The literature review will provide a discussion and theoretical background related to CO2 emissions, its determinants and harmful effects. The EU wants to become carbon neutral, and not just to reduce CO2 emissions. Developed countries agreed to reduce emission levels according to the Kyoto Protocol. Consequently, since it represents a departure from the customary technologies, the reduction in CO2 emissions has implications on the selected variables.
2.1. CO2 Emissions—Effects and Determinants
There are different drivers of environmental pollution. According to the Environmental Kuznets Curve (EKC) hypothesis, environmental pollution should decrease with increasing human development above a certain threshold. This theory is subject to harsh disagreement. Rahmal and Alam [
8] were not able to reject the EKC hypothesis on their set of data. According to their findings, pollution levels increase throughout the early stages of economic development while decreasing during later stages because of improved national economic standards that enable technical advancement. They discovered that higher levels of energy consumption, trade volume, and enterprise credit amounts have a detrimental impact on the environment through higher CO
2 emissions. They advocate advancements in renewable energy to lower pollution. They state that CO
2 emissions are key drivers of climate change and environmental pollution.
Erdogan, Kirca and Gedikli [
9] stated that CO
2 emissions represent the most important indicator of environmental pollution. Their analysis of six countries confirmed that rising CO
2 emissions negatively affect human capital by causing various diseases, affecting working efficiency and productivity, and subsequently, causing a rise in public costs of healthcare. Instead of being directed towards economic growth or education, these costs are directed towards consequence remediation of environmental pollution. They suggest to raise awareness among populations about harmful effects of CO
2 emissions and emphasize technological progress as a driver of declining the emissions. The reduction in CO
2 emissions represents a challenge for governments, institutions, multinational enterprises (MNEs), small and medium enterprises (SMEs) and the overall global community. The EU, a leading global trader and investor and one of the most important players in the global economy in its development strategies, emphasizes sustainable development as its priority. A reduction in CO
2 emissions and becoming carbon neutral are among their sustainable development goals. Harvard School of Public Health [
10] states that environmental researchers from Harvard University found that CO
2 emissions endanger human health and increase poverty and the risk of undernourishment, especially in less-developed economies, by reducing crop quality.
Cioca et al. [
11] agreed with the fact that sustainable development is a major global challenge, with special emphasis on CO
2 emission levels, and that it is the most important issue for each stakeholder in society: governments, regional integrations, business sectors, and science. They focused on EU and found that transport, the manufacturing sector, thermal and electricity production are the biggest drivers of environmental deterioration. They also found that the pollution level is reducing and that the main drivers of the emission level reduction are innovation activity, transition to green energy and technology.
The same variables, according to Mignamisi and Djeufack Dongmo [
12], have different consequences in nations with abundant and restricted resources. Urbanization is a major determinant of pollution, but other elements including income per capita, industrial and technological development, energy consumption, institutional quality, agricultural output, and involvement in global trade also have a big role. In terms of income per capita, the article provided evidence in favor of the EKC theory. Globalization levels, GDP per capita, and environmental taxes reduce emission levels, whereas car counts raise emissions, claim Vlahinić Lenz and Fajdetić [
13]. Rong et al. [
14] found that economic growth and GDP actually increase CO
2 emissions, whereas innovation activity and the move to renewable energy sources have a positive impact.
According to Roth [
15], the reduction in emission levels is a top priority for the global community due to the negative effects on human capital. It has a negative impact on children and young people’s life quality, cognitive abilities, and educational outcomes, as well as working productivity due to missed days at work. According to Apergis, Bhattacharya, and Hadhri [
16], environmental degradation killed 7 million people in 2012. They studied 170 economies and discovered that higher emission levels endanger health and increase healthcare costs, while its drivers are the increase in GDP, energy consumption, and population.
Terjanika and Pubule [
17], in their study of the EU economy, found that reducing pollution is the most important social problem today. Countries want to become carbon neutral, but new technologies are the most important factors for this. Since the industrial sector poses significant challenges, it is necessary to advance the industrial structure. The biggest obstacle to reducing CO
2 emissions and moving to green solutions is the high complexity of these processes, the lack of knowledge among managers and workers, and the high costs. Improving institutional quality is one of the key factors in reducing emissions. The regulatory framework is an important driving force in reducing emissions. They agree with several authors [
18,
19,
20], that barriers include not only cost, but also the speed of ROI (return on investment), the inability of human capital to accept new technologies, maintenance and functionality of existing technologies.
Nguyen [
21], when analyzing 100 economies, could not reject the EKC hypothesis in the form that higher industrialization levels reduce pollution. Mahmood, Furquan and Bagais [
22] emphasize the importance of declining pollution levels for health and biodiversity. The drivers of higher emission levels are FDI, whereby foreign companies very often export dirty industries to developing countries; trade, whereby dirty production is held at bay in developing countries; and energy usage, whereby most of the energy is still derived from fossil sources. Mance, Vilke and Debelić [
23] tested the EKC hypothesis on solid municipal waste by analyzing a panel of Croatian municipalities. Their results show the existence of the EKC due to detailed waste treatment policies in the richest municipalities.
Rios and Gianmoena [
24] analyzed the spillover effects of CO
2 emissions from 141 neighboring countries with positive results. Mance et al. [
23] found a positive statistical association in a dynamic panel regarding the relation of institutional and human capital quality to environmental indicators [
25].
Population levels and the integration into global trade flows do not have any statistically significant effect. Chen [
26], when analyzing OECD member states, found that EU countries perform better than other economic or trade associations in reducing pollution levels. This is probably due to the comprehensiveness of the EU-ETS. Results were different for the 18 EU member states from the 32 OECD members. In the EU, the EKC could not be rejected. In both cases, the increased use of fossil fuels increases the pollution level, and the transition to green energy reduces it. Green energy implies innovative energy solutions and confirms that innovation activities reduce pollution levels. Anwar, Younis and Ullah [
27] state that an increased urban population, GDP and integration into global trade flows increase the pollution level.
To reduce pollution levels, policy priorities have to improve the industrial structure, increase institutional and regulatory quality, enhance innovation activities through transition to green energy and create quality urban policies. Atici [
28] analyzed Central and Eastern European countries (CEECs) and found that increased energy consumption increases emission levels, while integration into global trade flows and an increase in the income per capita level reduces pollution. Wu, Zhu and Zhu [
29] agree with the fact that pollution is the major global concern and the harmful effects are greater than previously thought. Greenhouse gas emissions affect not only global warming, but also economic performance, quality of life and health. Additionally, industrial structure, industrialization and development may reduce CO
2 emissions.
Khan and Hou [
30] were also unable to reject the EKC hypothesis among the 19 EU member states of the International Energy Agency. They investigated the impact of environmental sustainability policies on CO
2 emissions and concluded that shifting toward such policies reduces emissions in the end. Human capital, population, R&D spending, investment, price level and personal consumption were all examined indicators. Natural resources, mortality rates, percentage of land covered by forest, surface area, fertility rate, green energy, and non-renewable sources are examples of environmental indicators. Their conclusion is that if sustainability is implemented in all of these areas, CO
2 emissions will be reduced.
According to Magazzino and Cerulli [
31], the main determinants of declining pollution levels are increasing the per capita income and reducing energy intensity, whereas urbanization and economic involvement in global trade flows increase pollution levels.
In a study of 11 CEE economies, Bayar, Diaconu, and Maxim [
32] found that economic growth reduces pollution levels, whereas credits provided to businesses and energy use raise pollution levels, not only across the panel of 11 nations, but also when tested individually for each economy in the model.
According to Duro and Padilla [
33], the primary factors contributing to the EU’s leadership in the world in terms of emissions reduction are its high per capita income and reduced energy intensity. They verified that more developed nations outperform less-developed nations in terms of reducing CO
2 emissions. The EKC theory was verified regarding the long term in the EU, according to Dogan and Seker [
34]. While initial development raises CO
2 emissions, development through an increase in the use of innovative and environmentally friendlier technologies manages to decrease the overall environmental impact of development.
The transition toward green, innovative energy solutions, and a higher level of involvement in global trade flows also reduce CO2 emissions, while the usage of traditional energy sources increases emissions.
Dogan and Inglesi-Lotz [
35] examined determinants of CO
2 emissions in EU countries and confirmed the long-run validity of EKC. The usage of traditional energy sources, higher energy usage and the rising population increase the pollution level. The urban population rate can have both negative and positive effects for environment, while industrial development contributes to a reduction in the short and higher emission levels in the end. Aydin and Essen [
36] examined determinants of CO
2 emissions in the EU with a special focus on different types of taxation related to pollution. They found that the income per capita and urban population level increase CO
2 emissions, while innovation activity, industrial structure, development, and price level reduce it. Regarding taxation, different types of taxation have different impacts on emission levels. All of them reduce emissions, but with a lower percentage. The total environmental taxes have the highest impact, while energy taxation is second. Transport and pollution taxes have smallest impact on the reduction in CO
2 emissions. Morales-Lage, Bengochea-Morancho and Martínez-Zarzoso [
37] analyzed the determinants of CO
2 emissions in the EU. In a panel data analysis that included all 28 members from 1971 to 2012, researchers discovered that a higher population, income level, technological development, and energy consumption all increase emission levels. They did, however, conduct separate analyses of old and new members after that. The results for new members are the same, while technological and industrial development reduces CO
2 emissions in old members, implying that industrialized countries outperform the least industrialized in terms of the reduction in CO
2 emissions.
CO2 emissions are a complex topic representing huge challenges to reduce its level. There are a variety of determinants that affect it differently in different periods and sets of countries.
2.2. Industrial Structure, Development, and CO2 Emissions
The pollution level increased with industrial revolutions. People were not aware of the environmental effects of industry and there was no possibility to create environmental laws. With further developments in industry and its upgrading, emissions changed. Technological progress enabled lower emission levels. Bets [
38] states that emission levels increased by 50%, from 278 ppm (parts per million) to 417 ppm. The American Chemical Society [
39] confirmed a higher level of pollution through time. They measured it from the beginning of the new era and confirmed that emissions of CO
2, CH
4 (methane) and N
2O (nitrous oxide) increased, but with the industrial revolutions, the emissions growth rate was higher. In the 20th century, emissions increased exponentially, and the growth was slightly higher than in the previous periods. CO
2 emissions are the biggest cause of pollution.
Fowler et al. [
40] confirmed that CO
2 emissions represent a problem, but the level of concentration significantly increased during the industrial revolutions. The global level increased, but there are differences among different groups of countries. Countries with a better industrial structure and a higher standard and level of industrial development are the frontrunners in reducing CO
2 emissions, while the pollution level increases in economies such as India, where the standard and industrialization level is lower. A higher level of institutional quality and rule of law impact the reduction in CO
2 emissions.
Li, Ma and Wei [
41] state that technological progress, upgrading industrial structure, innovation activity and institutional quality have positive effects on the reduction in emission levels; meanwhile, GDP growth does not have quantitatively large effects, although its effects are positive and statistically significant. They recommend focusing on new technologies and the development of an industrial structure of higher quality.
Hill and Magnani [
42] found that there are vague impacts regarding income and industrialization levels on CO
2 emissions, but low-income countries, with a lower level of technological progress, are faced with an increased pollution level. The same was found with the quality of human capital, while providing education services in these countries increases pollution due to a higher energy intensity.
Xu, Li and Huang [
43] state that studies confirm the importance of transferring credits to the private sector because they enhance industrial development and advance industrial structure, thus reducing level of CO
2 emissions; they confirmed this based on examples in China and the EU. They recommend a transformation toward innovative industries and green innovative solutions.
Olah et al. [
44] examined the impact of the fourth industrial revolution and its technologies on pollution. They state that it provides a great opportunity to reduce pollution levels and mitigate emissions, and can be a foundation for environmental policies and the harmonization of economic and industrial policies with environmental protection. They state there are benefits of the fourth industrial revolution and its technologies in mitigating emission levels, but the impacts will differ in countries with different levels of economic and technological development, thus, again confirming the necessity for upgrading industrial structure. Institutions and innovation activity will be necessary to enable these technologies to mitigate emission levels. The fourth industrial revolution implies upgrading industrial structure through innovation activity, better infrastructure and a transformation toward green energy.
Bonilla et al. [
45] state that impacts will differ and there are different scenarios. The fourth industrial revolution will change business models, require higher digitization levels, and therefore, can contribute to the reduction in emission levels. However, there is a possibility that with a higher industrialization level, digitization will increase emissions through increasing car use, traditional energy sources, raw material usage and energy intensity, but there is also a possibility that these technologies will enable the tracking of environmental data and provide the necessary information to reduce pollution levels. The reorganization of business processes can reduce energy intensity, waste creation and usage of raw materials and durability of products. It is expected that through time, the fourth industrial revolution will bring more positive than negative effects.
Kahia and Ben Jebli [
46] state that the industrial revolutions caused higher pollution levels due to the usage of non-renewable energy sources. They found that industrial upgrading has different effects in different national economies in the long and short term. In certain economies, it reduces emissions, while in others, it can increase emission levels in the long term, while in the short term, it reduces in all economies. Green energy reduces pollution levels, and they consider that industrial development based on innovative solutions can contribute towards mitigating CO
2 emissions. The same situation was observed with income per capita level, where effects differ in various economies.
Han and Chatterjee [
47] state that poor economies with low levels of industrialization are bigger polluters then high income and industrialized economies. They found that industrial development in less-developed economies causes higher pollution levels, and in industrialized economies, further development of industrial structure and transition from traditional toward innovative industries with low energy intensity causes lower pollution levels.
According to Zhou, Zhang, and Li [
48], improving industrial structure and technological development lowers pollution levels. Technologically advanced industries contribute to lower CO
2 emissions. The share of public companies, fixed capital formation, and FDI reduce CO
2 emissions, while the total and urban populations increase them.
Wang et al. [
49] state that industrial development, urbanization, energy consumption and income level increase GDP per capita in the panel of 14 countries, while effects differ per each country. They suggest to improve the industrial structure and enhance innovation activities in order to reduce the pollution level.
Kofi Adom et al. [
50] found that shifting industrial structure toward low energy intensity sectors centered on technological development and innovation can reduce CO
2 emissions. Economic growth can be affected by reshaped industrial structures. Lower CO
2 emissions can be a barrier to economic growth, whereas higher growth rates imply lower emissions. Reduced pollution levels are influenced by technological advancements, green energy, and innovative solutions.
According to Aiginger [
51], decision makers in the EU and industrialized countries must continue to develop strategies and policies for industrial development in order to achieve the sustainable development goals. One of the objectives should be to restructure the industry in order to reduce CO
2 emissions. Technological advancement, innovation activity, human capital creation and institutional quality are important drivers. These industrial strategies and policies complement environmental policies. More developed and industrialized economies that implement these ideas are more likely to achieve long-term development goals. Technological advancement, which includes reindustrialization with a different structure, as well as the transition to new technologies, all contribute to lower emission levels. Such industrial policies, which are already in place in Europe, have yielded some early results, as absolute and relative (per unit of GDP) pollution levels today are lower than in the last decade of the twentieth century, and countries with a higher level of industrialization and greener industrial structure outperform those with a lower level of industrialization.
Canal Vieira, Longo and Mura [
52] examined impacts of the EU-ETS (European Union Environmental Trading System) and industrial policy in mitigating CO
2 emissions from 2005 to 2017 in EU members. They found that different production sectors have different performances—the same as in different economies. Sectors that are more successful in the transformation toward new technologies and industrial structure reshaping processes perform better in mitigating emissions.
Muûls et al. [
53] confirmed that industrial development toward new technologies that were innovation-driven resulted in a nearly 5% reduction in pollution levels between 2005 and 2017. Developed EU economies with higher levels of industrialization and a diverse industrial structure outperform new members in terms of pollution reduction. It was the result of the EU-ETS and ideas about industrial and environmental policy harmonization.
Kaivo-oja et al. [
54] compared CO
2 emission reduction determinants in the EU, China, and the United States. Industrial structure and industrial development, which imply technological advancement, were important factors in pollution reduction. Innovations, particularly in green technology, fueled industrial development and technological advancement.
2.3. Innovation Activity and CO2 Emissions
One of the primary drivers of societal development is innovation activity. Innovations improved life quality by making everyday tasks and communication easier, and they enabled higher levels of development by increasing productivity and creating new paradigms. In this chapter, the role of innovation in reducing CO2 emissions will be discussed. In the fourth industrial revolution era, innovation, particularly in the fields of green energy and technological advancement, should be a key to reducing pollution levels.
Ali et al. [
55] found that innovation activity reduced pollution levels, while investment activity, an increasing GDP and higher energy consumption caused higher pollution levels. Results regarding the effects of innovation on environmental pollution agree with [
8,
11,
14,
24,
26,
35,
40,
43,
48,
49,
50,
52,
53]. Wang et al. [
56] examined the effects of economic policy uncertainty on pollution levels on a panel of 137 economies. They found that the uncertainty level increased emissions, but the effects were lower in developed and industrialized countries with an upgraded industrialized structure. Innovation activity, a higher average population age and rising population reduce the pollution level, while economic growth and added manufacturing value increase it. Carrion-Flores and Innes [
57] state that innovation activity—expressed with investments in R&D and an increased number of patents—reduces pollution levels in 127 manufacturing sectors across the USA, and reduced pollution levels enhance innovation activity. Mensah et al. [
58] examined OECD economies and found that innovation activity expressed in patent application have different effects in different economies. In certain economies, it reduces pollution levels, while in others, it increases pollution; the reason for this might be that patents are not related to the innovation activity that mitigates CO
2 emissions. However, they emphasized that innovation activity is a key driver in reducing emission levels. R&D and green energy are also key drivers in reducing emission levels, while GDP growth can have vague effects. Khan et al. [
59] examined the determinants of CO
2 emissions in 176 countries, and the EU member states was among these economies. Innovation measured with patent applications resulted in economic growth and a short-term increase in FDI, while it decreased pollution levels in the long term. FDI affects technological development and industrial structure, and can confirm that industrial development and structure reduce CO
2 emissions. Trade openness is a significant driver of the reduction in CO
2 emissions because it enhances technology and innovation transfer across the world. Institutional quality measured with different indicators—including the rule of law and corruption, and the transition to green energy that also represents innovation activity—contribute to decreasing pollution levels. Institutional quality is important because quality institutions can create a macroeconomic environment that enhances investment activity, technology transfer, and consequently, the advancement of industrial structure in certain economies. Welmin et al. [
60] found that CO
2 emissions are major source of environmental pollution compared to SO
2, NO
2 or other polluters. They found that an increase in innovation activity reduces CO
2 emissions since it develops green energy solutions and affects the technological upgrading of industry. The transition to green energy is another determinant of pollution reduction—the same as the globalization level. Economic growth, FDI and traditional energy sources increase CO
2 emissions. Choi and Han [
61] state that innovation activity and an increase in patent applications, especially in green technologies, should play a key role in mitigating pollution levels, and FDI as a main technology transfer channel that reshapes industrial structure and upgrades industry could reduce pollution. They examined developed and developing economies and found that innovation activity expressed through patent applications in the field of green technology and involvement in global trade flows reduce pollution levels in developed economies, while this is not always the case in developing countries. In the end, economic development level reduces CO
2 emissions in both groups, while in the short term, it increases pollution levels in developing economies. FDI and institutional quality reduce pollution levels.
Grosso et al. [
62] state that R&D and innovation activity are key drivers in reaching EU goals related to the zero-emission rate, especially because they enable technological development and the reshaping of industrial structure. The main finding of the paper is that all types of innovations should reduce pollution levels in the EU. Such types of innovations include technological innovations, but also the innovation of business models. Gilli, Mancinelli and Mazzanti [
63] found that innovation activity represents and will represent key determinants in mitigating the pollution level, but it will be necessary to complement green innovation with other types of innovation, such as business model innovation, process, product or service. Despite developed EU members outperforming the less-developed part, the major differences are among manufacturing sectors; however, in all sectors, innovation activity reduces the pollution level. Balsalobre-Lorente [
64], when analyzing five EU countries, stated that investments in innovation and transition to green energy reduced CO
2 emissions, while EKC was confirmed in the long term, but not in the short term. FDI increased the pollution level.
According to Wolf et al. [
65], several factors influence the achievement of zero emissions. Innovation, industrial development and the transformation of industrial structures through digitization processes should reduce pollution levels. The EU will need to shift its economic policy paradigms, reshape its innovation policy by ensuring a high-quality institutional and regulatory framework, and increase and improve spending on such activities. Innovation should help the EU compete with its main global competitors, such as the United States and East Asia, by lowering pollution and increasing economic growth. Human capital and education quality are also important drivers of lower emission levels.
Constantin et al. [
66] observed that overall innovation activity, capacity, and R&D are the major drivers of sustainable development in the EU, allowing it to achieve higher GDP growth rates while lowering pollution levels. They noticed that developed and highly industrialized EU economies outperform new Europe economies in industrial structure, development, and innovation capacity, and thus, in pollution reduction.
According to Vollenbroek [
67], innovation activities and their outcomes enabled the highest development and growth rates ever by increasing productivity levels and changing industrial structure, and they should now be the key in balancing economic growth and pollution levels in the EU and the rest of the world.
Mazzanti and Rizzi [
68] investigated the factors that contribute to lower CO
2 emissions in the EU and its manufacturing sector. Innovations such as new products, services, processes, and business models geared toward sustainable development should be a key driver in reducing CO
2 emissions. Such innovations reshape industrial structure, accelerate technological and industrial development, and facilitate the transition to renewable energy sources.
According to Aghion, Veugelers and Serre [
69], innovation and R&D are major deterrents to reducing pollution levels in the EU. Policymakers must increase both private and public investment in such activities.
2.4. Human Capital and CO2 Emissions
Human capital determines the productivity of all other resources, making it a critical driver of not only economic growth, but also overall societal development. Previous chapters emphasized and confirmed that innovation drives economic growth. Innovation is the inexorable result of human activity that adds to human capital. This section will focus on the role of human capital quality in reducing CO2 emissions. Human capital is expected to contribute to lower pollution levels. Different reasons are given, such as the negative effects on life quality and health, as well as work productivity. Because innovation activity and the transition to green energy reduce pollution, human capital becomes more important, and all of these solutions will be the result of quality human capital.
Kwon [
70] emphasized that human capital is a key driver of overall societal development, including a reduced pollution level through innovative solutions in the transition toward green energy and industry. It is necessary for national economies to find as many as possible indicators to determine its quality; in addition, they should increase investments in human capital. This is in accordance with the findings of [
14,
23,
50] and [
58].
Wang and Xu [
71] examined the drivers of CO
2 emissions in developed, developing and emerging economies. They found that the quality of human capital reduces the pollution level. A higher percentage of people that use the internet, economic growth, developed industrial structure and financing enterprises through credit activity reduce the pollution level. A higher number of people that live in the cities and investment activity increase the pollution level. Their findings also show different results in different groups of countries. In developed economies, human capital and internet penetration have higher effects on pollution reduction.
Khan [
72], when analyzing 122 economies, found that the quality of human capital is essential to mitigate CO
2 emissions—the same as financial development. He confirmed EKC in the long term. The involvement in global trade flows, FDI and an increasing population increase the pollution level. Salahodjaev [
73] stated that human capital is necessary in mitigating pollution—the same as institutional quality. He confirmed EKC in the long term. Population, level of globalization and bio-capacity increase pollution levels. Iqbal, Majeed and Luni [
74] found that quality human capital is an important driver in reducing pollution levels, while the increasing number of people that live in cities and a higher level of involvement in global trade increase it. However, the effects differ in developed than in developing and transition economies; developed economies have advanced industries and manufacturing, and their products and services are environmentally friendly; thus, in their case, inclusion in global trade flows reduces CO
2 emissions. Lin et al. [
75] examined the correlation among human capital and pollution in Chinese regions. Human capital is an important driver of the decline in pollution levels, but the most important is that human capital is innovative, and the personnel involved in R&D, science and engineering must apply as many patents as possible; the number of patents per applied researcher reveals their innovativeness. Such human capital will be the driver of innovative ideas and solutions for technological and industrial development, and the transition toward green energy. They recommend to all types of economies: high, middle, upper-middle and low-income to increase investments in human capital, but especially in innovative human capital. Economic growth in the short term increases pollution levels, while decreasing it in the long term, thus, confirming the EKC hypothesis. Investment activity, which is the main channel of technology transfer and industrial development, reduces the pollution level. The increasing population, manufacturing and energy usage are drivers of higher emissions.
Mance, Krunić and Mance [
25] conjecture that in the 21st century, the HDI is a more comprehensive measure of societal development, since it includes not only economic, but also other social components. Nadeem et al. [
76] found that human capital is an important driver in reducing pollution levels—the same as the transition toward renewable energy sources. A higher level of economic complexity, export, involvement in global trade flows, economic development and urbanization lead to higher emission rates. They suggest that it is necessary to transfer knowledge across the world to reduce pollution levels, since it can increase the quality of human capital. Ali, Akram and Burhan [
77] found that there are different drivers of pollution levels in various national economies by creating three groups of economies by pollution convergence levels. Human capital is the most important driver of CO
2 emissions, while economic complexity, investment activity, inclusion in global trade flows and total factor productivity have different effects. The effects of each variable—especially the economic complexity level, since it regards the indices level of industrial development—depend on the level of technological upgrading of industry toward green technologies. It is necessary to technologically upgrade industrial structure with eco-friendly technologies, products, services, organization and business models.
Chen and Wang [
78] analyzed EU economies in a 30-year period. They found that human capital—which encompasses knowledge, education levels and general health conditions—is an important driver of pollution reduction and economic growth, especially because human capital is a driver of innovation activity and technology upgrading in industry, of which are very important for lower emission rates. Flores Chamba et al. [
79] found that European economies that perform best in the quality of human capital and its knowledge level reach lower pollution levels. They conjecture that human capital and knowledge level are key drivers of lower energy usage and pollution reduction in EU member states and the rest of Europe. Increasing the price of fossil fuels reduce pollution and energy intensity in the EU, but increase it in the rest of Europe.
Alsaleh, Oluwaseyi Zubair, and Abdul-Rahim [
80] investigated what factors influence higher levels of bioenergy usage in the EU, because shifting to such sources is one of the key enablers of lower emission rates and meeting the EU’s zero-carbon emission targets. A lack of knowledge can be a significant impediment to a successful transition to such sources. Their main discovery is that high-quality human capital with a higher knowledge level, institutional quality, innovation activity and capacity, and economic development are the most important drivers of the transition to bioenergy sources and, as a result, lower emission rates. The EU must invest in these factors and increase private investments in people and innovative solutions. One of the major tasks of the EU is to create a regulatory and institutional environment that will allow for the development of human capital and the enhancement of innovation, as well as to invest in infrastructure that will allow for the transition to bioenergy sources.
According to Braun [
81], human capital and increasing its knowledge level through knowledge diffusion were and continue to be important determinants of lower pollution levels. EU-ETS, which is now one of the EU’s top priorities, necessitates a higher level of knowledge about the environment, technology (particularly green solutions and energy) and innovation. For the EU, it is necessary to encourage all stakeholders, including the public, academic and educational sectors, as well as the business sector, to invest in human capital and knowledge about EU-ETS and pollution reduction.
Cakar et al. [
82] identified human capital as one of the most important drivers of lower emission rates; however, this does not have to be the case in less-developed EU members. Increasing the number of patent applications is a similar situation because it depends on whether the patents are environmentally friendly and committed to pollution reduction. One of the main findings is that increasing the quality and knowledge of human capital reduces pollution levels, as increased knowledge leads to patents and innovations that can help reduce emissions.
Alsarayreh et al. [
83] stated that human capital—through increased knowledge and quality—contributes to lower pollution levels, while an increase in the general and urban population increases pollution. They recommend investments in human capital and innovation activity that will create new technologies necessary for green transition.
2.5. Institutional Quality and CO2 Emissions
National economies must build high-quality institutions that are resilient to corruption because this is the only way to create a quality regulatory and macroeconomic framework. Such a framework enhances innovation activity, economic and social development, technological progress, the creation of high-quality human capital, and therefore, is one of the major drivers of mitigating pollution. It can be measured with a variety of indicators such as the rule of law, corruption level, government effectiveness of integrity, regulatory quality, political stability and level of democracy.
Gani [
84] found that institutional quality—measured with various indicators, such as the rule of law or corruption levels—reduces pollution levels. Such findings agree with [
12,
17,
24,
27,
40,
41,
51,
59,
60,
65,
73,
80]. He confirmed EKC in the long term, but in the short period, he stated that a higher economic growth increases the pollution level—the same as the industrial and trade-to-GDP ratio. Muhammad and Long [
85] found that institutional quality measured through the rule of law, corruption and political stability levels contributes to lower emission rates in developed, developing and transition economies. The trade-to-GDP ratio and FDI have different effects in different group of economies, while energy usage causes higher emission rates. Results of their research emphasize the importance of building high-quality institutional frameworks through enhancing the rule of law and reducing the corruption level.
Lisciandra and Migliardo [
86] found that institutional quality is inversely associated with emission rates—the same as energy usage—while industrial development in the long term reduces emissions, and increases it in the short term. Economic growth represents an important driver of reduced pollution.
Runar, Amin and Patrik [
87], when examining 124 developed, developing, and transition economies, found that institutional framework is an important driver for reducing emission levels. They emphasized the importance of innovations and technological progress in the transition toward environmentally friendly business and growth models.
Eskander and Fankhauser [
88] found on a panel of 133 national economies that institutional quality, quality of legal framework related to emission levels, new laws related to pollution, economic growth in the long term and service-based economy reduce pollution levels, while economic growth in the initial stages and higher trade levels increase emission rates.
Li, Rishi and Bae [
89] examined economies that receive Official Development Aid (ODA). Not only is institutional quality in these economies an important driver of pollution reduction, but it also affects it indirectly, because a higher level of institutional quality effectiveness of ODA programs increases pollution reduction in terms of economic development and increasing the environmental quality. With a low level of institutional quality, ODA programs could contribute to higher pollution levels.
Stef and Ben Jabeur [
90] examined 83 economies and found that institutional quality is a key driver in lowering CO
2 emissions and that they are key determinants of the effectiveness of environmental legislation. Regarding poor institutions, new regulations related to the environment will not contribute to a lower pollution level. Human capital and the share of territory covered by forests contribute to reduced pollution, while urbanization, higher energy intensity and investments increase it. Jian et al. [
91] found that institutional quality indicators are important determinants in reducing the pollution level in China—the same as human capital and globalization—while an increasing population and energy intensity affects higher emission rates. Strengthening domestic institutions, a higher globalization level, increasing the quality of human capital, having a sustainable population growth and transitioning toward green energy are recommendations for China to reduce pollution levels.
Galeotti [
92] stated that institutional quality and legal frameworks are key drivers in implementing any type of policy, including those related to the reduction in pollution levels in each economy, including the EU. Another important driver of lower emission rates is technological and industrial progress, because it enables the harmonizing of objectives related to higher economic growth and lower pollution levels.
Castiglione, Infante, and Smirnova [
93] investigated the links between fiscal policy and taxes, environmental protection, economic growth and institutional quality. They classified EU economies as developed or developing: Scandinavian countries, Benelux, Austria, Germany, France, and the United Kingdom. The second group consisted of Mediterranean EU economies that were old EU members. The third group consisted of ex-communist economies. Their main finding is that institutional quality and legal framework quality are critical in achieving environmental tax efficiency and balancing higher levels of environmental tax burden with economic growth. This effect was stronger in developed and more industrialized EU economies, whereas in the other two groups, where institutional quality was lower, the effect of institutional quality on lower emission rate was weaker.
The United Nations Environmental Program research [
94] stated that institutional quality is key for successful and effective environmental protection policies and programs in the EU and the rest of the world. Corruption is one of key indicators of institutional quality, and therefore, it will affect all programs and policies related to pollution reduction.
Haring [
95] found that institutional quality is a very important driver for effective environmental policies in the EU. Countries with lower corruption and inequality levels are more successful in pollution reduction because people are more likely to believe in benefits of such policies; the reason for this is a higher level of trust in public institutions.
Fan [
96] stated that the EU is a pioneer in forming policies and programs related to environmental pollution. The EU enhances the rule of law and strengthens its institutions to reach objectives of lower emissions and economic growth. Such institutions enhance innovation activity and technological and industrial upgrading. The EU adapts its regulatory framework to challenges of the 21st century, and one of them is pollution. The legal framework and quality institutions are factors of success of environment protection policies. The problems in pollution reduction are disparities among member states, where developed and highly industrialized economies outperform the rest of the EU. The author suggests to Chinese authorities to set the EU as a benchmark for their environmental policies that will be harmonized with economic growth policies.
Chang and Hu [
97] found that institutional quality plays an important role in environmental protection in the EU, but different indicators have different effects. Reducing the corruption level is essential to reduce the pollution level. Higher political involvement can always represent a problem for reduction of pollution level.
According to Apergis and Garcia [
98], institutional and governance quality, as well as a regulatory framework, are critical in lowering emission rates in the EU because they reduce corruption, ensure that public funds are distributed fairly, and increase investments in appropriate technologies and programs. In such cases, government policies enable not only business sector development, but also investment in environmental programs and solutions. In highly developed and highly industrialized EU members, emission rates are lower. Their level of industrialization and welfare allows them to invest in innovations, technological and industrial structure upgrades, and green energy.
Ojonugwa, Osama and Osama [
99] found that public institutions and their quality in the EU increase the level of environmental protection in the EU when regulatory frameworks and judicial systems are characterized with the rule of law, the corruption level is reduced and controlled, authorities are effective, the political situation is stable and threats related to terrorist or criminal activities are on a low level. It also enables economic development, while economic growth and tourist activity increase CO
2 emissions.
Based on the theoretical background acquired from the literature review, the following research hypotheses regarding statistical associations were formulated:
The change in innovation activity is negatively associated with the level of CO2 emissions.
The improvement in industrial structure is negatively associated with the level of CO2 emissions.
The quality of human capital is negatively associated with the level of CO2 emissions.
Higher institutional quality is negatively associated with the level of CO2 emissions.
For research hypotheses 1, 3 and 4, besides the usual statistical significance, they are also expected to bear a negative sign in the statistical association. Research hypothesis 2 only expresses an expectation regarding the statistical significance regardless of the sign since it is a purely qualitative variable.