Green energy and the shadow economy: implications for environmental sustainability in G7 countries

Abstract

Shadow economy (SE) is an important feature of economic activity, yet excessive informality may undermine environmental sustainability by weakening regulatory compliance. While green energy (GE) is central to climate policy and sustainable development, the relationship between GE, SE, and ecological footprint (EFP) remains insufficiently examined in advanced economies. This study investigates the association between GE, SE, and EFP in G7 countries over the period 1993–2020. Using Cross-sectionally Augmented Autoregressive Distributed Lag (CS‐ARDL), Method of Moments Quantile Regression (MMQR), mean group estimations, and additional robustness checks, the study examines both short‐ and long-run associations while accounting for cross-sectional dependence and heterogeneity. The findings indicate that GE is negatively associated with SE and EFP across alternative specifications. The results are also consistent with a theoretically motivated formalization channel, whereby GE expansion may be linked to lower shadow economic activity, which in turn may be associated with reduced ecological pressure. However, given the observational nature of the data, the findings should be interpreted as conditional associations rather than definitive causal effects. The study contributes to the literature by linking green energy transition, informality, and ecological sustainability within a unified G7 framework and offers evidenceinformed policy implications for advancing SDG 7, SDG 12, and SDG 13.