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Clean Technologies and Environmental Policy (2018) 20:127–136

https://doi.org/10.1007/s10098-017-1463-5

ORIGINAL PAPER

The causal relationship between renewable energy consumption


and economic growth: evidence from Europe
Wadad Saad1 · Ali Taleb2

Received: 5 May 2017 / Accepted: 10 November 2017 / Published online: 20 November 2017
© Springer-Verlag GmbH Germany, part of Springer Nature 2017

Abstract
The European Union Renewable Energy Directive sets an objective of increasing the renewable energy share of the used
renewable energy in the EU by 2020. The objective of this study is to analyze and compare the short-run and long-run
relationship between renewable energy consumption and economic growth in 12 European Union countries and to derive
implications for renewable energy policy. To do so, we apply panel vector error correction model using the available annual
data from 1990 to 2014 on 12 European Union countries. Moreover, Granger causality test is conducted to examine whether
there exists any causal linkage between economic growth and renewable energy consumption. The findings indicate the pres-
ence of unidirectional causality running from economic growth to renewable energy consumption in the short run. However,
in the long run, a bidirectional causal relationship between the variables in question exists.

Keywords  Renewable energy · European Union · Granger causality · Panel vector error correction model

Introduction consumption and economic growth, to that on renewable


energy consumption and economic growth.
The debate regarding the causal relationship between energy Many countries consider energy-efficiency improvement
consumption and economic growth has existed since the and the development of renewable energy as two of the
study of Kraft and Kraft (1978). The importance of the most effective measures for addressing environmental and
energy consumption studies reflects the importance of the climate changes while ensuring economic growth, as renew-
implications for the establishment of the short-run as well able energy becomes the key, not only to development and
as of the long-run energy policy directions at the local level. social well-being, but also to the future sustainable economy.
Climate change has been seen as an emerging global This study aims to analyze and compare the short-run
issue, and there are clear concerns about the significant and long-run causal relationships between renewable energy
impact of the pollutants reduction in worldwide on the eco- consumption and economic growth in 12 European Union
nomic growth. In addition to this, there are the problems of countries. The main objective is to derive implications for
local energy supply and resources depletion issues, energy the long-run renewable energy policy. To do so, we use a
security issues that arise from the dependence on imported multivariate panel vector error correction model (VECM)
oil from economically, financially and politically sensitive based on available 1990–2014 annual data on 12 European
regions of the world, and the peak oil theories and assump- Union countries.
tions that anticipate that the world’s supply of oil will begin This study is organized as follows: “Renewable energy”
to run out. All of these factors support the change from section describes and explains the renewable energy issues.
the discussion on the causal relationship between energy In “Renewable energy future scenarios” section, environ-
mental economics and its relationship with economic growth
and sustainability are presented. “Literature review” section
is devoted to concepts and studies related to the subject in
* Wadad Saad question. The empirical results of the investigation of the
wsaad96@hotmail.com causal relationship between renewable energy consumption
1
Lebanese University, Hadath, Lebanon and economic growth for 12 European Union countries over
2 the period 1990–2014 are reported in “Data, methodology
University of Strathclyde, Glasgow, Scotland

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128 W. Saad, A. Taleb

and empirical results” section. The study ends with a conclu- during the course of any given day or season; wind, solar,
sion in the last section. wave and tidal energies are good examples.
Renewable energy (RE) is environmentally safe, and it
produces lower and negligible levels of pollutants when
Renewable energy compared with fossil energy sources they replace (Demir-
bas 2009). RESs meet domestic requirements and have the
The use of non-renewable sources of energy has a variety of potential to deliver energy services with no emissions of
harmful impacts on our environment. There are some sig- greenhouse gases (GHGs) and other pollutants (Panwar et al.
nificant hidden costs of non-renewable energy consumption 2011).
such as the costs from the air emissions that lead to public Renewable energy sources have outputs examination that
health and environmental costs that are borne at the local, rise and fall on daily and yearly basis. For almost all renew-
regional, national and global levels. For example, approx- able sources of energy, fuel expanses are not significant.
imately 78 percent of the USA’s emissions were energy- RE usually gets financial aid from government to moderate
related emissions of carbon dioxide in 2014. Burning fossil the adequate level of expenditures. Such elimination of cost
fuels emits a number of air pollutants that are harmful to problems, in addition to the elimination of formal obstacles,
both the environment and public health. releases much more RE than endeavors to establish price
Non-renewable energy consumption causes air pollution, stimulants (Popescu 2015).
which leads to what is known as acid rain that is formed The increased demand for energy services will impel
when sulfur dioxide and nitrogen oxides mix with water, renewable energy to degrees eclipsing current energy uti-
oxygen and other chemicals in the atmosphere. Acidic pre- lizations. Several renewable energy technologies can be set
cipitation raises the level of acidity of streams and lakes. up at the moment of utilization in urban and rural contexts,
This would have a negative impact on fish and other aquatic while others are chiefly used within complicated consider-
organisms. Water is polluted not only by acidic rain but also able energy arrangements.
by power plants that can harm wildlife (Energy Information Local RE preferences can be instrumental in energy secu-
Administration (EIA) 2015). rity objectives through varying energy reserves and reduc-
Renewable energy (RE) becomes the key, not only to ing reliance on restricted providers (Edenhofer et al. 2012).
development and social well-being, but also to the future Renewable energy is expected to be the fastest growing
economic sustainability. component of global energy demand over the next several
The consumption of fossil fuels is dramatically increasing decades (Sadorsky 2011).
along with the evolution in the quality of life, industrializa-
tion of developing nations and increase in the world popula- Types of renewable energy
tion. This increased rate of fossil consumption leads to an
increase in the rate of diminishing fossil fuel reserves and Many forms of renewable energy have been developed. The
has negative impact on environment, health risks and threat majority of these energies depend on sunlight, they are the
of global climate change. direct result of differential heating of the Earth’s surface, and
The society is slowly moving toward more sustainable this leads to movement of air (wind). Using panels and col-
production methods, waste minimization, reduced air pollu- lectors, sunlight is converted to solar energy. Other renewa-
tion from vehicles, distributed energy generation, conserva- bles that do not depend directly on sunlight are the radioac-
tion of native forests and reduction in greenhouse gas emis- tive energies such as geothermal, gravitational energies such
sions (Sims 2003). as waves or what is known as tidal energy.
Renewable energy sources (RESs) are called alternative
energy sources. RESs are energy sources that can be used Solar energy
to produce energy again and again (Panwar et al. 2011). RE
is energy derived from natural sources such as wind and Solar energy can be converted into heat or electricity. The
sunlight. These sources are replenished at a faster rate than use of solar photovoltaic systems, or PV systems, allows
they are consumed (International Energy Association 2015). generating electricity directly from light without noise,
RESs include biomass, hydropower, geothermal, solar, wind vibrations or emissions. Sunlight is free but power genera-
and marine energies. The renewables are the primary, clean tion cost is exceptionally high, although prices are starting
and domestic inexhaustible energy sources (Panwar et al. to come down (Panwar et al. 2011). Employing this system
2011) and they are more capital-intensive than traditional leads to reduction in the carbon dioxide (­ CO2) emission, but
energy (Meier et al. 2015). The International Energy Agency it requires a large area for small amounts of energy genera-
defines the variable renewables as sources that fluctuates tion (Topcu and Ulengin 2004).

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The causal relationship between renewable energy consumption and economic growth: evidence… 129

Wind energy steam and hot water, has been exploited for decades to gen-
erate electricity in domestic heating and industrial processes
The most economical renewable energy source used at the (Angelis Dimakis et al. 2011).
present is wind energy. Expenses for wind exploitation have Geothermal energy is a low-temperature energy, which
been reduced remarkably to rival and compete with many cannot be used for electricity production if classical tech-
conventional technologies for energy production (Pekez nologies are used. Thus, the use of geothermal energy could
et al. 2016). The wind technology converts the energy avail- be for various activities (Pekez et al. 2016) such as in: spas,
able in wind to mechanical power or electricity through the farms, agriculture for greenhouse heating, fish farm.
use of wind turbines (Balat 2009). Presently, onshore wind
accounts for more than one-third of the global renewable Policies and regulations of renewable energy
capacity.
Many governments started to substitute the conventional
Biomass energy energy with the more suitable energy, the renewable energy
technologies (Ayari et al. 2012). The agreement made in
The sources of this type of energy stem from animal wastes 2009 on the Energy and Climate Package aims to promote the
and crop residues, municipal biodegradable wastes and resi- use of energy from renewable sources to reach at least 20%
dues from industrial sector, among others. The bioenergy of the final energy consumption by 2020. With this agree-
is described as an all-round energy source, which can be ment, the European Union has made a strong obligations and
used for production of electricity, heat and fuels (Destouni commitment toward renewable energy (European Renewable
and Frank 2010). Implementing bioenergy plants has a posi- Energy Council 2010). The EU Renewable Energy Direc-
tive effect on creating direct employment and supporting the tive was accepted by the European Parliament and Council.
related industries. Biomass energy is now being promoted as The main objective was to promote technological innovation,
a strategy to achieve sustainable development. It allows the to ensure energy security and to provide opportunities for
widespread production of energy at reasonable costs and can employment in rural and isolated areas (Lind et al. 2013).
assist in mitigating climate change, develop rural economies The focus of governments around the world is on innovation
and increase energy security (Angelis Dimakis et al. 2011). and particularly on the eco-innovation to eliminate the car-
bon emissions (Doran and Ryan 2012). Taxes and additional
Wave energy prices on the energy sources encourage the development of
new energy technologies and decrease the demand on the
Wave or tidal energy is a form of hydropower that converts conventional energy as it becomes costlier (Popp 2002).
the energy of the tides into electricity or other useful forms The policies and regulations that are taken into considera-
of power. It is environmentally friendly and provides grid tion by governments to promote renewables are: tax incen-
stability and reliability as well as balancing support to inter- tives, tender schemes, tradable green certificates, feed-in
mittent renewable energy such as wind and solar power tariffs, direct cash grants and rebate, capital grants and sub-
(Destouni and Frank 2010). sidies and heat obligations.
Empirical studies about policies of renewable energy
Hydropower energy attempt to forecast their economic and environmental hori-
zons by 2030. Among others, Barker and Dagoumas (2009)
Hydropower is presently the most important source for examine the macroeconomic long-run rebound effect for the
electric power generation. It is environmentally friendly global economy stemming from energy-efficiency policies
and provides grid stability and reliability as well as balanc- by analyzing policies for the transport, residential and ser-
ing support to intermittent renewable energy such as wind vices building and industrial sectors of the economy for the
and solar power (Destouni and Frank 2010). Hydropower period 2013–2030. They find that the total rebound effect,
accounts for one-fifth of new renewable additions and over arising from the version about energy-efficiency policies
a quarter of generation growth (International Energy Asso- reported in IPCC AR4 WG3, is around 50% by 2030.
ciation 2015). The annual growth of hydropower slows but Moreover, Vance et al. (2015) assess counterbalance the
cumulative hydropower capacity growth is as large as the relationship between energy demand and environmental
current total power capacity (Pekez et al. 2016). effect, GDP, population and energy efficiency. Their find-
ings indicate that a 100% increase in energy efficiency by
Geothermal energy 2030 is required in order to meet the 1977 environmental
impact levels. This is considered to be infeasible unless a
Geothermal energy is the heat that can or could be extracted combination of policy and technology approaches is adopted
from the interior of the Earth. Geothermal energy, as natural to tackle this critical challenge. This research puts insights

13

130 W. Saad, A. Taleb

on the difficulty of moving toward energy sustainability and main point to discuss in this scenario is that, due to the huge
suggests possible solutions for policy and management of lock-in effect primarily between transportation and fossil
renewable energy. fuels, we are not able to replace fossil fuels. These latter,
accompanied with resources depletion issues, are on top pri-
ority nowadays. The energy security definitions include time-
Renewable energy future scenarios lessness of energy sources, amounts, location, prices, and
we could extend the definition to include economic, social
Although conventional energy demand is still high relatively, and environmental quality. (iv) “Clean and Secure Energy
the demand on renewable energy is being an important Future,” this fourth scenario is the best and the long time
source of energy today with a significant increase in demand. frame 2010–2100. This time frame is necessary to ensure
The Energy Technology Perspectives and the Interna- that enough time is given for hydrogen fuel cells to play an
tional Energy Agency’s key scenarios in the World Energy important role in meeting our energy needs. This scenario is
Outlook reveal that if no action is taken by 2050, coal an extension of the previously discussed scenarios.
demand would almost triple (192%), gas demand would Thus, in addition to climate change, this scenario is an
be more than double (138%) and oil demand would rise by ongoing process of continuous improvement to the energy
about two-thirds (65%) (Pfluger 2010). The International system. The starting point is climate change and energy
Energy Agency estimates that global demand for renewable security issues, but the main goal will be then carbon energy
energy is expected to grow annually at a growth rate of 7.3% infrastructure. This opens the possibility of a green-tech,
between 2007 and 2030, with a world demand for primary where technological developments bring about evolutions
energy over the same period at growth rate of 1.5% annually. in supplying renewable energy and widespread adoption of
Consequently, import dependency of most countries would RE leads to more technological energy innovation. Clean
further increase if no actions are taken to improve energy and secure energy future begins with the realization that four
supply (International Energy Association 2009). things must be done:
Renewable energy has not yet achieved widespread com-
petitiveness versus fossils, especially wind energy and solar (a) Efficient energy in building, transportation, industries,
energy. power generation and agriculture,
The future renewable energy share is expected to reach (b) Halting deforestation,
35% of an estimated global primary energy supply and (c) Immediate actions to put such technologies like solar,
50% of estimated global electricity production (Destouni wind, wave and geothermal,
and Frank 2010). By 2050, renewable energy will provide (d) More distant technologies like advanced battery stor-
100% of the world’s power demand (Pekez et al. 2016). Cli- age, fuel cells and next-generation biofuels (algae) need
mate change, fossil fuel depletion, energy security issues, to be invested in today.
economic growth, sustainable development, new technolo-
gies, innovations and environmental conscious consumers
are powerful forces that shape the renewable energy sector. Literature review
Thus, the future of the renewable energy depends upon how
powerful these forces are and which combinations of forces The empirical literature on the causal relationship between
prevail. These forces constitute the bases of future scenarios energy consumption and economic growth could be syn-
(Sadorsky 2011) that should be taken into account in order thesized into four testable hypotheses: growth hypothesis,
to develop renewable energy. conservation hypothesis, feedback hypothesis and neutrality
The different scenarios focus on: (i) “Business as Usual” hypothesis (Omri et al. 2015). In this case, energy conserva-
is the name of the first scenario which is still less attrac- tion policies devoted to reduce energy consumption will have
tive since governments, leaders, individuals and businesses no impact on economic growth. However, there are sometimes
lack the political will and economic commitment to adopt certain results of empirical studies that show that there could
RE and it is still very costly and suffers from lack of stor- be a mixed hypothesis contributing to the causal relationship.
age. (ii) “Focus on Climate Change” is the second scenario To estimate the causality between renewable energy
which constitutes the greatest threats to mankind, and if left consumption and economic growth, many researchers have
unchecked, it will seriously disrupt economic activity. Con- studied the available data and information about a variety
sequently, government policies have to subsidize renewable of developed and developing countries around the world.
energy and tax fossil fuel as a future scenario. In addition, However, there are different results contributing to different
publically funded renewable energy research and develop- hypothesizes. It is a controversial issue.
ment (R&D) is one area that currently needs a boost. (iii) The growth hypothesis suggests that there is a uni-
The third scenario is the focus on “Energy Security.” The directional causal relationship from renewable energy

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The causal relationship between renewable energy consumption and economic growth: evidence… 131

consumption to economic growth; thus, renewable energy is the neutrality hypothesis. So, if a country follows either
consumption plays a significant role in economic growth. conservative or expansive policies, no impact will be seen
This role may directly or indirectly enhance the economic on economic growth. Payne (2009) uses TY approach, and
growth through the production process as a complement to he affirmed that neutrality hypothesis exits for 25 developing
labor and capital. In this case, energy conservation policies countries. Menegak (2011) uses a multivariate panel frame-
aimed at reducing consumption will have negative impact work in getting the causality direction of 27 European coun-
on economic growth. tries. His findings reveal that neutrality hypothesis does exist.
For the USA, Payne (2011) examines the causality by Tugcu et al. (2012) use the Hatemi-J causality test to
using the Toda–Yamamoto (TY) causality tests for Granger study and investigate the causality between renewable
causality within a multivariate framework for the period energy consumption and economic growth for G7 coun-
1949–2007. The empirical findings supported the growth tries. The results indicate that neutrality hypothesis exists for
hypothesis. France, Italy, Canada and USA, while the feedback hypoth-
A unidirectional causality running from economic growth esis exists for England and Japan. Germany stands for the
to renewable energy consumption is postulated by the con- conservation hypothesis. For the USA, Yildirim et al. (2013)
servation hypothesis. When the country experiences eco- assert that growth hypothesis results from a causality from
nomic growth, this helps in the growth of the renewable biomass-waste-derived energy, while neutral hypothesis runs
energy consumption as well. In this situation, energy con- from other sources of renewable energy. Al-Mulali et al.
servation policies that may prevent energy consumption will (2013) examine the causal relationship between renewable
have negative impact on economic growth. energy consumption and economic growth. They report that
Sari et al. (2008) use the ARDL approach to test the the findings of the study of 108 countries are 79% feedback
causal relationship between renewable energy consumption hypothesis, 2% conservation hypothesis and 19% neutrality.
and economic growth in theUSA. Their study asserts that In this study, we examine the cointegration property in more
a conservation hypothesis is valid. Sadorsky (2009) also precise terms within a panel-econometric framework. Firstly,
affirms that a conservation hypothesis exists for 18 emerg- in order to explore the relationship between renewable energy
ing countries. Moreover, Menyah and Wolde-Rufael (2010) consumption and economic growth in 12 European Union
apply a Granger causality test and find that a conservation countries, we apply panel vector error correction model using
hypothesis exists for a group of developed countries. annual data from 1990 to 2014. Secondly, we use Granger cau-
The feedback hypothesis reveals that there is a bidirec- sality test to investigate whether there is any causal relationship
tional causal relationship between renewable energy con- between the variables involved in this study.
sumption and economic growth. A feedback hypothesis
implies that the consumption of energy, regardless if this
energy is traditional or renewable energy and economic Data, methodology and empirical results
growth are inherited and may well serve as complements
to each other (Omri et al. 2015). In this case, the validity In this section, we present a data description and display the
of the hypothesis energy conservation policies designed to methodology used in order to explore the causal relationship
reduce energy consumption may decrease economic growth between economic growth and renewable energy in EU over
performance, and likewise, changes in economic growth are the period 1990–2014. The main results obtained from the
reflected back to energy consumption. regressions are reported and analyzed in this section.
Apergis and Payne (2010, 2011, 2012a, b) examine the
causal relationship between economic growth and renew- Data description
able energy consumption for 13 Eurasia countries, 20 OECD
countries, 6 Central American and other 80 random coun- The purpose of this study is to investigate the causal rela-
tries. Using the panel data methodology, they find out that tionship between renewable energy consumption and eco-
the feedback hypothesis exists. Salim and Rafiq (2012) test nomic growth in 12 European countries. This would help
causal relationship between renewable energy consumption us to indicate whether renewable energy consumption is
and economic growth; their findings show that feedback important for a country’s economy and whether it plays a
hypothesis is valid. significant role in increasing economic growth and improv-
Belk et al. (2011) investigate the long-run relationship ing the development plans or not. The included countries in
between energy consumption and real GDP in 25 OECD this study are Austria, Denmark, Finland, France, Germany,
countries over the period 1981–2007 and find that there is a Italy, Netherlands, Poland, Portugal, Romania, Spain and
bidirectional relationship between these two variables. Sweden. The availability of the required data had limited
When there is no existence of causal relationship between the number of European countries chosen.
economic growth and renewable energy consumption, this

13

132 W. Saad, A. Taleb

Annual data from 1990 to 2014 on these 12 countries the dynamics of the autoregressive coefficients for all panel
were collected from the World Bank, United Nations Divi- units. The Fisher-type tests that are developed by Maddala
sion and Eurostat database. The econometric framework and Wu (1999) and which employ nonparametric methods
includes renewable energy consumption (REC) in thousands in performing panel unit root test with the ADF-Fisher and
of tons of oil equivalent, real gross domestic product (GDP) PP-Fisher. Moreover, the Im et al. test (2003) (i.e., IPS test)
in billions of constant 2005 USD, real gross fixed capital that allows solving Levin and Lin’s serial correlation prob-
formation (GFCF) in billions of constant 2005 USD and lem by assuming heterogeneity between units in a dynamic
total labor force (L) in millions. We follow Lee (2005) and panel framework.
Soytas and Saris (2006) among others in taking GFCF as a
proxy for the capital stock. Model

Research methodology The model equation that explores the long-run impact of
renewable energy consumption on economic growth is writ-
The multivariate panel approach based on cointegration and ten as follows:
error correction techniques is used in this study. The estab-
LnGDPit = 𝛼i + 𝛽i LnRECit + 𝛾i LnGFCFit + 𝜆i LnLBRit + 𝜀it
lishment of such models requires following these two steps:
(1)
(i) panel unit root tests, which consist of testing the station-
where i = 1, 2, … , N represents each country in the panel;
arity of the variables. All variables have to be non-stationary
t = 1, 2, … , T refers to the time period; LnGDP, REC, LnG-
at level but stationary at their first difference, I(1). (ii) Panel
FCF and LnLBR are real GDP, renewable energy consump-
cointegration test which implies testing for the presence of
tion, labor force and gross fixed capital formation, respec-
a long-term cointegration relation between the variables
tively (all are in logarithmic form). The parameter αi allows
involved in the model. Once these requirements are satisfied,
for the possible country-fixed effects. ɛit is the white noise
we proceed to the model and present the obtained results.
stochastic disturbance term. The parameters βi, γi and 𝜆i are
the elasticities of renewable energy consumption, gross fixed
Panel unit root test
capital formation and labor, respectively.
The dynamic error correction (EC) model used in this
In order to conduct the panel unit root test, we use a set
study is based on Canning and Pedroni (2008) approach
of panel unit root tests. This test assumes homogeneity in
within a panel data framework. The EC model employed
leads to:
m m m
∑ ∑ ∑
ΔLnGDPit = 𝜃1i + 𝜃11ik ΔLnRECit−k + 𝜃12ik ΔLnGDPit−k + 𝜃13ik ΔLnLBRit−k
k=1 k=1 k=1
m (2)

+ 𝜃14ik ΔLnGFCFit−k + 𝜆1i ECTit−1 + u1it
k=1

m m m
∑ ∑ ∑
ΔLnRECit = 𝜃2i + 𝜃21ik LnRECit−k + 𝜃22ik ΔLnGDPit−k + 𝜃23ik ΔLnLBRit−k
k=1 k=1 k=1
m (3)

+ 𝜃24ik ΔLnGFCFit−k + 𝜆2i ECTit−1 + u2it
k=1

m m m
∑ ∑ ∑
ΔLnLBRit = 𝜃3i + 𝜃31ik ΔLnRECit−k + 𝜃32ik ΔLnGDPit−k + 𝜃33ik ΔLnLBRit−k
k=1 k=1 k=1
m (4)

+ 𝜃34ik ΔLnGFCFit−k + 𝜆3i ECTit−1 + u3it
k=1

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The causal relationship between renewable energy consumption and economic growth: evidence… 133

m m m
∑ ∑ ∑
ΔLnGFCFit = 𝜃4i + 𝜃41ik ΔLnRECit−k + 𝜃42ik ΔLnGDPit−k + 𝜃43ik ΔLnLBRit−k
(5)
k=1 k=1 k=1
m

+ 𝜃44ik ΔLnGFCFit−k + 𝜆4i ECTit−1 + u4it
k=1

Table 1  Panel unit root test. Source: Table made by the author Table 3  Fully modified ordinary least squares test; dependent vari-
able: LnGDP
Variables Test statistics Level First differenced
Variable Coefficient T-statistic Prob.
LnGDP LLC − 4.08110** − 5.55147**
IPS 0.13024 − 6.03407** LnREC 2.3212*** 107.4767 0.0000
ADF-Fisher 18.303 82.3058** LnGFCF 0.3581*** 21.0202 0.0000
PP-Fisher 23.5853 130.245** LnLBR 0.4738*** 4.15884 0.0000
LnLBR LLC 0.00171 − 7.50049** *** Significance at 1%
IPS 2.93029 − 9.16008**
ADF-Fisher 9.55917 125.178** Table 4  Determination of the lag length of the panel VECM
PP-Fisher 7.53586 234.779**
Schwarz informa- Lag 1 Lag 2 Lag 3 Lag 4 Lag 5
LnGFCF LLC − 2.52778** − 5.93060**
tion criterion
IPS − 0.23214 − 6.28689**
ADF-Fisher 19.5754 85.3544** SIC − 14.93 − 15.41 − 15.39a − 15.59 − 15.36
PP-Fisher 20.9071 102.888** a
 The optimal lag chosen according to SIC test
LnREC LLC − 1.38325 − 4.17947**
IPS 2.22481 − 5.30613**
ADF-Fisher 8.9906 75.5441** The panel unit root results suggest the potential presence
PP-Fisher 18.4686 137.203** of panel cointegration relationship. A panel cointegration
** Significance at 5% level method is a good technique to test the equilibrium long-run
causal relationship among panel variables. The test used for
this purpose is the ones proposed by Pedroni (1999, 2004)
Empirical results and Kao (1999). The former is the most commonly used test
since it takes into consideration the heterogeneous short-run
In order to determine the order of integration and the station- dynamics between time series. Two types of cointegration
arity properties of the variables involved in this study, we tests were presented by Pedroni (1999, 2004). The first is
used the aforementioned panel unit root tests. The obtained within-dimension approach, which assumes that a panel
results, reported in Table 1, show that all variables are inte- group shares the same AR process in the residuals and it
grated of order one according to all tests, except for LnGDP includes four statistics: panel ν-statistics, panel rho-statis-
that reveals the presence of unit root with respect to LLC at tics, panel PP-statistics and panel ADF-statistics. The second
level with 5% level of significance. However, since three out is between-dimension approach, which allows for heteroge-
of four tests do not reject the null of the presence of unit root neity between groups and comprises three statistics: group
at level, we will rely on the majority of tests. rho-statistics, group PP-statistics and group ADF-statistics.

Table 2  Panel cointegration test Panel statistics Test statistics Weighted statistics Panel statistics Test statistics

Within dimensions Between dimensions


Panel ν-statistics 3.9615** 3.0537** Group rho-statistic 2.2322
Panel rho-statistics 0.7333 1.4724 Group PP-statistic − 2.9878**
Panel PP-statistics − 2.6083** − 1.07652 Group ADF-statistic − 4.9640**
Panel ADF-statistics − 3.5474** − 2.8765**
Kao residual test − 6.53773**

** Significance at 5% this means that the null hypothesis of no cointegration is rejected

13

134 W. Saad, A. Taleb

Results for panel cointegration tests that are presented in imbalance) in the dependent variable is being corrected in
Table 2 show that the null hypothesis of no cointegration each short period.
is rejected in seven out of eleven tests. Although four tests The ECT values in Table 5 indicate that there is a bidi-
show an insignificant level for cointegration but a majority rectional causality between economic growth and renewable
of seven tests indicate the rejection of the null hypothesis. energy consumption. Thus, the feedback hypothesis exists.
Moreover, Kao residual cointegration test indicates that the This term is negative and statistically significant in ΔLnGDP
null hypothesis of no cointegration among the variables is and ΔLnREC equations, which reveals a mutual causal rela-
rejected. Thus, the variables are cointegrated. tionship between these two variables and indicates that these
In order to determine the long-run equilibrium relation- variables readjust toward a equilibrium after the occurrence
ship, the fully modified ordinary least squares (FMOLS) of a shock.
technique for heterogeneous cointegrated panels is used With respect to the short-run causality, the results in
(Table 3). Table 5 show that there is unidirectional causality running
All the coefficients are positive and statistically signifi- from labor force to gross fixed capital formation, labor force
cant at 1% significance level. The results indicate that each to renewable energy consumption and economic growth to
1% increase in renewable energy consumption increases real renewable energy consumption. Finally, there is a bidirec-
GDP by 2.23%; a 1% increase in gross fixed capital forma- tional causality between economic growth and labor force.
tion increases real GDP by 0.36%, and a 1% increase in labor The empirical findings of this study are in line with the
force increases real GDP by 0.47%. studies of Apergis and Payne (2010) for 20 OECD countries,
To explore the causal relationship between the variables, Apergis and Payne (2011) for six Central American coun-
a panel vector error correction model is estimated to perform tries, Apergis and Payne (2012a, b) for 80 countries, Al-
the short-run and long-run causality through this model. Mulali et al. (2013) for 108 countries, Pao and Fu (2013) and
With respect to Eqs. 2–5, a short-run causal relationship is Cho et al. (2015) for less developed countries. This study
determined by the significance of the F-statistics. A long-run shows that in the long run a bidirectional causality occurs
causal relationship is revealed by the statistical significance between renewable energy consumption and economic
of the respective error correction term using a t test. growth; thus, the feedback hypothesis exists and implies
The optimal lag length of the panel VAR model is lag 4 that an increase in energy consumption leads to an increase
according to Schwarz criterion (see Table 4). Since we used in economic growth and vice versa.
data that are not stationary at level but stationary at first dif- The short-run results that showed the existence of the
ference, then lag 3 is taken as an optimal lag length for the conservation hypothesis, i.e., a unidirectional causality run-
panel VECM. ning from economic growth to renewable energy consump-
Wald tests of the “differenced” explanatory variables give tion, are consistent with the results of the studies performed
us an indication of the “short-run” causal effects, whereas by: Sari et al. (2008) in the USA and Sadorsky (2009) who
the “long-run” causal relationship is implied through the affirms the existence of a conservation hypothesis for 18
significance of the t test(s) of the lagged error correction emerging countries. Moreover, Menyah and Wolde-Rufael
term(s) that contains the long-term information since it is (2010) apply a Granger causality test and find that a conser-
derived from the long-run cointegrating relationship(s). The vation hypothesis exists for a group of developed countries.
results of these tests are presented in Table 5. In time-series analysis, two well-known versions of a
The coefficient of the lagged error correction term, how- portmanteau test are available for testing the autocorrelation
ever, is a short-term adjustment coefficient and represents in the residuals of a model: It tests whether any of a group
the proportion by which the long-run disequilibrium (or of autocorrelations of the residual time series are different
from zero.

Table 5  VECM and Wald Source of causation


causality test
Short-run Chi-square statistics Long-run coefficients
ΔLnGDP ΔLnGFCF ΔLnLBR ΔLnREC ECT

ΔLnGDP … 2.5677 7.2329** 1.3960 − 0.0140**


ΔLnGFCF 5.1630 … 6.5067** 4.3261 − 0.0022
ΔLnLBR 6.6853** 1.4668 … 4.8330 − 0.0007
ΔLnREC 7.3332** 4.92123 9.5853* … − 0.0696**

**, * Significance at 5 and 10%, respectively

13
The causal relationship between renewable energy consumption and economic growth: evidence… 135

Recommendations and conclusion The policy implications stemming from this study suggest
that cooperation among the 12 EU countries, in terms of
In today’s world, renewable energy sources are increasingly joint projects, or joint support schemes, should be intensi-
incorporated by many countries since they are clean, are fied in order to enhance the investments in renewable energy
sustainable and have less negative environmental effect. for the economic and environmental benefits. This is what
The attention toward sustainable development has acceler- actually many EU countries are aiming to achieve through
ated renewable energy consumption in recent decades, and “The Paris Agreement for Climate Change.” Besides, reduc-
many countries are moving toward new sources of energy ing the increased dependence on imported fossil fuels from
to decrease the harmful effects of non-renewable energy non-EU countries will lessen the energy price volatility and
sources on the economy and environment. will contribute to the decarburization strategy.
The objective of this study was to explore the relation- Renewable energy projects can also bring economic ben-
ship between renewable energy consumption and economic efits to many regional areas, as most projects are located
growth in twelve EU countries over the period 1990–2014. away from large urban centers and suburbs of the capital
To do so, panel vector error correction model (VECM) was cities in Europe. However, it should be noted that achieving
applied using annual data for the variables in question. In a more efficient use of energy cannot be designed without
addition, Granger causality tests based on the VECM were considering other economic and environmental factors than
performed to investigate direction of causality between these those evoked in this study. Future studies should take into
variables if it exists. The focus in this study was on both the consideration the national and international factors that may
short-run and the long-run causalities. This could help to affect energy-efficiency production and use.
conclude important policy implications for renewable energy
consumption.
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