Are environmental policy stringency and green energy mediators in the nexus between economic policy uncertainty and environmental sustainability in OECD countries?

In developed countries, there is growing uncertainty regarding the trade-off between deepening environmental sustainability and increasing production to maintain employment and income levels. This research aims to examine the mediating effect of environmental policy stringency and green energy on the nexus between economic policy uncertainty and environmental sustainability in the countries of the Organisation for Economic Co-operation and Development. The nexus between economic policy uncertainty and environmental sustainability was moderated by economic growth, population density, economic globalization, and environmental taxes. We employed a set of panel data techniques: Pooled Ordinary Least Squares (POLS), Feasible Generalized Least Squares (FGLS), and the System Generalized Method of Moments (SYS-GMM). Specifically, we propose that the mechanism transmitting the effect of economic policy uncertainty to environmental sustainability is due to the environmental policy stringency and the ongoing search for clean energy sources. The findings show that environmental sustainability has structural inertia due to the organization of production and energy systems and the level of economic development in this group of countries. We also found that population density, economic policy uncertainty, and trade globalization have a negative effect on environmental sustainability. The findings are consistent when using the urban primacy index as an alternative measure of population density. Furthermore, we applied Lewbel's (2012) instrumental variables strategy to reduce the potential endogeneity between economic policy uncertainty and environmental sustainability. Finally, we used the load capacity factor as a proxy for environmental sustainability, and the findings are robust. In addition, the findings show that the environmental policy stringency and green energy act as mediators in the link between economic policy uncertainty and environmental sustainability in developed countries. Environmental policymakers should promote environmental quality by implementing stricter regulations and encouraging the adoption of green energy.