Renewable Energy and Economic Growth: An Overview of the Literature

Renewable Energy and Economic Growth: An Overview of the Literature

Patrizio Morganti (University of Tuscia, Viterbo, Italy) and Giuseppe Garofalo (University of Tuscia, Viterbo, Italy)
DOI: 10.4018/978-1-7998-1419-1.ch004

Abstract

The global commitment to drastically curb greenhouse gas emissions towards a sustainable development is strongly connected to the development and usage of renewable energy (RE), such as solar and wind. Between 2006 and 2016, world's total RE consumption, excluding hydro-electricity, increased by almost 350%, and RE investment grew from US $47 billion in 2004 to 279.8 billion in 2017. The importance of RE has attracted a lot of attention from the economic literature as well, since a growing body of empirical research is investigating the relationships between RE and economic growth. The general outcome is the existence of a positive bi-directional (direct and reverse) link between RE consumption and real GDP, though it also emerges evidence showing no statistically significant relationship. This Chapter provides i) an overview of the recent world's trends of RE production and investment, ii) an extensive and detailed review of the recent advances in the RE-growth empirical literature, highlighting the main methodologies adopted and the main findings emerged.
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Introduction

The global commitment to drastically curb greenhouse gas emissions towards a sustainable development is strongly connected to the development and usage of renewable energy (RE). RE is sourced from natural processes and is either inexhaustible or can be replenished. Examples of renewable energy are solar photovoltaic (PV), wind, geothermal, hydropower, bio-energy, and ocean power. The share of renewables has increased significantly in the recent years. Between 2006 and 2016, world’s total renewable energy consumption, excluding hydro-electricity, increased by almost 350% (from 93 to 420 million tonnes of oil equivalent), and renewable energy investment grew from 47 US$ billion in 2004 to 279.8 billion in 2017 (BP 2017, FS 2018). The growth of renewables has been faster in the developing non-OECD countries compared with the OECD countries (REN21 2019 and FS 2018). Also, emerging countries are largely investing in renewables (IEA 2013). In 2018, global investment in RE was USD 288.9 billion, mostly in PV and wind. Developing and emerging economies accounted for 53% of total RE investment, with China alone accounting for 32% of the total. In 2018, China led in global investment in RE, followed by the U.S., Japan, India, and Australia (REN21 2019). In particular, China led in hydropower, solar PV, wind, and solar water heating, in terms of total capacity or generation.

The growing role of renewables has attracted a lot of attention from both academics and energy policy analysts. In particular, there exists a growing body of empirical research which examines the relationship between renewables and economic growth, with important implications for policy makers.

The aim of this Chapter is to is to provide an overview of i) the world’s trends of RE production and investment since 2000, ii) the recent advances in the RE-growth literature by highlighting methodologies, main findings, and policy implications. The questions addressed by this paper are: i) Which is the current state of art of the literature in renewables and economic growth?, ii) Does exist a statistically significant relationship between RE and real GDP growth?, iii) What is the sign of this relationship?, iv) What are the effects across-countries and over-time?, v) What policy lessons can we learn?

It emerges that different outcomes can be obtained depending on i) the energy variables involved, ii) the existing causal relationship, iii) the econometric technique adopted, and iv) the countries included in the sample of the analysis. The causal relationship between RE and growth is indeed investigated according to different hypotheses, such as 1) the “growth” hypothesis, assuming the existence of a uni-directional link between RE consumption and economic growth (for instance, Fang 2011, Tiwari 2011, Bilgili and Ozturk 2015), 2) the “feedback” hypothesis, implying a bi-directional link between renewables and economic growth (Apergis and Payne 2010a, Apergis and Payne 2010b, Apergis and Payne 2011, Salim and Rafiq 2012, Bhattacharya et al 2016), 3) the “conservative” hypothesis, meaning that there exists a uni-directional link from economic growth to energy consumption (Sadorsky 2009, Tugcu et al. 2012, Al-Mulali et al. 2013, Cho et al. 2015, Inglesi-Lotz 2016), 4) the “neutrality” hypothesis, implying no effect among each other (Menegaki 2011, Al-Mulali et al 2013). From the perspective of policy makers, this literature overview offers important lessons for the implementation of future policies on promoting renewable energy in combination with macroeconomic policies aimed to a sustainable growth and development. Governments, energy planners, international cooperation agencies, utilities, and associated bodies must act together in implementing strategies for renewable deployment across countries. Therefore, it is crucial to have as much as reliable information regarding the direction of the potential link between RE and growth

Key Terms in this Chapter

Ktoe: 1000 toe.

Renewable Investment: Investment in technologies aimed to generate primary energy from renewable sources.

Renewable Energy Consumption: The sum of the energy consumption from renewable sources in the end-use sectors. Energy used for transformation processes and for own use of the energy producing industries is excluded. Final consumption reflects for the most part deliveries to consumers.

Kilowatt-Hour: The kilowatt hour (kWh) is a unit of energy commonly used as a billing unit for energy delivered to consumers by electric utilities. If energy is transmitted or used at a constant rate (power) over a period of time, the total energy in kilowatt hours is equal to the power in kilowatts multiplied by the time in hours.

Economic Growth: Real GDP per capita growth rates, usually measured at constant prices with respect to a base year.

Tonne of Oil Equivalent (TOE): A unit of energy defined as the amount of energy released by burning one tonne of crude oil. It is approximately 42 gigajoules or 11,630 kilowatt hours, although as different crude oils have different calorific values, the exact value is defined by convention; several slightly different definitions exist. The toe is sometimes used for large amounts of energy. Multiples of the toe are used, in particular the megatoe (Mtoe, one million toe) and the gigatoe (Gtoe, one billion toe).

Renewable Energy Production: Production of primary energy from renewable sources, i.e. hydro, geothermal, solar, wind and tide/wave/ocean energy, as well as from biofuels and renewable waste.

Renewable Energy: Energy that is collected from renewable resources, which are naturally replenished on a human timescale, such as hydro, geothermal, solar, wind and tide/wave/ocean energy, as well as from biofuels and renewable waste. Renewable energy often provides energy in four important areas: electricity generation, air and water heating/cooling, transportation, and rural (off-grid) energy services.

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