DO GREEN FINANCE, GREEN TRADE, ECONOMIC DEVELOPMENT, AND ENVIRONMENTAL TAXES ENHANCE ENVIRONMENTAL SUSTAINABILITY? EVIDENCE ON THE MEDIATING ROLE OF TECHNOLOGICAL INNOVATION IN DEVELOPED AND DEVELOPING COUNTRIES

Abstract

This study examines the dynamic effects of green finance, environmental taxation, economic development, and green trade on environmental sustainability, with technological innovation serving as a mediating mechanism. Grounded in Sustainable Development Theory, Innovation and Technology Theory, and the Environmental Kuznets Curve (EKC) hypothesis, the research adopts a comparative empirical framework using balanced panel data covering 20 developed and 20 developing countries from 2000 to 2023.Methodologically, the study employs Dynamic Fixed Effects (DFE) estimation, Generalized Estimating Equations (GEE), and panel cointegration techniques, complemented by robustness checks including the Sargan test and cross-sectional dependence diagnostics. The empirical findings reveal that green finance significantly enhances environmental sustainability in developed countries, where institutional quality and regulatory effectiveness are relatively strong. In contrast, green finance exerts a negative impact in developing economies, largely due to misallocation of financial resources and weak implementation frameworks. Environmental taxation contributes positively to environmental sustainability in developing countries by discouraging environmentally harmful activities, whereas its effect in developed economies is mixed, potentially reflecting diminishing marginal environmental gains and policy saturation. Economic development intensifies environmental degradation in developing countries, consistent with the upward phase of the EKC, while its adverse effects are mitigated in developed economies due to advanced technologies and stricter environmental regulations. Furthermore, green trade exhibits a limited or negative influence on environmental sustainability in both country groups, particularly in developing nations, where trade-driven industrial expansion often occurs at the expense of environmental protection. The mediating analysis indicates that technological innovation significantly strengthens the effectiveness of green finance, environmental taxation, and green trade in promoting environmental sustainability in developed countries. However, its mediating role remains weak in developing countries, reflecting persistent structural, technological, and institutional constraints.