Achieving carbon-neutral economies through circular economy, digitalization, and energy transition

Abstract

Decarbonization is of utmost importance to effectively address climate change, advance environmental sustainability, and protect biodiversity and ecosystems. Therefore, developed and developing economies are focusing on adopting various approaches to achieve zero carbon emissions. Thus, this study attempted to generate a meaningful relationship between the circular economy, digitalization, energy transition, and eco-friendly trade strategy to capture the role of factors that function to attain carbon neutrality. For the above-given objectives, dynamic econometric methods, such as the cross-sectional autoregressive distributed lag model (CS-ARDL), were adopted to assess the G7 dataset between 1990 and 2022. These findings suggest that the parameters under investigation are important for achieving carbon neutrality in G7 in the long term. Moreover, Panel Corrected Standard Errors (PCSe) confirmed that every aspect affects carbon neutrality. Consequently, the long-term attainment of decarbonization is greatly aided by a circular economy, digitalization, energy transformation, and green trade. Thus, significant and comprehensive policy changes are needed in several sectors, such as the development of digitization, environmental regulations, sustainable and green technology, and renewable energy sources.

Introduction

A comprehensive understanding of the significance of decarbonization is imperative for effectively addressing climate change and making progress towards a sustainable future. This notion encompasses the reduction of CO₂ emissions in various sectors, such as energy, transportation, and industry. Zhu¹ stressed the concerns of having a comprehensive understanding of the factors devoted to the mitigation of CO₂ emissions in newly manufactured passenger vehicles. Moreover, Aydin² provide a comprehensive analysis of the key technologies and regulations that significantly impact the industry’s decarbonization efforts. The concepts mentioned above include hydrogen with zero CO₂ emissions, electrification, energy efficiency, and CO₂ capture. Flexibility is critical for guaranteeing the cost-effective decarbonization of energy systems, according to Amin³, specifically regarding grid assistance and balancing. Shah⁴ emphasized the international endeavors to transit low- CO₂ energy system, wherein nations have pledged to decrease their CO₂ emissions. These studies emphasize the critical and intricate character of decarbonization, further highlighting the necessity of implementing a comprehensive approach that incorporates technological advancements, government initiatives, and global collaboration.

Di⁵ highlighted the importance of circular economy in achieving decarbonization particularly in the era of digitization and energy transformation. However, the current trend towards a circular economy in materials, with the goal of reducing CO₂ emissions from digitalization and transitioning to clean energy, requires the creation of stronger systems to handle the disposal of these materials once they reach the end of their life cycle⁶. Implementing sustainable taxes can significantly accelerate this transition, as Hu⁷ suggest. Understanding the impact of digitalization and regulations, such as interventions in the circular economy, is essential for achieving zero CO₂ emissions in green trade⁸.

The Paris Climate Conference set a target of 1.5 °C for global warming by 2100 ⁹. At the 76th UN General Assembly, China, one of more than 200 members, committed to becoming CO₂ neutral by 2030 and reaching its peak by 2060 ¹⁰. The IPCC calculates that to have a greater than 66% chance of keeping the temperature rise to 1.5 degree centigrade (°C), worldwide CO₂ emissions from 2012 to 2100 must not surpass 400 billion tons ^11,12. China’s CO₂ emissions must be reduced to 4–8 billion tons, and by 2050, to 1–2 billion tons. The pu"uit of " CO₂ neutrality and CO₂ peaking” by the Chinese government caught the interest of people from all fields of life. Companies and individuals are reluctant to aggressively cut emissions because doing so comes at a significant cost and offers little return on investment¹³.

Digital technology has increased global interest in smart cities as a new municipal administration model. Governments worldwide are frantically building smart cities¹⁴. Singapore established “Intelligent Nation 2015” in 2006, and South Korea “create” “U-city” smart cities. The Netherlands “launched “Smart City and Planning and Construction for “Amsterdam” in 2011 ¹⁵. IBM Janeiro’s first complete metropolitan data management hub in 2"10 with “Smarter Cities” technology¹⁶. In 2021, China began developing smart cities with 277 cities, counties, and villages as experimental locations¹⁷. Digital governance improved when local governments implemented smart cities. Lighting, transportation, environmental protection, energy, and factory smart application projects are prevalent. However, these approaches have significantly reduced urban pollution. Digital governance advocated by smart cities must be scientifically assessed to reduce CO₂ emissions. This review maximizes technology’s benefits in CO₂ emission reduction to “achieve “CO₂ neutrality and CO_” peaking” within the timeframe¹⁸. Digitalization affects climate goals both positively and negatively. Energy use is increasing and must be reduced. Digitalization may also boost RE use. Energy use increases when cloud servers and datacenters are built and maintained. Intelligent digital solutions may improve industrial processes, develop energy-efficient substructures, buildings, and power grids, and reduce CO₂ emissions to promote economic sustainability¹⁸. Optimization of energy network procedures and energy saving would reduce the carbon footprint. High-speed Internet and cloud technologies may aid sustainable development. The Internet of Things and Al might increase the power grid efficacy and solar energy availability, thereby increasing RE use. Digital platforms for sharing and transferring knowledge and e-learning materials are beneficial to education. Global digitalization and environmental and economic consequences are needed¹⁹.

The World Bank reports a 70% increase in worldwide CO₂ emissions from 20.6 million kilotons in 1990 to 34.0 million in 2018 ²⁰. Consequently, researchers are studying the factors that cause CO₂ emissions in different countries²¹. Researchers have presented several reasons for the positive influence of RE on CO₂ emissions mitigation. At the outset, shifting to RE leads to a significantly reduced carbon footprint compared to the utilization of fossil fuels. For instance, coal generates around 3.7 pounds of CO₂ E/kWh, whereas wind energy produces just 0.04 pounds. Moreover, the use of coal and natural gas leads to significant detrimental health impacts owing to the toxins emitted by the combustion of fossil fuels²². Moreover, RE might potentially address the growing need for energy caused by population growth and economic development²³.

China’s exports to Belt and Road countries are increasing. The Statistical Communication of China’s National Economic and Social Development reported CYN 21.7348 trillion exports in 2021. China exported 30% of its goods to Belt and Road nations, totaling CYN 6.4924 trillion²⁴. Most exports in the manufacturing sector are manufactured goods designed for exports²⁵. Multiple types of pollutants originate from industry. Environmental history focuses on the major pollution issues that occur during rapid industrial development²⁶. The growing commercial operations in the Belt and Road regional value chain have raised concerns about pollution. China is the world’s largest CO₂ emitter and has the main industrial and trading power techniques. The International Energy Agency (IEA)²⁷ reported in 2021 that China emits the China’s 2021 CO₂ emissions were 11.9 billion tons, 33% of global China’s broad and energy-intensive conventional export industries have expanded during the first and intermediate stages of industrialization and economic liberalization, causing environmental degradation and resource depletion. China entered intermediate and advanced industrialization in 2010²⁸. Thus, there is a pressing need to bolster expansion of the industrial sector and promote export trade.

The G7 nations must curb carbon emissions because of their historical CO₂ contributions, global environmental policy influence, and sustainable development role. As leading industrial economies, they bear a greater responsibility for addressing climate change by reducing fossil fuel reliance. Decarbonization allows them to fulfill Paris Agreement commitments, restrict global temperature increases, and establish a global precedent²⁹. This transition requires improved energy efficiency, decreased dependence on volatile fossil fuel markets, and progress in renewable energy and eco-friendly technologies. It also enhances public health by mitigating air pollution, safeguarding ecosystems, and securing future energy sector growth³⁰. Moreover, it empowers G7 countries to maintain their green market leadership and economic competitiveness. Through decarbonization, G7 economies can steer the world towards a sustainable and climate-resilient future.

Addressing climate change and achieving carbon neutrality require a holistic approach that combines sustainable economic methods and technological innovations. This study highlights the vital importance of circular economy concepts, digital transformation, and energy sector shifts in lowering carbon emissions among G7 countries. This study utilizes a comprehensive dataset from 1990 to 2022 and applies CS-ARDL and PCSe econometric techniques to examine how these factors contribute to decarbonization efforts. As developed nations grapple with growing environmental issues, there is an increasing need to harmonize economic growth with sustainability. Circular economic strategies that emphasize resource efficiency and waste minimization offer significant transformative potential. While digitalization enhances energy optimization and fosters innovation, it also increases energy demand. These initiatives are further supported by the intricate requirements of an energy transition that has resulted in the increased adoption of renewable energy sources. The authors expect their results to assist countries in achieving a balance between economic development and environmental protection as they work towards carbon neutrality. The importance of this research lies in its contribution to filling this knowledge gap, offering a thorough understanding of the relationships between these factors and creating a framework for sustainable advancement.

The present study is significant in examining the dynamic relationship between the circular economy and digitalization in the context of environmental conservation efforts aimed at attaining zero carbon emissions within the G7. This analysis examines the effect of energy transition and green trade on sustainability, focusing on enduring global problems, such as climate change and the escalation of carbon emissions. The main objective of this study is to provide insight into the involvement of G7 countries in addressing environmental hazards and promoting a sustainable, low- CO₂ future, with a specific focus on their dynamic economic development. With the objective of investigating the decarbonization rating of the productivity of the circular economy, digitalization, energy transition, and green trade, this study considers the circumstances of the G7 economies. For this analysis, study has used cutting edge methodologies (CS-ARDL and Panel Corrected Standard Errors) to get robust results. This research adds to the existing EKC literature by revealing the transformative power of circular economy, digitalization and energy transition to reconfigure the classic EKC path towards the realization of carbon free economies. This approach offers a more comprehensive view of how economic growth can be aligned with environmental and social well-being, and provides actionable insights for policymakers seeking to balance growth with sustainability. Particularly, despite the impressive performance of the G7 economies in circular economy, digitalization, energy transition, and green trade, which arguably portrays the decarbonization potential³¹, scientific inquiry is seemingly lacking from this perspective.

The subsequent sections of this paper are structured as follows: the second section delves into the relevant literature, whilst the third section outlines the data and methodology employed. The fourth section presents the findings and their analysis, and the fifth section concludes the paper by discussing policy implications.

Review of literature

In the search for a CO₂-neutral future, the convergence of the circular economy, digitalization, energy transition, and green commerce serves as an irrefutable reaction. The implementation of a circular approach leads to an increase in resource generation, enhancement in resource efficiency, and promotion of sustainable consumption. Digital technologies facilitate the attainment of effective resource allocation and instantaneous energy surveillance³². Concurrently, the transition towards RE sources reduces reliance on CO₂-intensive fuels, while developments in energy storage enable the seamless integration of these sources into distribution networks. Green commerce enables the exchange of environmentally advantageous products, hence promoting sustainability in global supply chains³³. When considered collectively, these fundamental principles establish a dynamic structure that drives us towards a future characterized by enhanced sustainability and resilience, whereby the pursuit of economic well-being and environmental stewardship converge.

Circular economy and decarbonization

In the corporate sector, the notion of a “circular economy” is employed as a method for waste reduction. To attain “zero waste,” organizations have endeavored to close the loops within their supply chains concerning abandoned products³⁴. A Circular economy not only diminishes ecological impact and provides economic advantages, but also lessens reliance on distant supply chains and limited resources by enhancing community and company resilience. The Circular Economy (CE) has been adopted by forward-thinking company executives as a cost-efficient strategy to enhance corporate resilience and sustainability³⁵. To mitigate adverse environmental impacts, corporate environmental management encompasses tactical decisions and operational and strategic initiatives across all sectors within the circular economy framework. Consequently, to maximize the advantages of CE, corporations are aligning their business goals with environmental management practices³⁶. Circular Economy primarily emphasizes the optimization of material flow throughout the value chain, energy efficiency, and resource management³⁷. It also seeks to safeguard and mitigate (e.g., biodiversity protection and climate change) the environment and diminish the depletion of natural resources³⁸. The CE model utilizes fewer resources to sustain consistent consumption and output, while employing recycled raw materials to diminish diverse resource usage³⁹. The circular economy focuses on recovery, reduction, remanufacturing, recycling, refurbishment, and reuse⁴⁰.

Economic development plays a beneficial role in both tackling climate change and advancing environmental sustainability. Economic expansion promotes industrialization, which in turn results in increased utilization of natural resources and enhanced agricultural production. These commercial operations exacerbate the rapid decrease in natural resources and the generation of higher volumes of hazardous waste⁴¹. Moreover, the widespread use of natural resources in agriculture, deforestation, and mining has substantially influenced the environment. The use of natural resources is a pivotal factor in the production process. Thus, guaranteeing sufficient resources leads to reduced pricing and a rise in oil consumption⁴². The tension arising from the partial availability of natural resources and the need to protect the environment forces governments to provide financial support that is not economically viable for the fuel use. This ultimately leads to a rise in the amount of CO₂ emissions associated with the product. Extracting natural resources helps reduce environmental deterioration by meeting energy needs and limiting the discharge of toxic waste into water, air, and land. On the other hand, a deeper understanding of how natural resources, economic development, and CO₂ emissions are interconnected is advantageous for both policymakers and government officials. This information helps in effectively lowering CO₂ emissions and fostering the expansion of the RE industry. Multiple studies have analyzed the link between economic growth and natural resources, but there have been fewer studies on their impact on CO₂ emissions. Economic activities are associated with the onset of climate change and ecological degradation. Economic development fosters the progression of industrialization and urbanization, resulting in an increase in the use of natural resources and the growth of agricultural production⁴³. These economic activities reduce natural resources by generating trash that exceeds the capacity of the natural environment to assimilate and treat. Furthermore, the presence of ‘“natural “resources” is essential for the manufacturing process. Hence, maintaining an equilibrium in the availability of natural resources serves to curb price hikes and decelerate the use of oil⁴⁴. Understanding the correlation between environmental pollution, natural resources, and GDP is crucial not only for policy analysis but also for the progress of RE enterprises. Prior research has shown a correlation between natural resources and GDP growth, but not specifically with CO₂ emissions. Introducing natural resources as a factor in empirical analysis” of the “energy growth and environmental nexus” is an innovative method. Currently, there is a scarcity of research exploring the relationship between natural resources and the connection between energy, growth, and the environment. The topic has been investigated in a recent study conducted by Tcvetkov⁴⁵.

H₁

Does circular economy affect decarbonization in G7?

Digitalization & decarbonization

In recent years, the emergence of the digital economy has sparked significant academic interest because it offers innovative solutions to environmental challenges. Zhao⁴⁶ asserted that the growth of the digital economy in Chinese cities has a substantial impact on reducing PM2.5. Mohamed⁴⁷proposed that the expansion of the digital economy had considerably decreased air pollution in China. According to Li⁴⁸ smart city pilots in China have effectively decreased pollution emissions. Regarding studies on the influence of the digital economy on CO₂ emissions’ experts’ findings support the idea that the digital economy helps reduce CO₂ emissions. Ashwani⁴⁹ suggested that the digital economy might enhance CO₂ emission reduction by influencing energy intensity, amount of energy, and urban afforestation. According to Vaio⁵⁰ digitalization played a crucial role in enabling China to achieve low- CO₂ development. They proposed that the advancement of the Internet has hastened the reduction in energy utilization intensity by means of economic development, research and development expenditure, human capital, financial growth, and the enhancement of industrial structure. Nevertheless, certain studies, including those conducted by ⁵¹ and ⁵², have presented conflicting findings. These studies suggest an inverted U-shaped relationship between the digital economy and CO₂ emissions. According to their research, the initial development of the digital economy leads to an increase in CO₂ emissions, but as the digital economy progresses further, CO₂ emissions eventually decrease.

Moreover, research has recently concentrated on examining the influence of digital technology and digital money on CO₂ emissions. Kurniawan⁵³ argued that the advancement of digital technology has the potential to not only decrease CO₂ emissions in local locations but also stimulate CO₂ emissions in neighboring regions. According to Wu⁵⁴, technological innovation in the information business is expected to lead to higher CO₂ emission intensity. However, they also argue that cross-industry technology spillovers may help lower CO₂ emission intensity in a sustainable manner over time. Based on Chinese province panel data, Ohueri⁵⁵ concluded that digital banking had a substantial inhibitory impact on CO₂ emissions. They stated that digital finance has the potential to mitigate financial limitations and enhance investment in research and development, thereby fostering green innovation. Azizi⁵⁶ contended that the combined impact of digital finance and green technology innovation may greatly enhance the effectiveness of reducing local CO₂ emissions.

H₂

Does digitalization affect decarbonization in G7?

Energy transition and decarbonization

The energy transition levels of countries are influenced by aspects such as efficiency, affordability, reliability, and energy independence, as well as concerns related to economic development, employment, and social inclusion⁵⁷. Numerous studies have examined the effects of energy transition on CO₂ emissions, primarily by analyzing the proportion of REC within the overall energy mix, which serves as a proxy variable for energy transition. Sun⁵⁸ employed a comprehensive policy assessment model to analyze CO₂ emissions resulting from energy transition, revealing substantial gains in renewable and nuclear energy, alongside a decrease in coal usage to below 20% by 2050. Hou⁵⁹ examined 72 nations and observed that elevated levels of renewable energy consumption are essential for reducing CO₂ emissions, positing that increased emissions are necessary for environmental sustainability. You⁶⁰ examined a comprehensive panel of 120 nations and found that RE consumption has a diminishing effect on CO₂ emissions; however, this reducing impact may be obscured by heightened economic growth and increased non-renewable energy consumption. Zhou⁶¹ examine BRICS nations and assert that energy transition facilitates decarbonization.

Gan⁶² carried out a unique analysis that showed that between 1990 and 2014, RE had a variety of effects on CO₂ emissions in 67 emerging nations. Panel OLS and fixed-effect panel QR methods were used in the study. Research has confirmed that utilizing RE sources and energy efficiency are essential for lowering CO₂ emissions in developing nations. To promote sustainable growth, Ameer⁶³ examined the significance of RE in determining the association between GDP and CO₂ emissions in Malaysia. F-bounds, VECM, Granger causality, and CUSUM tests were employed in the investigation. An inverted N-shaped link between RE and CO₂ emissions in Malaysia was found to have a clear negative correlation. In addition, research on the application of system dynamics modeling to analyze the relationship between RE and CO₂ emissions in Ecuador was conducted by Mentel⁶⁴. The time range covered by the study was 1980–2021 and the primary goal was to examined the connection between a nation’s GDP and CO₂ emissions. Their research demonstrated that effective CO₂ emission management is feasible even, in the face of ongoing economic expansion.

H₃

Does energy transition affect decarbonization in G7?

Green trade and decarbonization

Zhao⁶⁵ investigated the dispute on the correlation between global trade and ecological degradation. However, the findings of these studies are unconvincing and do not provide a decisive resolution. For instance, original research discovered that trade has a beneficial impact on environmental quality, indicating that commerce greatly improves environmental circumstances. An illustration of this phenomenon can be found in the scholarly investigation carried out by Rahman²⁶, which examined the correlation between commerce and the environment, considering other pertinent variables, for the BRICS nations from 1995 to 2018. Meng⁶⁶ examined the relationship between quality of the environment and business in their research. Their study revealed that although exports have comparatively less influence on the decline in environmental quality, imports have resulted in a substantial rise in CO₂ emissions. Zhu⁶⁷ discovered divergent outcomes in their analysis of Indonesia, suggesting that export activities are leading to an increase in CO₂ emissions.

Similarly, Udeagha⁶⁸ determined that trade has significantly and detrimentally affected the ecology of Asian nations from 2005 to 2020. Nasir⁶⁹ found that trade had a negative impact on the ecosystem of Asian countries from 1980 to 2015. Academics are motivated to conduct more research on the relationship between commerce and the environment due to the disappointing outcomes of past studies. This study explicitly investigates the effects of green trade (trade that is eco-friendly) on improving environmental quality. In their study, Rahman⁷⁰ found that undeveloped nations have more unfavorable environmental conditions than industrialized countries. Their findings revealed noteworthy strategy ramifications for affluent nations and the possibility of exporting ecologically advantageous technologies to less affluent ones via trade.

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Does green trade affect decarbonization in G7?

Understanding the interaction between digitization, circular economy, energy transition, and green commerce is crucial in facilitating the shift towards a zero-carbon society. Emphasizing the significance of policy linkages between digitization and low-CO₂ transition scenarios, Yang⁷¹ highlights their crucial role. Li⁷² highlights the importance of circular economy and RE sources in achieving climate neutrality. As demonstrated in⁴⁴, there is a strong correlation between energy transition initiatives and circular economy in their joint mission to address climate change and reduce pollution. Highlighting the importance of resource circularity in achieving CO₂ neutrality, Muganyi⁷³ specifically examines the circular economy and RE. According to this research, it is obvious that a well-rounded approach that encompasses digitalization, circular economy, energy transition, and green trade is crucial in achieving a society that is free from CO₂ emissions.

In the literature review section, we delve into the analysis of previous studies that have explored the concepts of circular economy (CE), digitalization (DZ), energy transition (ET), green trade (GT), and their effects on environmental sustainability. Such inquiries are often conducted autonomously and largely focused on industrialized nations. Unlike other studies, this analysis provides a thorough analysis of how various factors contribute to achieving CO₂ neutrality, specifically within the G7 countries. This study seeks to employ sophisticated econometric techniques and a comprehensive dataset spanning a significant period to examine the relationship between circular economy, digitalization, energy transition, and green trade to accomplish the total eradication of CO₂ emissions. This study seeks to address a significant void in the current body of research.

Data and methodology

The study investigates the factors that influence decarbonization in the context of the G7 economies (United Kingdom, Japan, Canada, France, Germany, Italy, and the United States). This study utilizes a panel dataset of 231 observations, covering the G7 economies from 1990 to 2022. Data were sourced from reputable databases, including WDI for decarbonization (DC), digitalization (DZ), energy transition (ET), and green trade (GT), and OECD for circular economy (CE). To ensure consistency and reliability, variables were transformed into natural logarithms to achieve normality and reduce heteroscedasticity. Cross-referencing similar metrics across sources ensured data accuracy, while missing values were addressed using country-specific growth trends to maintain temporal and cross-sectional integrity. Digitalization, energy transition, green commerce, circular economy, and economic growth are the factors that determine DC in this study. In particular, the measurement approach is determined to be appropriate for the G7 countries given the minor differences in population size, the socio-economic and economic characteristics of the countries being similar, and the availability of GDP and energy datasets. Furthermore, the G7 countries were chosen since they are some of the leading countries utilizing transition energy. When it comes to reducing emissions, the G7 region is in the lead. In the G7 area, 40% of all home energy use is derived from renewable sources.

Theory of Environmental Kuznets Curve (EKC)⁷⁴ explains the inverted U-shaped relationship between economic growth and environmental degradation which states that as lower stages of economic growth carry pollution with it and later turns around. Upon combining this with decarbonization (DC), circular economy (CE), digitalization (DZ), energy transition (ET), green trade (GT), and economic growth (GDP), dynamic dependencies between the G7 economies are highlighted.

The initial phases of economic expansion, characterized by industrial growth, lead to increased CO₂ emissions. However, CE aims to reduce waste as industries shift towards resource efficiency, ultimately resulting in lower CO₂ emissions. The DZ initially drives innovation and energy optimization, which over time contributes to CO₂ emission reduction. The ET facilitates the phasing out of fossil fuels and the adoption of renewable energy sources, directly supporting decarbonization efforts. The GT involves the exchange of environmentally friendly goods and technologies to reduce emissions. To achieve emission reduction across all G7 economies and validate the EKC hypothesis, it is necessary to develop harmonized green economies. This can be accomplished by integrating CE, DZ, ET, GT, and economic growth with green parameters, ultimately leading to a sustainable economy.

Table 1 provides the basic details of the variables, including sources and measurements. The variables were transformed into natural logarithms as per the study by⁷⁵. This is performed to guarantee adherence to a normal distribution.

Table 1 Variables description.

The information presented indicates that CO₂ emission is used for decarbonization, denoted by “DC,” while efficient resource management is employed for the circular economy, referred to as “CE.” Furthermore, individuals who use fixed telephone services, mobile phone services, and the Internet are used to create an index for measuring digitalization. Moreover, the incorporation of RE consumption is being employed as a crucial component of the worldwide shift from fossil fuels to sustainable sources. Experts have thoroughly examined the transition to RE in the field. Furthermore, an additional index is generated when utilizing exports and imports as a gauge of green trade, denoted as “GT.”

Table 2 shows the outcomes of the descriptive statistics to offer a brief overview of the factors. When analyzing data, descriptive analysis explores crucial measures, such as central tendency, deviation from the mean, and spread. This central tendency improves the behavior of the emphasized elements. Skewness and kurtosis are two statistical measures commonly employed to evaluate the dispersion of data. Understanding the concept of skewness allows us to assess the symmetry of the data, whereas kurtosis provides valuable information on a distribution’s tails and whether they are lighter or heavier than expected. From the analysis, the balance and tail of the data provide strong evidence for a normal distribution. The results are shown in Table 2.

Table 2 Descriptive summary.

Table 2 displays the central tendency components (mean, minimum, and maximum) that provide support for the study, while the standard deviation values are within the acceptable range (± 2), as per the thumb rule. Symmetries and tails of data can also fall within the typical range of values, such as skewness (± 3) and kurtosis (± 10), as reported in Fig. 1. Thus, it indicates a solid match because the skewness and kurtosis values align with the anticipated range, indicating a normal distribution, as mentioned in Fig. 1.

Fig. 1

Spread of data and normality test.

Understanding the importance of investing in research and development of the circular economy, digitalization, energy transition and green trade is essential for effectively reducing CO₂ emissions. Here, is an equation that represents the model:

$${\text{D}}{{\text{C}}_{{\text{it}}}}={\beta _{\text{0}}}+{\lambda _{\text{1}}}C{E_{{\text{it}}}}+{\lambda _{\text{2}}}DZ+{\lambda _{\text{3}}}E{T_{{\text{it}}}}+{\lambda _{\text{4}}}{\text{G}}{{\text{T}}_{{\text{it}}}}+{\lambda _{\text{5}}}GD{P_{{\text{it}}}}+{\mu _{{\text{it}}}}$$

(1)

Academia reported that CE, DZ, and ET appeared as the key factors in eliminating the potential level of CO₂ in the developed economies. Sibt-E-Ali⁷⁶ reported that digitalization significantly influences CO₂ levels. Moreover, switching from fossil fuels to RE is spreading as result of the CO₂ emission tax assisting in seeking decarbonization⁷⁷.

Methodology starts with analyzing the slope heterogeneity of the panel dataset, because it is important to notify the uniform slope⁷⁸, as reported in Eq. 2.

$$\Delta =\sqrt S \left( {\frac{{{S^{ - 1}}F\% - L}}{{\sqrt {2L} }}} \right)and\Delta adj=\sqrt S \left( {\frac{{{S^{ - 1}}F\% - L}}{{\sqrt {\frac{{2L(M - L - 1)}}{{M+1}}} }}} \right)$$

(2)

Further, when dealing with the panel dataset, cross sectional property of the dataset should be analyzed because observation may not be independent of each other across different groups⁷⁹, as mentioned in Eq. 3.

$$CD=\sqrt {\frac{{2M}}{{S(S - 1)}}} \left( {\sum\limits_{{z=1}}^{{S - 1}} {\sum\limits_{{x=z+1}}^{S} {{{\hat {\rho }}_{zx}}} } } \right)\sim S(0,1)$$

(3)

In the presence of cross-sectional dependency, it is worthy to apply the second-generation unit root tests because it significantly incorporated the cross-sectional dependency and measure the stationarity property of each study factors, Pesaran⁸⁰ reported in Eq. 4.

$$\Delta {B_{zm}}={\varphi _z}+{\zeta _Z}{B_{z,m - 1}}+\delta z{\overline {B} _{m - 1}}+\sum\limits_{{x=0}}^{q} {{\delta _{zx}}} {\overline {B} _{m - 1}}+\sum\limits_{{x=1}}^{q} {{\lambda _{zx}}} \Delta {B_{z,m - 1}}+{\varepsilon _{zm}}$$

(4)

$CIPS=\frac{1}{S}\sum\limits_{{Z=1}}^{S} {{m_z}} (S,M)$ 5

To investigate the existence of long-term cointegration among the selected series in both categories, Westerlund⁸¹ cointegration tests were utilized in this study. The utilization of the Westerlund cointegration methodology in studies including slope heterogeneity models signifies a notable progression⁸². In addition, the test takes into consideration the presence of CSD.

$$\begin{gathered} {E_a}=\frac{1}{S}\sum\limits_{{z=1}}^{S} {\frac{{{{a^{\prime}}_z}}}{{FR\left( {{{a^{\prime}}_z}} \right)}}} \hfill \\ {E_m}=\frac{1}{S}\sum\limits_{{z=1}}^{S} {\frac{{M{{a^{\prime}}_z}}}{{{{a^{\prime}}_z}(1)}}} \hfill \\ {Q_m}=\frac{{a^{\prime}}}{{FR\left( {a^{\prime}} \right)}} \hfill \\ {Q_a}=Ma^{\prime} \hfill \\ \end{gathered}$$

(6)

Blomquist⁷⁹ reported that the conventional ARDL is not suitable for measuring relationship among the factors, when there is CSD is prevailing in the dataset. Cross-sectional autoregressive distributed lagged (CS-ARDL) is beneficial in this perspective, as reported in Eq. 7.

$$LCO2={\alpha _{zm}}+\sum\limits_{{x=1}}^{q} {{\beta _{zm}}} LCO{2_{z,m - x}}+\sum\limits_{{x=0}}^{q} {{\gamma _{zm}}} {Y_{m - x}}+{\sum\limits_{{z=0}}^{3} {\delta \overline {B} } _{m - x}}+{\varepsilon _{zm}}$$

(7)

The “Panel Corrected Standard Errors” (PCSe) is employed to address the issue of cross-sectional dependency and heteroscedasticity. The process of fixing standard errors in panel data models is used to accomplish this. Panel data models, sometimes referred to as cross-sections, entail the collection of data points for several persons or entities during a designated time. PCSe tackles the problem of cross-sectional dependence, which arises when there is a correlation between observations inside each cross-section. PCSe is employed in panel data analysis to enhance the precision and dependability of estimates by tackling the problem of standard errors that arise from cross-sectional dependency.

Results and discussion

Before proceeding, it is crucial to analyze the path of each component, including DC, DZ, ET, and GT, to reach CO₂ neutrality within the G7 economy. Figure 4 illustrates the historical patterns of the research variables gathered to highlight CO₂ neutrality.

Fig. 2

Trend of Study Factors.

Figure 2 explicitly describes the trend of each study factor with respect to the country to heighten the participation of each country seeking zero CO₂. Further, to assess the correlation among the core factors of the study apply the correlation, histogram and data spread as displayed in Fig. 3.

Fig. 3

Correlation.

The information presented in Fig. 3 provides evidence that there is a link between the DE, DZ, ET, GT, and DC when seen from the perspective of the G7 countries. The variance inflation factors (VIF), which are often used to quantify multicollinearity, are utilized in the study to confirm that this association is favorable to the study or to create issues such as multicollinearity. The results of the VIF are presented in Fig. 4, which can be found here.

Fig. 4

VIF.

Figure 4 illustrates the values of VIF to uncover the existence of multicollinearity. The findings indicate that there is no evidence of multicollinearity, since the VIF values fall within the acceptable range of (± 5, ± 10). Furthermore, cross-sectional dependency test validates the presence of CSD as reported in Table 3.

Table 3 CSD test.

The presented table displays the outcomes of diverse cross-sectional dependency (CD) tests performed on distinct parameters, encompassing DC, CE, DZ, ET, GT, and GDP. The study conducted four distinct CD tests, including CD by Pesaran^79,83, CDw by Juodis and Reese⁸⁴, CDw + by Pesaran and Xie⁸⁵, and CD* by Pesaran and Xie⁸⁵, each utilizing four principal components (PCs). The offered test statistics and their accompanying p-values enable the evaluation of the importance of cross-sectional dependency for each parameter. P-values below a programmed significance level (e.g., 0.05) are indicative of substantial cross-sectional dependency. An example of a parameter that exhibits substantial cross-sectional dependency is parameter CE, which demonstrates a test statistic of 6.220 and a p-value of 0.000. In contrast, the parameter GT demonstrates a CSD that is somewhat less significant but still noticeable, as indicated by a test statistic of 19.970 and a p-value of 0.007. The findings of this study contribute to the conception of the existence and magnitude of CSD among the examined variables, hence enhancing the reliability of statistical inference in the analysis of panel data.

Further, in the potentiality of CSD, second- generation unit root is more effective as related to the conventional unit root. The outcomes of unit root test are reported in Table 4.

Table 4 Second generation unit root test.

Table 4 illustrates the payoff of second-generation unit root tests, namely the CIPS and PSADF tests, conducted on study variables at level and different formats. The findings of the study provide opposition to the null hypothesis of a unit root, so indicating that the series exhibits stationarity. All tests indicate that the variable GT has statistically significant values, providing strong evidence of stationarity. On the other hand, variable DZ also exhibits statistically significant results, but with somewhat smaller magnitudes, indicating relatively less persuasive evidence against the unit root theory. Consequently, indicating that all the factors have stationery at first difference in both cases CIPS and PSADF except the GT and GDP, which are stationery at level.

However, Westerlund cointegration is beneficial when there is Cross sectional independence and results in Table 5 discloses that CE, DZ, ET, GT and GDP are cointegrated with decarbonization, indicating that these factors have a significant clout on DC in the perspective of G 7, as reported in Table 5.

Table 5 Westerlund cointegration.

Therefore, while considering the CSD property of the dataset cross- sectional ARDL is more suitable methodology is measuring the short- and long-term association among the concerning factors. The outcomes are given in Table 6.

Table 6 Outcomes of CS-ARDL approach.

Table 6 presents the CS-ARDL model, for short-run and long-run effects of variables such as DE, DZ, ET, GT, GDP, and error correction term (ECT). The results indicate that variable DE exhibits a significant positive effect in both short and long runs, suggesting its substantial influence. Conversely, while DZ and GT show positive coefficients, their effects are not statistically significant in the short run. ET and GDP display significant positive impacts in both short and long runs, indicating their importance in the model. Moreover, ECT exhibits significance, implying adjustment towards equilibrium in the long run, indicating that factors have a significant influence in achieving decarbonization in the perspective of G7 economies.

For the validation of CS-ARDL findings, the study employs the Panel Corrected Standard Errors (PCSe), which significantly incorporated CSD and heteroscedasticity. The results are rumored in Table 7.

Table 7 Outcomes of PCSe.

Table 7 displays the PCSe outcomes for factors including CE, DZ, ET, GT, and GDP in acquiring DC. CE and DZ have robust positive impacts in seeking decarbonization, as evidenced by their highly significant p-values, indicating their major contributions. On the other hand, ET and GT have significant effects, with ET showing a positive influence and GT displaying a moderate positive impact. The model demonstrates a notable beneficial impact of GDP, as evidenced by a very significant p-value. Consequently, indicating that all the concerning factors are statistically assisting in achieving decarbonization, and PCSe results validate the findings of CS-ARDL.

Discussion

The decarbonization process is of paramount importance in tackling the challenge of climate change, reducing GHG emissions, protecting biodiversity and ecological sustainability. The effective mitigation of environmental degradation, enhancement of energy security, and promotion of economic possibilities may be achieved by implementing circular economy concepts, digitalization, the utilization of RE sources, and the development of green commerce. This shift has significant importance in effectively tackling the problem of global warming⁸⁶, promoting sustainability⁸⁷, and ensuring a resilient future for all individuals.

In considering the intersection of circular economy and decarbonization within the context of environmental sustainability, that is how embracing circular economy principles can significantly contribute to achieving decarbonization goals. By adopting strategies such as waste reduction, resource efficiency, and product lifecycle management, businesses and communities can decarbonization throughout the value chain. Liu⁸⁸ reported that circular economy focuses focusing the efficient and long-term utilization of resources, minimizing waste and resource depletion. Udemba⁸⁹ discloses that implementing circular economic strategies such as reducing, reusing, repairing, and recycling, all sectors can significantly reduce their CO₂ footprint. However, the outcomes are consistent with the previous studies⁹⁰ ,⁹³ and ⁹⁴.

The significance of digitalization in the process of decarbonization lies in its ability to augment energy efficiency and regulation⁹³. The use of smart meters, sensors, and data analytics in digital technologies facilitates the real-time inspection and management of energy consumption in many sectors, such as buildings, factories, and transportation systems⁹⁴. These processes enable the detection of operational inefficiencies within businesses, the adoption of energy-conservation strategies, and the mitigation of overall energy usage, hence leading to a shrinkage in CO₂ emissions⁹⁵. The findings are in the line of⁹⁶, ⁸⁸ and ⁹⁹.

The energy switch encompasses the widespread use of RE sources such as solar, hydro, wind, and geothermal power. These sources provide electricity without emitting greenhouse gases, making them an eco-friendly alternative to fossil fuels⁹⁸. Further, the transition is decentralizing the energy production and distribution systems. Distributed generation technologies, such as rooftop solar panels and microgrids, enable communities, businesses, and individuals to generate their own RE locally, reducing reliance on centralized fossil fuel power plants⁹⁹. The study results are consistent with those of previous studies^100,101 ,and¹⁰².

Green trade contributes to the decarbonization process by mitigating the CO₂ emissions associated with the production of goods by advocating for the utilization of RE sources, environmentally friendly materials, and energy-efficient manufacturing methods¹⁰³. Green trade facilitates the worldwide interchange of RE technologies and resources, encompassing solar panels, wind turbines, and biofuels¹⁰⁴. Furthermore, Emenekwe¹⁰⁵ discloses that green trade facilitates the implementation of CO₂-neutral and CO₂-negative initiatives by offering financial incentives to reduce emissions and adopt sustainable practices. The study results are consistent with the previous studies like¹⁰⁶ and ¹⁰⁷.

Conclusion and policy implications

The reduction in greenhouse gas emissions, which are major contributors to global warming and climate change, hinges on decarbonization efforts. Mitigating climate change impacts, including extreme weather events, temperature increases, and sea level rise, can be achieved by adopting cleaner energy sources, circular economic practices, and digital technologies. To this end, strategies encompassing circular economy principles, digitalization, energy transition, and green trade have been integrated into decarbonization initiatives. Notably, the triad of circular economy, digitalization, and energy transition has emerged as a key factor in environmental preservation, development, and sustainability. A study analyzing G7 data spanning 1990 to 2022 was undertaken to explore these relationships. Cointegration among the variables was confirmed using Westerlund methodology. The CS-ARDL method was applied to evaluate the short- and long-term effects of the study variables. Findings from this approach indicate a long-term association between these factors and carbon neutrality. Furthermore, the panel-corrected standard errors demonstrate that all examined factors significantly contribute to achieving carbon neutrality. This study makes many significant contributions to the literature on attaining carbon-neutral economies, with a specific focus on the Environmental Kuznets Curve (EKC) theory. The EKC hypothesis speculates an inverted U-shaped association between economic growth and environmental degradation, proposing that ecological quality originally declines with economic growth but finally progresses as countries reach higher income levels and adopt cleaner technologies. Our research extends this theoretical framework by incorporating the roles of circular economy practices, energy transition and digitalization in determining the path of carbon neutrality.

This study suggests that carbon neutrality in G7 countries depends on four crucial elements: circular economy strategies, technological advancements, energy sector transformation, and eco-friendly trade practices. It investigates the interplay between these components and decarbonization efforts, revealing the long-term relationships among the examined variables and their effect on reducing carbon emissions. This research underscores the necessity of comprehensive policies that encourage circular economic initiatives, digital technologies, adoption of renewable energy, and sustainable trade practices. The results show that to effectively combat climate change and promote sustainable economic development, governments must set ambitious targets, offer incentives, and invest in research and development across these domains. This investigation contributes to filling knowledge gaps and provides valuable insights for policymakers aiming to balance economic growth with environmental preservation as nations work towards their carbon neutrality objectives.

Study implications

Based on these findings, legislative and administrative authorities must formulate policies pertaining to the environment. Governments must establish and execute a comprehensive legislative framework that facilitates the widespread adoption of circular economy practices, digital technologies, RE sources, and green commerce. The proposed framework must encompass a range of incentives, laws, and support mechanisms aimed at fostering the adoption of sustainable practices and technology within enterprises and industries. It is imperative for governments to set ambitious objectives and deadlines to attain CO₂ neutrality and facilitate the transition towards a CE. The implementation of CO₂ pricing mechanisms serves as a catalyst for reducing emissions and promoting the adoption of low- CO₂ alternatives, hence facilitating advancements towards achieving CO₂ neutrality. To achieve decarbonization of energy production and decrease dependence on fossil fuels, it is essential for governments to provide resources for the development of RE infrastructure and clean technology.

Governments must actively encourage the adoption of digital technology and solutions to effectively support CO₂ emissions reduction initiatives across diverse industries. This entails allocating resources towards the implementation of smart grids, energy management systems, and digital monitoring tools with the aim of optimizing energy use, mitigating emissions, and improving overall efficiency. To enhance dependability, integration, and performance, it is imperative for governments to aid the digitalization of RE infrastructure. It is imperative for governments to actively promote remote work and telecommuting projects to mitigate the CO₂ emissions linked to commuting and travel.

Governments should prioritize the incorporation of environmental elements, such as obligations to CO₂ neutrality and sustainable practices, in trade agreements. This entails engaging in negotiations to establish agreements that foster sustainable commerce, bolster RE growth, and facilitate the implementation of eco-friendly technologies and practices. Governments must aid enterprises engaged in the production and exportation of ecologically sustainable goods and services. These industries encompass a range of sectors, including RE technology, sustainable agricultural materials, and low-CO₂ manufacturing methods. Governments should offer incentives, including tax exemptions, grants, and research money, to stimulate private sector investment in environmentally friendly products and foster innovation. Governments must provide conducive conditions for sustainable investment, such as green bonds, climate funds, and investment incentives for RE projects to encourage green financing and investment flows.

The government plays a crucial role as a political tool for achieving decarbonization goals. To this end, a comprehensive set of policies was established to create a legislative framework based on circular economic principles, including digital technology, renewable energy sources, and eco-friendly commerce. This structure should incorporate incentives, regulations, and support mechanisms to promote sustainable practices in all sectors. Governments are expected to set ambitious timelines and targets for achieving carbon neutrality while implementing carbon taxes and investing in renewable energy infrastructure and clean technology development. Additional measures focus on supporting policy solutions for reducing digital emissions, facilitating remote work, and incorporating environmental obligations into trade agreements. Furthermore, governments must promote the production of environmentally friendly goods and green exports, encourage investments in the circular economy, and allocate funds for the research and development of circular economy solutions, digital technologies, and renewable energy infrastructure.

The allocation of resources by policymakers should be directed towards research and development efforts that specifically target the advancement of circular economy solutions, digital technologies, RE infrastructure, and green trade practices. Conservation and financial resources should be allocated to pioneering initiatives that aim to improve resource efficiency, foster energy conservation, and support the shift towards RE sources. Moreover, to advance the process of reducing CO₂ emissions, authorities must aggressively encourage cooperation and form alliances among governments, companies, universities, and civil organizations.

Limitation and future study directions

This extensive research acknowledges its limitations and suggests directions for future research. Focusing on the G7 nations limits their relevance to emerging or developing economies with different resources and policies. The dataset’s lack of post-2022 insights necessitate updates or predictive models. Although it examines variables such as the circular economy, digitalization, energy transition, green trade, and economic growth, it omits crucial factors such as institutional quality, social dynamics, and innovation ecosystems. The CS-ARDL methodology addresses cross-sectional dependence, but DCCE or machine learning can offer more nuanced perspectives on nonlinear dependencies. Future research could conduct industry-specific analyses to derive policy implications for sectors such as energy, transportation, and manufacturing. This study investigates variable correlations, but not causal relationships, which could be explored using structural equation modeling or Granger causality tests. Data quality issues have led to the use of proxies for digitalization, indicating the need for more precise indicators through big data or IoT integration. Addressing these gaps would enhance the study’s robustness and understanding of decarbonization dynamics across diverse economies.