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The study aims to explore the moderation effect of renewable energy consumption (REC) on the relationship between foreign direct investment (FDI) inflows and carbon emission (CO₂). Furthermore, the study investigates the prevalence of rebound effect in energy efficiency for the top five FDI inbound destinations in the Asia-Pacific region.

The study uses a balanced panel data set spanning from 1995 to 2020 obtained from the World Bank Database. This paper used feasible generalized least squares (FGLS) as the primary method, and to ensure the robustness of the findings, this paper used the panels corrected standard errors (PCSE) model.

The findings reveal a negative relationship between FDI and CO₂ emissions and REC and CO₂ emissions. However, the moderation effect of REC on the relationship between FDI inflows and CO₂ emissions is positive, suggesting that when both FDI and REC increase simultaneously, carbon emissions also increase. This study attributes the observed positive moderation effect to the phenomenon known as the rebound effect.

FDI fosters environmental sustainability. Regions’ FDI policies can be guidelines for other nations aiming for similar outcomes. REC reduces CO₂ emissions, underlining renewable energy’s efficacy. However, positive moderation effect of REC on the relationship between FDI and CO₂ emissions highlights the necessity for balanced policies to prevent unintended consequences like the rebound effect.

The originality of this study lies in examining the prevalence of rebound effect in energy efficiency. Prior empirical studies have explored the relationship between REC and carbon emission and established that increased efficiency in renewable energy creates positive environmental and climate externalities. However, it is constrained by rebound effects and this has been ignored by previous studies.