Pathways to environmental debt reduction among OECD countries: navigating the synergies between human capital, green finance, and innovation

Abstract

To achieve the Sustainable Development Goals (SDGs), notably SDG 7 (Affordable and Clean Energy), SDG 9 (Industry, Innovation and Infrastructure), SDG 13 (Climate Action), SDG 15 (Life on Land), and SDG 6 (Clean Water and Sanitation), there is a compelling necessity to address the mounting problem of environmental debt. As aggregate ecological liabilities quantified through CO2 emissions, deforestation, and pressure on freshwater resources, environmental debt remains a persistent problem for high-income economies. While green finance is a pivotal tool for mobilizing capital toward low-carbon transitions, its effectiveness may depend on the absorptive capacity of societies to translate financial flows into environmental gains. Informed by Absorptive Capacity Theory and the Environmental Kuznets Curve hypothesis, this study examines the interrelationships between green finance and environmental debt in OECD economies from 2014 to 2021, with a focus on the role of human capital. The System GMM results show that green finance contributes to lower carbon dioxide emissions when positively moderated by Human Capital and Research. However, the interaction effects of green finance with Human Capital and Research on water stress and deforestation remain mixed. The instrumental variable quantile regression (IVQR) estimates further indicate that these effects vary according to the level and type of environmental debt. Overall, the findings suggest that green finance is most likely to support environmental debt reduction when it is aligned with strong absorptive capacity and sector-specific safeguards.