Unintended delays: Green technology, finance, and energy transition

Abstract

Environmental-related technologies (ERTs) are widely regarded as drivers of decarbonization, yet their contribution to the renewable transition depends on how innovation is directed and financed. When ERT activity mainly improves the efficiency of fossil-based systems, it can reduce emissions intensity without accelerating structural substitution toward renewables. This study investigates that possibility using a panel of 167 countries over 1990–2021, integrating OECD environment-related patent data, the IMF Financial Development Index, and World Bank indicators of renewable energy consumption. To address endogeneity, we employ an instrumental-variable 2SLS framework with region and year fixed effects. The estimates show that, on average, higher ERT is associated with a lower renewable share in total energy use, consistent with a tilted innovation pattern in which environmental technologies are absorbed within the incumbent fossil regime. However, this relationship is conditional on financial structure. In economies with deeper financial systems, especially stronger financial institutions, the association between ERT and renewable energy consumption turns positive. These results remain stable across alternative specifications and robustness checks. Overall, the results suggest that expanding green innovation in an undirected manner is unlikely to ensure a faster renewable transition. Environmental R&D and financial development are more effective when they are aligned with renewable deployment and supported by financial systems capable of channeling capital toward large-scale clean energy investment.