Exploring the nonlinear and regime-dependent impact of energy transition on economic growth through the threshold effect of energy productivity and the moderating role of climate investments

Abstract

The relationship between renewable energy and economic growth remains a subject of intense debate. This article investigates the non-linear, regime-dependent nature of the energy transition-growth nexus, examining how energy productivity thresholds and climate investment condition this relationship across the EU-27. Using a Panel Smooth Transition Regression (PSTR) model on a balanced quarterly dataset (2015–2024), we challenge traditional linear assumptions. Our results reveal a highly significant energy productivity threshold of 4.956 €/kgoe. Below this absorptive capacity level, the energy transition exhibits a statistically insignificant association with GDP. However, above this threshold, it becomes a powerful driver of economic expansion, validating the green growth hypothesis. Conversely, empirical evidence rejects climate investment as an independent structural threshold. Yet, when integrated as a moderating variable, the interaction between climate investment and energy transition correlates with diminishing marginal returns. This conditional association suggests a substitution effect, indicating that climate finance plays a nuanced moderating role in mature markets. These conclusions remain robust after accounting for alternative threshold variables and the Covid-19 pandemic shock. Policymakers must therefore closely monitor and boost the productivity of renewable energy, while also encouraging further climate investment, in order to build the absorptive capacity necessary to unlock sustainable economic growth. However, in mature, high-performing economies, they must phase out unnecessary public subsidies for climate-related projects and transition to a market-driven approach to renewable energy growth.