Can Green Energy Finance and Eco‐Friendly Taxes Cap Global Warming to 2 Degrees and 1.5 Degrees Celsius Above Pre‐Industrial Levels? Uncovering the Synergistic Power of Rule of Law

ABSTRACT Anchored on the sustainable development goals (SDGs) and the Paris Agreement, which seek to limit the global average temperature to well below 2°C above pre‐industrial levels and pursue efforts to limit the temperature to 1.5°C, this study investigates how green energy finance and environmental taxes affect environmental quality, with an emphasis on the moderating role of the rule of law. Using data on Australia (1996–2021), the findings via the Kernel Regularized Least Squares machine learning technique show that green energy finance significantly reduces greenhouse gas emissions, promoting SDGs 13 and 7. The rule of law also enhances environmental quality by mitigating greenhouse gas emissions, contributing to SDGs 13 and 16. The interaction between the rule of law and green energy finance yields additional emission‐reducing effects. In contrast, environmental taxes are positively related to emissions, and this negative effect intensifies when conditioned on the rule of law, challenging SDG 13. Economic growth increases emissions, especially at lower income thresholds, which contradicts SDG 13; however, the threshold effect supports the EKC hypothesis. These outcomes highlight the crucial role of governance in aligning fiscal and environmental policies to achieve SDGs 7, 13, and 16, while also identifying policy misalignments that could hinder sustainable progress if left unaddressed.

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