Can energy intensity, clean energy utilization, economic expansion, and financial development contribute to ecological progress in Iceland? A quantile‐on‐quantile KRLS analysis

Abstract

Global challenges, such as the COVID‐19 impacts, climate crisis, and geopolitical tensions, have prompted economic transformations. These issues have led to macroeconomic data assuming non‐normal distributions, necessitating a nonlinear analytical approach. As a result, this study unveils the influence of energy intensity, renewable energy, economic growth, and financial development on carbon dioxide emissions in Iceland from 1995Q1 to 2020Q4 using the Quantile‐on‐Quantile Kernel‐Based Regularized Least Squares (QQKRLS) and Wavelets Quantile Correlation (WQC) methods. The QQKRLS results showed that energy intensity, renewable energy, and economic growth are negatively associated with carbon dioxide emissions across various quantiles, while financial development is positively linked with carbon dioxide emissions. Furthermore, the WQC outcomes confirm the results of the QQKRLS. In addition, in the short and medium term, financial development negatively affects carbon dioxide emissions across various quantiles, while in the long term, financial development positively influences carbon dioxide emissions. In light of the results gleaned from this study, Iceland should continue on its path of renewable energy investments, create policies that will completely decouple economic growth from carbon dioxide emissions, and ensure that the development of the financial system is funding clean energy activities. This provides a roadmap for sustainable economic and environmental development.