The impact of renewable energy on the environment and the economy

Reducing the gap between carbon emissions and economic development is one of the solutions to achieving the Sustainable Development Goals (SDGs). The role of renewable energy in rebalancing economic and environmental conditions is becoming an important topic of debate in current discussion circles.

Therefore, the main purpose of this article is to use both growth and environmental functions to demonstrate the effectiveness of renewable energy in promoting economic growth and mitigating carbon emissions for 15 large renewable energy consuming countries using both FMOLS and Vector Error Correction Model (VECM) estimation techniques. The results of the FMOLS method show the effectiveness of renewable energy in increasing economic growth and reducing carbon emissions.

The impact of renewable energy development and technologies in the current context

The concept of sustainable development has its place in today’s policies and agendas. The reality of global warming also seems to fall within a broad consensus, given the numerous scientific studies on the topic and the signing of the Kyoto Protocol. However, the social impact of the energy sector takes on another dimension, especially following the development of densely populated countries such as China or India. All these developments in and around energy, especially in its relations with the environment, have been marked by the rapid improvement and expansion of new energy technologies that exploit renewable energy sources (RES). They respond both to the need to have safe and inexhaustible energy sources and to the need to produce different forms of energy, which must be «clean», in the sense that they do not affect the environment and, in particular, do not produce greenhouse gas (GHG) emissions.

The acceleration of human activity, in a context of increased energy consumption, in particular fossil fuels, causes an increase in greenhouse gas emissions, in particular carbon dioxide (CO2). In fact, consumption in developed countries (OECD) grows on average by 1.1% per year. In emerging economies, primary energy consumption will grow at an average annual rate of 3.2% until 2025. The International Energy Outlook predicts strong growth in global energy demand until 2025. This result is alarming when we consider that fossil fuels contribute approximately 80-95%1 to global primary energy demand. This high dependence in fact increases the risk of a possible energy “blackout”, which could be caused by the depletion of natural resources. Therefore, it is necessary to resort to new sources of energy to grow the economy without damaging the environment. For this reason, industrialized countries are committed to the development and use of renewable energy sources such as solar energy, biomass, geothermal energy, tidal energy, hydroelectric energy and wind energy. However, renewable energy also has other environmental consequences, for example disturbing land and ecosystems in hydroelectric reservoirs or altering water flows downstream of dams; treatment of water effluents from biomass or renewable fuels; residual ash from biomass combustion; and the impact on large bioenergy crops with intensive land use. Throughout the life cycle of renewable energy, the construction of renewable energy plants often uses fossil fuels, which have significant implications. Since all forms of energy production have some impact on the environment, we will ultimately have to reach a compromise between the needs of energy development and environmental protection. The principle of sustainable development can be usefully applied to the definition of new projects to mitigate possible environmental effects.

Recent energy economics literature has supported the key role of renewable energy as a driver of sustainability, while at the same time having the potential to rebalance sustainable development goals. Much of this literature has been interested in examining the relationship between energy consumption (renewable and non-renewable), environmental degradation and economic growth. This literature could be divided into two directions. The first focuses on examining the link between energy and economic growth.

The second focuses on the link between environment and growth through the validity of the Environmental Kuznets Curve (EKC) hypothesis. This hypothesis indicates that the level of environmental degradation increases as a country develops, but begins to decline when income growth passes a tipping point. In general, environmental quality will initially worsen and then improve with economic development. This hypothesized association is well evaluated theoretically and has been confirmed by most empirical research. These relationships between economic growth and energy consumption, as well as between economic growth and environmental degradation, have been the subject of intense study in recent decades. An evaluation of these studies shows that most of them focus on analyzing the relationship between growth and energy or between growth and environment. Only a few studies have been interested in analyzing these two relationships in the same context. The central contribution of these research studies is to examine the dynamic relationship between carbon emissions, economic growth, and renewable and non-renewable energy consumption in an integrated framework. None of these were interested in demonstrating the effectiveness of renewable energy in promoting economic growth and mitigating carbon emissions.

Environmental resources and economic growth can be sustainable through green technological innovation. Environmental resources can be preserved through an efficient supply chain process. Furthermore, to improve the quality of the environment and stimulate economic activities, society must import durable capital goods. Therefore, to prevent the earth’s temperature from rising, academia must point out negative externalities. These countries use “emissions cap” policies through restrictions on emissions inventory; therefore, these economies can provide technical assistance to developing countries to control CO2 emissions. Green projects offer a higher return than traditional projects. Therefore, economies need to invest more in stimulating green technologies through research and development projects and focus on innovation in environmental management through the lens of renewable energy. These savings follow the pollution halo hypothesis; therefore, more investment should be allocated for green technology transfer through foreign direct investment to host countries.

Inbound foreign direct investment can significantly overcome the problem of environmental degradation and achieve environmental sustainability through clean technologies. The current analysis used some green indicators, but it is recommended that future analyzes identify more variables, such as green finance, carbon taxes and research and development (R&D) spending, to minimize CO2 emissions especially for developing and transition economies.

This research represents an important step towards contributing green growth to future leading green growth economies by building on existing literature. The contribution of organic growth to improving environmental quality varies from country to country, therefore it is possible to conduct country-specific research on this topic using these important variables. Furthermore, developing economies can use data on ecological growth and various other factors provided by researchers for further investigation to minimize the effects of global climate change. To measure the impact of environmental degradation, few variables are considered; thus limiting this study so that researchers can also add the ecological footprint and other indicators of environmental destruction.

In conclusion, a bidirectional dynamic causality was found between green economic development, renewable energy, green technology, green trade, domestic financial investment and environmental quality. This therefore indicates that achieving a sustainable environment and growth may indeed be possible in future green economies by leveraging renewable energy sources, green technology, domestic financial investments and green trade.