Renewable and Nonrenewable Energy Consumption, Economic Growth, and Emissions: International Evidence.

• Author: Le, Thai-Ha

1. INTRODUCTION

   Most of the observed increase in global mean temperature ("global warming." since the mid-20th century is believed to be attributable to human activities (US National Research Council, 2008). It is expected that human-induced warming of the climate will continue throughout the 21st century and beyond (US National Research Council, 2008). In this context, the significance of clean and sustainable environment was first recognized officially in the Kyoto Protocol (1997) that was endorsed by both developing and developed countries. The protocol identifies greenhouse gases (GHG) emissions, particularly carbon dioxide (C[O.sub.2] ) emissions, as the primary sources of global warming. More specifically, C[O.sub.2] emissions from burning fossil fuels and industrial processes account for 65% of global GHG emissions (IPCC, 2014).

   Apart from C[O.sub.2], methane (C[H.sub.4]) and nitrous oxide ([N.sub.2]O) that are emitted from agricultural activities such as fertilization, irrigation, livestock and rice production, energy use and biomass burning are the other key sources of GHG emitted by human activities at the global scale. [N.sub.2]O emissions and C[O.sub.2] emissions from forestry and other land use as well as from fossil fuel and industrial processes contribute much of GHG emissions at the global level (IPCC, 2014).

   The Kyoto Protocol was a cornerstone in the promotion of renewable energy sources (RES) that would be a key solution to mitigating climate change and managing energy demand growth. Countries of all income levels have been promoting and adopting policies to switch energy consumption towards RES. Since 1990, RES have grown at an average annual rate of 2.2%, which is slightly higher than the growth rate of world's Total Primary Energy Supply (TPES) of 1.9% (IEA, 2016). The growth rate has been especially high for solar photovoltaic and wind power, which grew at average annual rates of 46.2% and 24.3% respectively, from very low bases in 1990 (IEA, 2016). Nevertheless, the path through which consumption of RES leads to higher growth is uncertain (see, for instance, Domac et al., 2005; Masui et al., 2006; Chien and Hu, 2007; Krewitt et al., 2007; and Apergis and Payne, 2010). Overall, the growing threat of global warming, concentration of GHG emissions in the atmosphere, and climate change is a topic of growing global importance. In particular, it is important to find ways to mitigate their effects while finding alternative ways to meet rapidly growing energy demand worldwide (Stern, 2007).

   Against the above background, this study sets three objectives. First, it examines how RES and Nonrenewable Energy Source (NES) influenced the level of economic development in a global sample of countries of varying income levels. Second, this study investigates how RES and NES impact the level of GHG emissions in the global sample, controlling for income and other factors. Third, this study analyzes whether the level of economic development influences the effect of RES and NRES on the level of GHG emissions. To do so, the global sample is separated into subsamples of countries at different levels of development using a panel approach. Figure 1 seems to suggest that different income groups of countries contribute differently to global GHG emissions in per capita terms.

   The three main findings are as follows. First, the consumption of both renewable and non-renewable energy appears to promote economic growth for both developed and developing economies. While this evidence is found in several studies in the literature, almost no study uses a global sample (of 102 countries) like the one used here. Second, this study finds that renewable energy helped developed countries contain carbon emissions. In other words, renewable energy has been effective for controlling carbon emissions in developed countries. Most of the studies in the literature that examine the relationship between renewable energy and carbon emissions in a large sample of countries do not separately examine developing and developed countries [for instance, Apergis et al. (2010)] and many of the studies are national studies [e.g. Menyah and Wolde-Rufael (2010) for the US].

   Third, this study finds renewable energy does not help containing carbon emissions in developing countries. Perhaps lack of data has hindered quantitative analysis of whether renewable energy can help control carbon emissions in developing economies. Tiwari (2011) was the only study that examines this issue. Using a simple SVAR approach including GDP, renewable energy consumption and C[O.sub.2] emissions, Tiwari (2011) finds that renewable energy did not contribute to tackling C[O.sub.2] emissions in India.

   The rest of this study is organized as follows. Section 2 reviews relevant studies, focusing on two strands of literature, which are (1) the nexus between RES and economic growth and (2) the relationship between RES and NES and emissions. Section 3 presents the empirical model, data and methodology employed in this study. Section 4 reports the empirical results. Section 5 discusses the policy implications. Section 6 concludes the study.

2. LITERATURE REVIEW

   There is a large literature that examines the dynamics of the relationships between electricity or energy consumption and economic growth, either in bivariate or multivariate frameworks [see, for instance, Le (2016), Le and Quah (2018), Fang and Le (2019); Le and Nguyen (2019)]. (1) These studies delve into both a single country and many countries, and center on four hypotheses growth; conservative; feedback; or neutrality - associated with this relationship [see, for example, Lee and Lee (2010), Belke et al. (2011), Stern and Kander (2012), Liddle (2013), Ouedraogo (2013), Karanfil and Li (2015), Yildirim et al. (2014), Tang et al. (2016)]. Specifically, (1) the feedback hypothesis states that energy consumption promotes economic growth and economic growth promotes higher energy consumption; (2) the growth hypothesis suggests that energy consumption drives economic growth; (3) the conservative hypothesis proposes a unidirectional link flowing from economic growth to energy consumption; and (4) the neutrality hypothesis states that there is no relationship between energy use and economic growth.

   For instance, Liddle (2013) studied a global sample of 79 countries during the 1971-2007 period and the results indicate that energy consumption and electricity consumption contribute significantly to economic growth for all panels of countries at different income levels. Similarly, Tang et al. (2016) found evidence of growth hypothesis for Vietnam using the neoclassical Solow growth framework for the 1971-2011 period. The Granger causality test revealed unidirectional causality running from energy consumption to economic growth. On the other hand, Lee and Lee (2010) showed a positive bi-causal relationship between the level of economic activity and energy/electricity consumption for a group of 25 OECD countries from 1978 to 2004, which supports the feedback hypothesis. However, there are only a handful of studies in the field of renewable energy consumption in a disaggregated framework. The next section presents a selective review of the recent literature in the field of renewable energy consumption and economic growth.

   There is no unique way through which RES can boost economic growth. However, several studies attempted to propose plausible mechanisms for such a relationship [see, for example, Domac et al. (2005), Masui et al. (2006), Chien and Hu (2007), Krewitt et al. (2007), Bhattacharya et al. (2016 and 2017), Armeanu et al. (2017).] Domac et al. (2005) and Chien and Hu (2007) proposed two channels through which renewable energy promotes economic growth. First, the expansion of renewable energy industries generates new business and employment opportunities, which contribute to economic growth. Second, the import substitution of energy might have direct and indirect effects on GDP and/or trade balance.

   Renewable energy has some distinctive positive economic ripple effects compared to nonrenewable energy. Armeanu et al (2017) pointed out that RES are eco-friendly sources of energy or green energy. As such, RES drive sustainable growth through energy and financial savings achieved by replacing NES and costly energy with low-priced RES, leading to slower depletion of natural resources. Besides a smaller negative effect on the environment than non-renewable energy, renewable energy has the potential of creating jobs associated with developing, setting up, and operating renewable Energy Systems. Compared to fossil fuel technologies, which tend to be mechanized and capital intensive, the renewable energy industry is more labor-intensive (IRENA, 2013). This implies that, on average, more jobs are created for each unit of RES consumed. The implicit scarcity of nonrenewable resources such as fossil fuels should drive market dynamics toward alternative resources. RES thus has the benefits of environmental and long-term economic sustainability, although renewable sources are not efficient enough to fully meet energy needs.

   On the other hand, Kahia et al (2016) proposed that most renewable energy technologies might be less competitive than non-renewable energy due to a high level of initial capital cost and thus higher levelized cost of electricity. This explains the competitive disadvantage of renewable energy due to lengthy payback time needed to recover high initial capital costs (Baulch et al, 2018). This speedy decline of the costs of renewable energy technologies is mainly attributed to substantial advances and manufacturing capacities. They also explain why the share of RES in the energy mix is widely expected to rise.

   The empirical evidence is mixed at best. Apergis and Payne (2010) examined the link between RES and GDP for a sample of 20 OECD countries during 1985-2005. The study detects a long-run equilibrium...