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Said, R.;  Bhatti, M.I.;  Hunjra, A.I. Renewable Energy and Economic Growth. Encyclopedia. Available online: https://encyclopedia.pub/entry/27082 (accessed on 04 July 2024).
Said R,  Bhatti MI,  Hunjra AI. Renewable Energy and Economic Growth. Encyclopedia. Available at: https://encyclopedia.pub/entry/27082. Accessed July 04, 2024.
Said, Rabie, Muhammad Ishaq Bhatti, Ahmed Imran Hunjra. "Renewable Energy and Economic Growth" Encyclopedia, https://encyclopedia.pub/entry/27082 (accessed July 04, 2024).
Said, R.,  Bhatti, M.I., & Hunjra, A.I. (2022, September 10). Renewable Energy and Economic Growth. In Encyclopedia. https://encyclopedia.pub/entry/27082
Said, Rabie, et al. "Renewable Energy and Economic Growth." Encyclopedia. Web. 10 September, 2022.
Renewable Energy and Economic Growth
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This entry is adapted from the peer-reviewed paper 10.3390/en15155349

The clean development mechanism entails a vast deployment of renewable energy technologies to enhance sustainable development. Energy security is quickly becoming a reality as various renewable energy supplies are exploited because of their potential for mitigating GHG emissions. As part of the UNFCCC (United Nations Framework Convention on Climate Change), the Kyoto Protocol incorporates the idea of a “clean development framework”. Developed nations would contribute to emission reduction measures, which would then fund renewable energy programs in the developing world. Increasing the usage of green technology and renewable energy sources can help address this problem. However, mass sustainable energy development faces a few obstacles, including unpredictability, input–output cost analysis, higher manufacturing costs, and a lack of knowledge and financial resources. Renewable energy sources are critical to a country’s overall growth. Developing countries must increase their reliance on renewable energy sources.

energy consumption sustainable development renewable energy

1. Introduction

Researchers dispute the association between expanding the usage of renewable energy sources and stimulating the economy. From this perspective, Konuk et al. [1] investigated the connection between economic growth and energy use in developing countries. Their outcomes suggest that biomass energy usage and economic growth go hand in hand. The research by Jenniches [2] also looked at the financial implications of a shift to generate renewable energy sources in the region. Determining technologies and timeframes for evaluation are critical, in his opinion. Doytch and Narayan [3][4] assessed the influence of manufacturing and service growth on the usage of non-renewable and renewable energy sources. According to their findings, high-growth industries such as the service industry in advanced economies and the manufacturing industry in developing economies benefit from renewable energy. Acheampong et al. [5] found a bi-directional causal association between renewable energy use and economic growth using the GMM-PVAR approach. Koengkan et al. [6] discovered that countries such as Venezuela and Argentina have low levels of renewable energy in their power mix. These governments saw a connection between renewable energy and fossil fuel usage as a viable solution to resource shortages.
Instead of increasing economic growth in several countries, energy conservation measures might slow it down [7]. Another study by Ivanovski et al. [8] suggested a beneficial effect of non-renewable energy on economic activity and development in OECD nations. Zebra et al. [9] investigated renewable energy systems in developing nations. Regarding renewable and non-renewable mini-grid maintenance and production, Asian developing countries surpass African countries. As mini-grid costs come down, renewable energy will become increasingly more accessible on the utility-scale. Economic growth (hurdles) and renewable energy generation are also examined in this context by researchers. It is agreed that there are technological, societal, and governmental barriers to the growth of renewable energy. However, Seetharaman et al. [10] asserted that these variables do not directly impact the results of renewable energy development. The use of renewable energy does not hamper economic growth, according to Islam et al. [11]. Despite this, it has a substantial impact on the economy. Investments in renewable and conventional energy usage have both good and negative effects on income growth, based on the beneficial impact of local and foreign investments on energy demand. The quality of the institution also affects the utilization of renewable energy. It is also negative to renewable energy consumption because urbanization has a beneficial influence on non-renewable power consumption.
To achieve faster and more spectacular economic growth, certain industrialized countries, despite their revolutionary attempts to embrace renewable energy technology, remain tied to the usage of fossil fuel alternatives [12]. Even while renewable energy has an environmental benefit, the economic peace that may be achieved with non-renewable sources of energy benefits different economies and their citizens’ way of life, but it does not benefit the environment. For industrialized countries, renewable energy consumption may not substantially affect economic growth, and several EU nations may not correlate renewable energy and economic development metrics. There has been some discussion and an uncertain economic climate, but the EU countries’ proportion of overall energy consumption is steadily increasing and is not significantly dependent on economic issues [13]. Renewable energy might have a significant economic impact if only fossil fuels were substituted. South Korea’s electricity and power generation would have to pay an additional 35 trillion KRW annually if only renewable energy sources were used [14]. Customers will be unwilling to pay for this strategy since it is impractical. According to their findings, the FDI and investments in renewable energy projects may have “economic advantages” for the region by establishing new job and training possibilities, production and linking activities, etc. Education and mobilization of the general public are also imperative for the region’s renewable energy resources to be fully utilized. According to Oluoch et al. [15], 73 percent of Kenyans highly support the development of renewable energy sources technologies, and 91 percent feel that renewable energy technologies will lower the energy generation costs in the country.
Numerous studies in theory and research suggest that the link between rising economic growth and rising energy consumption might take several different forms. Recent economic studies on renewable energy sources and long-term economic development are necessary in light of the growing public concern over the environmental harm caused by fossil fuel use. For example, the growth, conservation, feedback, and neutrality hypotheses are only a few examples of theories proposed to explain the energy consumption–economic growth connection.

2. Growth Hypothesis

This hypothesis argues that energy use is critical to economic development and other inputs (such as technological advancement, capital investment, and labor) cannot substitute energy’s importance in the production process. According to this theory, reducing energy usage could hurt economic growth. Using panel estimation approaches for the 38 main renewable energy-producing economies from 1990 to 2012, Bhattacharya et al. [16] found that renewable energy usage has a “significant positive effect” on long-term growth in the economy in 57 percent of economies investigated. As a result, the use of renewable energy is an important factor in the development. Inglesi-Lotz [17] investigated 34 OECD countries between 1990 and 2010 using the Pedroni co-integration approach. The findings suggest that using renewable energy has a positive relationship with economic growth. Murshed et al. [18] investigated the association between renewable energy usage and economic development in Argentina from 1971 to 2016. They discovered a long-run relationship between sustainable energy and economic growth using an advanced form of the STIRPAT model. Furthermore, Wang et al. [19] investigated the causation between renewable energy utilization and economic growth using a panel of OECD countries. According to the study, renewable energy usage has a favorable influence on economic development. In addition, Zahoor et al. [20] examined the impact of clean energy investment on China’s economic growth over the period 1970–2016. They found that clean energy investment is positively associated with China’s economic growth.

3. Feedback Hypothesis

The feedback hypothesis demonstrates that economic development and energy use are linked reciprocally. Growth in the economy has a negative impact on energy consumption, and the decrease in energy usage has a negative impact on economic growth and its development [21]. A study by Lin and Moubarak [22] suggested that renewable energy has been linked to economic growth in China. This illustrates that China’s economic advancement is supporting the growth of the renewable sector. An investigation of the causation between renewable energy usage and economic development was performed by Rafindadi and Ozturk [23]. According to their findings, increasing the country’s reliance on renewable energy boosts the country’s economic growth by 0.2194 percent for every 1 percent rise in renewable energy consumption. Using data from 1960 to 2017, Acheampong et al. [5] found a positive feedback relationship between renewable energy consumption and economic growth in Sub-Saharan Africa. Gyimah et al. [21] investigated the direct and indirect effects of renewable energy consumption on economic growth in Ghana using the Granger causality test based on data from 1990 to 2015. The study’s findings point to a connection between growing economic activity and an increase in the use of renewable energy sources.

4. Conservation Hypothesis

According to the conservation theory, energy consumption is a function of economic growth, and the growth concept is absolutely at odds with this (e.g., energy consumption determines economic growth). The hypothesis of conservation has had a great deal of support in recent years. Between 1994 and 2003, Sadorsky [24] employed panel co-integration estimations for a sample of 18 emerging economies to examine the link between renewable energy use and economic growth. The results indicated that economic growth positively influences renewable energy consumption. In addition, the researchers reported that renewable energy consumption would surge by 3.5 percent if real GDP per capita increased by 1 percent. This means renewable power consumption will increase dramatically as emerging economies gain traction. Menyah and Wolde-Rufael [25], for example, found evidence of one-way causality between economic growth and the utilization of renewable energy in the United States. More recent studies also validated conservation theory [26][27][28].

5. Neutrality Hypothesis

According to the neutrality theory, there is no correlation between energy consumption and the economy’s growth. Researchers indicate that energy has little bearing on economic growth. Capital and labor are the essential components of production, while energy is an intermediate input. Despite a multitude of evidence indicating a connection between the use of renewable energy and economic growth, other investigations point out that no such relationship exists in many European countries [29]. Since renewable energy was still in its infancy in Europe during this period, Menegaki [29] proposed that the lack of correlation between GDP growth and renewable energy usage may be attributable to this early stage of development and market penetration.
Toda–Yamamoto causality tests were conducted on the US economy from 1949 to 2010 by Yildirim et al. [30]. The study supported the neutrality hypothesis: no casual association between economic growth and renewable energy use. Vaona [31] used Granger causality tests to confirm the neutrality hypothesis in Italy from 1861 to 2001. More recent studies support this hypothesis. For example, Eyuboglu and Uzar [32] discovered no causal association between renewable energy usage and economic development for a panel of 15 emerging markets from 1990 to 2015. Inal et al. [33] offered similar conclusions for the context of African oil-producing nations from 1990 to 2014. As a result, there is no convincing evidence of a relationship between higher usage of alternative energy sources and enhanced economic development in any manner or direction on this subject. Bulut et al. [34] examined the impact of renewable energy consumption on economic growth for the USA using quarterly data over the period 1977Q1–2019Q3. The results indicated that there is no cointegration between the two variables.
The G7 industrialized countries cannot ensure environmental sustainability despite their economic success. For example, Ahmad et al. [35] showed that financial globalization and eco-innovation decrease the ecological footprint, and urban areas hurt the environment because they increase carbon footprint levels. Amri [36] emphasized the interconnectedness of three parameters across various income groups of countries. Renewable energy use and GDP growth, commerce and renewable energy, trade, and economic growth were linked in all explored countries. Another study focused on renewable energy consumption, ecological footprint, and economic growth in the US. Using the ARDL model, it is possible to link an increase in renewable energy use with the reduction of environmental deterioration [37]. Using different statistical techniques, Armeanu et al. [38] examined the connections between renewable energy, distinct forms of energy, economic growth, carbon intensity, and rapid urbanization in various nations with varying income levels. They discovered that in developed countries, a co-integration exists between renewable energy consumption and carbon releases from renewable and nuclear sources. Using the Granger causality test, there is only one bidirectional causal connection between economic growth and resource consumption in developing countries. In contrast, developed countries have a bidirectional link between energy intensity and carbon emissions.
Researchers such as Hao et al. [39] employed panel data techniques to examine the consequences of green growth in G7 countries in the past 25 years. According to the conclusions, environmental deterioration is affected by both short-term and long-term GDP development. Consequently, the claim that green growth improves the environment is valid. Changing CO2, GDP, green economy, environmental regulation, renewable power consumption, or human resources in all seven G7 countries will affect the other countries.
Conversely, energy usage benefits growth in several low- and middle-income nations, whereas renewable energy sources have a negative effect [40]. Li and Leung (2021) used panel data methodologies to investigate the connection between economic growth, energy prices, and renewable energy use. They showed that increasing renewable energy requires economic growth even in countries such as the G7, whose economies are well-established. In another study, Namahoro et al. [41] showed that renewable energy positively impacts economic growth. Renewable energy use in the G7 countries benefits economic growth, and this positive association is affected by the threshold value. Thus, renewable energy’s function in promoting economic growth is non-linear. For example, renewable energy plays an essential role in fostering economic growth if EU members increase their use above a certain threshold. Concerning renewable energy consumption and economic growth, Chen et al. [42] used a threshold model in their study. These studies, which use 1995–2015 as a baseline, show that renewable energies significantly and favorably impact economic growth in OECD nations but not developed ones. When renewable energy consumption reaches a particular level in emerging and non-OECD countries, it dramatically affects economic growth. According to Sharma et al. [43], switching to renewable energy has more long-term economic benefits than short-term costs using dynamic panel data estimation.

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Rabie Said
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Muhammad Ishaq Bhatti
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Ahmed Imran Hunjra
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