results indicate that financial development does not significantly impact environmental quality (p
> 0.05). Overall, the findings of this study support the notion that digitalization and renewable energy consumption contribute positively to environmental quality, while economic growth is associated with increased carbon emissions. Moreover, the study suggests that financial development does not play a significant role in shaping the environmental quality, in line with the research conducted by Shahbaz et al. [51
]. This is surprising, given that previous results discussed by Al-Mulali et al. [24
] indicated a significant relationship between financial development and CO2
emissions in European countries.
presents the results of the long-term AMG estimation, including the estimated coefficients, standard errors, and probabilities associated with the variables (p
-value). In the context of Central European countries such as the Czech Republic, Hungary, Latvia, and Slovakia, digitalization plays a mediating role in the relationship between renewable energy consumption and environmental quality, as indicated by the observed statistical relationships. On the one hand, a negative and significant relationship is identified between renewable energy consumption and CO2
emissions, signaling that an increase in renewable energy usage correlates with a decline in CO2
emissions. Concurrently, digitalization is associated positively with environmental quality, attributed to its capability to augment resource efficiency and foster sustainable innovation by enabling meticulous resource management, optimization, and the cultivation of eco-friendly products, services, and business models. Therefore, in this context, digitalization acts as a mediator that not only directly improves environmental quality but also potentially enhances the impact of renewable energy consumption on environmental outcomes by facilitating more efficient and innovative uses of renewable energy, although a further detailed study would be necessary to fully elucidate this mediating role.
In this context, our finding bears similarity to the results discovered by other scholars, as mentioned above. Haller et al. [9
] discerned a significant impact of digitalization and renewable energy consumption on reducing the volume of greenhouse gas emissions in European countries. Likewise, Ha et al. [10
] unearthed a relationship between digitalization and enhanced environmental performance in 25 European countries, with digital skills, business digitization, and digital public services particularly boosting environmental performance. However, it is worthy to note the nuanced complexity in this subject, as seen in Kuzior et al.’s [11
] study, which concluded that digitalization’s direct impact on the environment (greenhouse gas emissions) in the European Union countries was neither statistically significant nor noticeable, even with a 1 to 4-year delay, thus emphasizing the multifaceted and diverse implications of digitalization on environmental outcomes across varied contexts and study parameters. Our findings address this issue in countries such as Bulgaria, Croatia, Estonia, Lithuania, Poland, Romania, and Slovenia, where neither renewable energy consumption nor digitalization was found to have a significant impact on environmental quality, highlighting the variable impacts and relationships across different regional contexts.
In Central European countries, the role of financial development as a mediator in the relationship between renewable energy consumption and environmental quality reveals varied impacts across different nations. In the context of Lithuania and Latvia, an increase in financial development exhibits a positive influence on environmental quality, signaling a potential mediating effect where financial development not only directly impacts environmental quality but may also amplify the positive effects of renewable energy consumption on the environment by facilitating investments in renewable energy projects, promoting energy efficiency, and supporting sustainable initiatives. These mechanisms are congruent with the findings of Afzal et al. [37
], who, in their study on green finance and sustainable development across Europe, posited a positive relationship between financial development and environmental quality. Khan et al. [28
] also substantiate the relationship between financial development and renewable energy consumption within the European context, further affirming the aforementioned associations. This suggests that within Europe, financial development may potentially play a pivotal role in steering or influencing renewable energy consumption patterns, reinforcing the confluence between financial systems and sustainable energy initiatives. Furthermore, in this nexus, financial institutions emerge as pivotal actors, with the capacity to further fortify environmental quality by enforcing and promulgating environmental standards and policies. Through strategic investments, sagacious lending practices, and active shareholder activism, these institutions can serve to both directly and indirectly enhance the environmental benefits stemming from increased renewable energy consumption.
However, in countries like Bulgaria, Croatia, Estonia, and Slovenia, an expansion in financial development is associated with an uptick in carbon emissions, indicating a contrasting mediation effect. The aforementioned complexity underscores the necessity of a nuanced understanding of the intermediary role of financial development, particularly considering that, as revealed by the analysis, economic growth also plays a complex role in affecting environmental quality. Specifically, in Bulgaria, Hungary, Latvia, Lithuania, and Slovenia, an increase in economic growth correlates with a deterioration in environmental quality, emphasizing the importance of dissecting and understanding the various direct and indirect paths through which financial development and economic growth influence, and are influenced by, the utilization of renewable energy and the broader sustainable development context within each nation.
The intricate relationships among renewable energy consumption, carbon emissions, economic growth, digitalization, and financial development are corroborated by the results of the Dumitrescu–Hurlin panel bootstrap causality test, as depicted in Table 9
. The findings disclose a bidirectional causality relationship between renewable energy consumption and carbon emissions, implying that alterations in one can influence the other and vice versa. Furthermore, a similar reciprocal causality is observed among economic growth, digitalization, financial development, and carbon emissions, revealing an interwoven and mutually impactful association among these variables, thereby underscoring the complexity of the relationships in the examined contexts. The detected bidirectional causality implies a nuanced and complex scenario for economic policy making. Therefore, meticulous attention to policy frameworks is paramount to ensure that interventions in one area do not inadvertently foster negative outcomes in another. Moreover, the mutual influence between economic growth, digitalization, and financial development in relation to carbon emissions suggests that policies in these areas must be formulated with a holistic, integrated approach.
5. Conclusions and Policy Recommendations
Understanding the interplay between digitalization, renewable energy consumption, financial development, and economic growth is essential for formulating effective strategies to promote sustainable development in Central European countries. Therefore, the aim of this study is to investigate these interactions, with a particular focus on their implications for environmental quality. The analysis utilizes annual data from 11 Central European countries (Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia) covering 1995 to 2019.
The study unfolds pivotal insights into the relationship between renewable energy consumption, digitalization, and environmental quality within a selection of Central and Eastern European countries. A discernible, negative correlation between renewable energy consumption and CO2 emissions was empirically established in the Czech Republic, Hungary, Latvia, and Slovakia, while concurrently, a positive association between digitalization and environmental quality was also identified within the same nations. Digitalization emerges as a mediating factor, which not only intrinsically ameliorates environmental quality but potentially amplifies the positive repercussions of renewable energy consumption on environmental outcomes by enabling more efficacious and innovative applications of renewable energy. The need for further comprehensive studies is highlighted to thoroughly decipher the nuanced dynamics of this mediating role. Intriguingly, a stark contrast is noted in the context of Bulgaria, Croatia, Estonia, Lithuania, Poland, Romania, and Slovenia, where neither renewable energy consumption nor digitalization was found to exert a significant impact on environmental quality. This disparity in outcomes is potentially ascribed to a myriad of influences, such as divergent economic structures, environmental policies, technological infrastructures, and socio-cultural dimensions, underlining the intrinsic complexity and multifaceted nature of these relationships.
Diving deeper into the dynamics of financial development as a mediator between renewable energy consumption and environmental quality uncovers a spectrum of impacts thereby illustrating a complex and varied tapestry of outcomes across distinct nations. Particularly in Lithuania and Latvia, the augmentation of financial development seems to cast a beneficial glow upon environmental quality. It becomes apparent that financial development does not just directly influence environmental quality but could potentially serve to magnify the positive reverberations of renewable energy consumption on the environment by facilitating investments in renewable energy projects, which underpin a cleaner, more sustainable trajectory. This poses as a fascinating juxtaposition to the scenarios unraveling in countries like Bulgaria, Croatia, Estonia, and Slovenia, where a swelling in financial development is paradoxically tethered to a rise in carbon emissions, showcasing a contrasting and somewhat discordant mediating effect. This dichotomy underscores the imperative for a keen understanding of the diverse socio-economic and policy contexts that contour the pathways through which renewable energy consumption, digitalization, and financial development intersect and weave impacts upon environmental quality across different nations.
Furthermore, the findings highlight that the relationship between economic growth and environmental quality varies among countries. Specifically, in Bulgaria, Hungary, Latvia, Lithuania, and Slovenia, economic growth has a negative impact on environmental quality. However, for Lithuania and Latvia, an increase in economic growth is associated with improved environmental quality. Additionally, the impact of financial development on environmental quality also differs across countries. In Bulgaria, Croatia, Estonia, and Slovenia, an increase in financial development is linked to higher carbon emissions. In contrast, for Lithuania and Latvia, an increase in financial development positively influences environmental quality. These divergent results underscore the country-specific nature of the relationship between economic growth, financial development, and environmental quality.
The obtained results provide a basis for formulating the following policy recommendation. Central European countries, especially Bulgaria, Croatia, Estonia, Lithuania, Poland, Romania, and Slovenia, should prioritize fostering a sustainable digitalization strategy. A comprehensive strategy should encompass encouraging the adoption of digital technologies that support environmental preservation, such as energy-efficient infrastructure and digital solutions for waste management and resource optimization. Additionally, strengthening financial support for green investments is crucial in accelerating the transition to a low-carbon economy. Bulgaria, Croatia, Estonia, and Slovenia should establish dedicated funds, provide tax incentives, and offer grants to incentivize investments in renewable energy projects, energy-efficient technologies, and sustainable infrastructure. By facilitating access to financial resources and creating an enabling investment environment, governments can drive the adoption of environmentally friendly practices and technologies. Also, collaboration and capacity building are key focus areas for Central European countries. Establishing regional partnerships, organizing joint research projects, and creating platforms for knowledge sharing can expand the adoption of sustainable practices across the region. By learning from the experiences and expertise of the Czech Republic, Hungary, Latvia, and Slovakia, other countries can collectively work towards sustainable development.
Further research can be pursued in several areas to enhance our understanding of the interplay between digitalization, renewable energy consumption, financial development, and environmental quality in Central European countries. Firstly, exploring the mediating factors that influence the varying effects of digitalization on environmental quality across countries would provide valuable insights. Furthermore, analyzing sector-specific impacts would allow for a deeper exploration of the challenges and opportunities for sustainable digital transformation and financial investment, particularly in sectors such as renewable energy, transportation, and manufacturing. Lastly, conducting comparative studies to analyze regional differences within Central European countries would shed light on the influence of local contexts, policies, and economic disparities on the relationship between digitalization, renewable energy consumption, financial development, and environmental quality.