Asymmetric Impact of Renewable Energy Capital Market on CO2 Emissions: Revisiting the EKC in India

Abstract

Promoting sustainable development in India necessitates the integration of economic growth with environmental quality and the advancement of green finance. This study examines the existence of the Environmental Kuznets Curve (EKC) hypothesis along with the integration of capital market-based financial development of the renewable energy industry as an indicator of green finance. The Autoregressive Distributed Lag (ARDL) and its non-linear counterpart (NARDL) models are employed to assess the short-run and long-run relationship of CO₂ emissions with economic growth and the traded value of renewable energy equities. The findings validate the presence of an inverted U-shaped EKC under both model specifications, suggesting that India is approaching the income threshold beyond which emissions begin to decline. Crucially, the NARDL model reveals an asymmetric long-run effect, where positive shocks to the renewable energy stock market development significantly reduce emissions, whereas negative shocks exhibit no statistically significant effect. Robustness checks using GHG emissions as an alternative environmental indicator confirm the baseline findings. The study recommends incentivizing the renewable energy firms by exploring measures such as capital gains tax relief, technology subsidies, and simplification of listing procedures for green firms. It also calls for enhancing market visibility and investor participation by introducing a dedicated renewable energy index in the major stock exchanges. These findings offer actionable policy insights to support India's transition toward a net-zero economy by 2070.