Assessing the economic impact of renewable energy on economic growth

Abstract

The key contribution of this dissertation is to analyse the relationship between renewable energy production and economic growth by classifying countries based on environmental performance rather than economic development, given that literature lacks examining this relationship on the proposed type of classification. In order to do so, four hypotheses are constructed, firstly that (1) renewable energy production has a positive effect on economic growth, secondly that (2) renewable energy production has a positive effect on gross fixed capital formation, thirdly that (3) renewable energy production has a positive effect on labour force and fourthly that (4) a differential impact of renewable energy production in low and high environmentally degraded countries exists. These hypotheses are analysed by employing the Dynamic Ordinary Least Squares (DOLS) estimation technique using annual data from the U.S. Energy Information Agency and World Development Indicators for the period 1995 2017 and countries are classified into low and high environmentally degraded panels based on the Environmental Performance Index (EPI). The key finding is that a positive and significant relationship is exhibited between renewable energy production and economic growth in both panels, supporting the first hypothesis. No significant relationship is found between renewable energy production and investment, rejecting the second hypothesis. The third hypothesis is only accepted for the high environmentally degraded countries. Acceptance of the fourth hypothesis shows that the differences found between both panels have important implications for policymakers and that renewable energy deployment can bring about sustainable economic growth.