How do green innovation shocks shape green growth and carbon emissions over the business cycle?

This study examines how green innovation interacts with green growth and carbon emissions over the business cycle, with a particular focus on its dynamic role in shaping macro-environmental outcomes. It employs a multivariate time-series framework based on Fourier-based unit root and cointegration techniques combined with a vector error correction model, allowing for smooth structural changes and distinguishing between long-run equilibrium relationships and short-run dynamics. The empirical findings reveal that green innovation is strongly procyclical and responds significantly to capital accumulation and green investment. Its contribution to green growth emerges gradually rather than instantaneously, reflecting delayed diffusion and adjustment processes. The results further show that innovation-driven shocks account for an increasing share of fluctuations in both green growth and carbon emissions over longer horizons. While economic expansions initially increase emissions due to scale effects, innovation-induced efficiency gains lead to a reduction in emissions in the medium to long run. Conversely, recessions weaken innovation activity, resulting in persistent losses in green growth and delayed environmental improvements. The study contributes to the literature by providing a dynamic framework that links macroeconomic conditions, innovation processes, and environmental outcomes over the business cycle. It highlights green innovation as a key transmission channel and offers new evidence on the timing and persistence of innovation shocks. The findings also provide policy-relevant insights by emphasizing the importance of countercyclical support for green innovation to avoid recession-driven setbacks in sustainable growth and emissions mitigation.