The environmentalists argue that climate change is a real threat, and therefore, they believe both developed and developing countries should shift their energy sources from fossil-based to renewable alternatives, including solar, wind, geothermal, hydropower, bio-oils, and ocean power to sustain economic growth. In this context, this study investigates the causal relationship between two sets of pairs—(i) renewable energy consumption and economic growth and (ii) nonrenewable energy consumption—and economic growth for 16 OECD countries for the 1971-2015 period. To fulfill this objective, the study employs a recently introduced frequency domain approach in both single-country form and multi-country (panel) form. The study indicates some dissimilarities on renewable and nonrenewable energy consumption and economic growth nexus in OECD countries. Although the results of single country frequency domain test mostly support neutrality hypothesis, multi-country frequency domain test finds strong evidence supporting bidirectional causality among these sets of pairs.
Top1. Introduction
After 2nd WW, the economic development through rapid industrialization has caused immense environmental distress. Solid evidence presented by natural scientists showing that the increase in energy use, primarily fossil fuels, has caused extensive irreversible environmental damage and furthermore, the climate change will be expected to cause an enormous long-term threat to national economies and possibly will endanger global ecosystem (Hansen and Skinner, 2005). In order to mitigate and even to reverse the environmental threat, some concrete measures have been taken by international community, including the Kyoto Protocol and Paris Agreement. Improving energy efficiency is one of the operational tools outlined in these agreements for reducing CO2 emission and greenhouse gases alongside promoting energy conservation policies, stimulating low-carbon energy production (renewables) and promoting capture and storage (CCS) technology.1 Renewable energy-based alternatives are the most probable solution in this matter since they are green, sustainable, and affordable (Bulut and Muratoglu 2018).
OPEC shocks, volatility in oil prices, global climate change and increasing public awareness about environmental problems have significantly influenced the way economists think about the issues related to energy and environment which in turn triggered more research being conducted in economic literature. Understanding and analyzing possible links and/or causality among economic growth, energy use and environmental hazard have been very vibrant research area in the economic field for several reasons. Renewable energy consumption is still limited (i.e. constituting about %15 of global energy market), in spite of having an upward trend, due to its relatively high costs and technological barriers in many countries, while non-renewable energy consumption has been increasing considerably in comparison due mainly to its relatively low costs and ease of operation (Nguyen and Kakinaka 2019). Therefore, in order policymakers to evaluate the usefulness of energy efficiency and conservation policies as well as the viability of alternative forms of energy production, in-depth analysis about the direction of causality among these variables is critical. Volatility, as well as upward trend in energy prices, also have great implications. In-depth understanding about the links/causality is vital for the analysis of indirect impacts of volatility in energy prices (or fluctuations in energy costs) in the growth process of the nations and their magnitude (Tsani and Menegaki 2018).
The empirical studies examining the links between energy-growth relations cover a broad array of research questions, but the direction of causality has been a focal point since Kraft and Kraft (1978). After this seminal work, a large number of studies using different methodological tools and/or different data coverage have aimed at testing causal relation between economic growth and energy consumption; albeit conflicting results. Based on the results of these studies, four distinct hypotheses have been established; namely, (i) growth hypothesis, (ii) the conservation hypothesis, (iii) the feedback hypothesis, and (iv) neutrality hypothesis (Shiu and Lam, 2004; Squalli, 2007; Ozturk, 2010). Each hypothesis has a distinct connotation regarding energy conservation policies.