From shadow to sustainability: How informality, environmental taxes, and green innovation reshape carbon and biodiversity futures in the G7 countries

The shadow economy remains a blind spot in climate and biodiversity policy. However, its interaction with fiscal and technological forces can significantly affect the success or failure of sustainability transitions. We propose a novel integrated framework that combines econometric models with deep learning to examine the role of the shadow economy, environmental taxes and green innovation on consumption-based CO₂ emissions and biodiversity in the G7 countries. Using data from 1994–2020, the study employs Cross-sectionally Autoregressive Distributed-lag (CS-ARDL) and Fully Modified Ordinary Least Squares (FMOLS) to estimate the relationship among the variables. Moreover, deep learning models—Long Short-Term Memory (LSTM) and Convolutional Neural Network (CNN)—are applied to quantify and forecast the relationship between these factors. The study finds that the shadow economy increases environmental degradation. Whilst green innovation and environmental taxes improve both emissions reduction and biodiversity productivity. Forecasts to 2030 indicate that without reducing the shadow economy, effective tax enforcement and green innovation, the G7 will likely to miss decarbonization and persistent biodiversity loss. The findings highlight the need for integrated policies for reducing the shadow economy with effective environmental taxes and sustainability-focused innovation.