The Interconnections between Renewable Energy, Economic Development and Environmental Pollution: A Simultaneous Equation System Approach.

AuthorSonkiazis, Elias

    A large number of studies has considered the impact of new energy sources, other than fossil-based energy, on economic growth or the causality between the so-called renewable energies and economic growth (see among others Court, et al., 2018; Bhattacharya, et al., 2016; Sebri, 2015; Apergis and Payne, 2012). Although there is not a clear consensus, the majority of these studies provides evidence on the following aspects: renewable energies affect positively economic growth; the relationship between renewable energy consumption and economic growth is mostly bidirectional; the new sources of energy favor the creation of new jobs in new sectors; and renewable energies are technology enhancing. Another important finding is that new energy sources alleviate the balance-of-payments dependence on fossil-based energy, especially in countries where this kind of energy sources is inexistent and has to be imported. Others point out that using renewable energy is a way to reduce macroeconomic instability, which might result from the oil-price volatility that provoked severe economic crises in the past.

    Almost all studies concentrated on the relation between renewable energy consumption and economic growth (or per capita income growth), but very few studied the impact of these sources of energy on improving the quality of the populations standards of living, which is measured by the Human Development Index (HDI). The HDI (1) is a more accurate and broader measure of standards of living that takes into consideration also health conditions (through life expectancy) as well as education measurements (through years of schooling), along with income factors (gross national product per head). It has been established in the health economics literature that better health increases labor productivity and therefore economic growth (e.g. Lopez-Casasnovas et al., 2005), and through the endogenous growth theory that human capital is the engine of growth (e.g. Romer, 1986; Lucas, 1988; Barro, 2001). Knowing that renewable energy contributes to better health conditions through lower environmental pollution and that it is linked to new technologies, the HDI is more suitable than any other economic indicator commonly used in the literature to assess the impact of renewable energies on the quality of the standards of living.

    Another shortcoming in the literature is that most studies apply quantitative approaches to measure the relationship between income and renewable energy consumption without explaining the mechanism through which this connection operates. The models used are mostly non-theoretical in nature focusing on empirical evidence. Examples of these empirical frameworks are the causality tests trying to identify the direction of the relationship between income measures and renewable energy sources or cointegration techniques to ensure a non-spurious correlation, among other dynamic specification approaches. Few studies employ a simultaneous equation system approach that describe the important links and feedback effects between economic variables and renewable energy consumption (Tiba and Omri, 2017).

    The aim of this paper is to contribute to the existing literature in two main aspects: first, using a more suitable indicator that measures the quality of standards of living, based on the HDI (which considers health and education conditions); second, employ a more suitable approach that describes the important interconnections between economic indicators, renewable energy consumption and environmental pollution. The latter lies on a system of equations that can be estimated simultaneously, describing analytically the linkages between variables characterized by reciprocal feedback effects with growth expanding tendencies.

    The paper comprises the following sections. Besides the introduction, section 2 discusses briefly the literature review, outlining the main findings. The model description is made in section 3. Section 4 explains the variables, the data, and stylized facts. Section 5 presents and discusses the obtained results from the estimated equations. Section 6 provides a sensitivity analysis. The last section concludes.


    The existing literature on the energy consumption-economic growth relationship is extensive and controversial, insofar provides paradoxical and not conclusive results. A review of the research in this field can be found, for example, in Tiba and Omri, 2017; Menegaki, 2014; Ozturk, 2010; or Payne, 2010. Typically, the studies analyzing the energy-economic growth nexus consider four main hypotheses:

    i) The feedback hypothesis, supported by the bidirectional connection between energy consumption and economic growth, meaning that both variables influence each other reciprocally. Under this hypothesis, energy conservation policies, that reduce energy consumption, have a negative impact on economic growth, which in turn affects energy consumption adversely.

    ii) The growth hypothesis, validated by the existence of a unidirectional relationship running from energy consumption to economic growth. According to this view, energy consumption plays a vital role in enhancing higher economic growth, and therefore energy conservation policies are expected to have negative impacts on economic growth.

    iii) The conservation hypothesis, confirmed by the existence of a unidirectional connection running from economic growth to energy consumption. Therefore, higher economic growth leads to increased energy consumption with no feedback effect. In this case, energy conservation policies will not affect economic growth adversely.

    iv) The neutrality hypothesis, validated by the absence of relationship between energy consumption and economic growth, i.e. the variables are independent. Policies targeting at reducing energy consumption have no impact on economic growth and vice-versa.

    If the relationship between energy consumption and economic growth has been widely explored in the energy economics literature over the past decades (using different approaches/methods, time frames and country samples), the research on energy-human development nexus is rare, and the focus on renewable energy is even scarcer. The existing empirical studies generally use monetary indicators such as gross domestic product (GDP) as a proxy for economic growth, and very little attention has been given to alternative measures of human development, particularly the Human Development Index (Shaojian et al., 2018; Kocak and Sarkgunesi, 2017; Alper and Ogus, 2016; Inglesi-Lotz, 2016; Zhang and Broadstock, 2016). Moreover, as mentioned above, empirical evidence on this relationship is mixed and no consensus has been achieved in the literature, which highlight the need for additional research in the field. In particular, to the best of our knowledge, empirical studies exploring the interconnections between renewable energy consumption and HDI are practically nonexistent in the literature, which gives an original character to the research presented in this work.

    Important exceptions are the works by Kazar and Kazar (2014) and Pirlogea (2012). In the first study, the authors explore the interconnection between renewable energy consumption and economic development using HDI as a proxy of the country development level. The study covers two different time periods: 1980-2010 with 5-year data to analyse long-term effects, and 2005-2010 yearly data for short-term effects, using a sample of 154 countries. The empirical results show that, in the long-run, increasing levels of economic development lead to higher levels of renewable energy, while, in the short-run, there is evidence of bidirectional causality between the variables. Moreover, the nature of this causal nexus varies across countries with different levels of HDI in both, the short-run and long-run analysis. Pirlogea (2012), in turn, uses a panel data approach to examine the relationship between energy consumption (including both renewable and fossil fuel energy) and human development for six European Union countries with high (Bulgaria, Romania) and very high HDI values (Ireland, Netherland, Poland and Portugal), for the period 1997-2008. Empirical findings support evidence of a positive relationship between renewable energy consumption and human development, supporting the growth hypothesis. In the case of fossil energy consumption, the results are mixed: there is a positive nexus for countries with very high HDI and negative in countries with high HDI level.

    Among the few existing studies, Hiranmoy et al. (2015) and Ouedraogo (2013) also modeled the energy-human development relationship, but both consider the total energy consumption. In the first study the authors employ panel cointegration techniques to investigate the long-term relationship between HDI and energy consumption for a panel of 60 countries over the period 1985-2011. Their results confirm the existence of a long-run relationship between the two variables and that energy consumption has a significantly positive impact on HDI. The study conducted by Ouedraogo (2013) supports evidence of a negative cointegration relationship between energy consumption and HDI in the long-run. In the short-run, results support the neutrality hypothesis of no causality in either direction, meaning that energy consumption has a neutral effect on HDI. This study covers a panel of 15 developing countries over the period 1988-2008 and uses cointegration and error correction estimation techniques.

    Another stream of studies investigating the correlation between energy consumption and HDI is based on a descriptive analysis only. Due to the descriptive nature of these studies the consistency and validity of conclusions are ambiguous. For instance, Martinez and Ebenhack (2008) analyse the correlation between HDI and per capita energy consumption for 120 nations. Results support a strong relationship between the two variables for most...

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