Environmental Regulation as a Moderator in the Nexus Between Green-Sector Venture Capital and CO₂ Emissions

Venture capital (VC) is increasingly important for advancing clean technologies, yet its direct impact on CO₂ emissions remains insufficiently understood, especially within Europe’s diverse regulatory landscape. This study examines how environmental regulation moderates the effect of Green-sector VC investment on CO₂ emissions in 21 European countries from 2007 to 2021. Using FGLS estimations, alternative emission indicators, dynamic GMM, and extensive robustness checks, including subgroup analyses of advanced versus emerging economies and a pre-pandemic sample, we provide comprehensive evidence. The results show that VC investments significantly reduce CO₂ emissions, with the strongest effects in emerging economies. Moreover, stricter environmental regulations enhance VC’s decarbonization impact, highlighting the complementary roles of policy and private finance. Findings remain robust when excluding the COVID-19 period, contributing to sustainable finance research by showing how regulatory quality strengthens the effectiveness of VC in supporting Europe’s low-carbon transition. JEL Codes Q54; Q58; G24; O32; Q56