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

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

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128
and empirical results” section. The study ends with a conclu-
sion in the last section.
Renewable energy
The use of non-renewable sources of energy has a variety of
harmful impacts on our environment. There are some sig-
nificant hidden costs of non-renewable energy consumption
such as the costs from the air emissions that lead to public
health and environmental costs that are borne at the local,
regional, national and global levels. For example, approx-
imately 78 percent of the USA’s emissions were energy-
related emissions of carbon dioxide in 2014. Burning fossil
fuels emits a number of air pollutants that are harmful to
both the environment and public health.
Non-renewable energy consumption causes air pollution,
which leads to what is known as acid rain that is formed
when sulfur dioxide and nitrogen oxides mix with water,
oxygen and other chemicals in the atmosphere. Acidic pre-
cipitation raises the level of acidity of streams and lakes.
This would have a negative impact on fish and other aquatic
organisms. Water is polluted not only by acidic rain but also
by power plants that can harm wildlife (Energy Information
Administration (EIA) 2015).
Renewable energy (RE) becomes the key, not only to
development and social well-being, but also to the future
economic sustainability.
The consumption of fossil fuels is dramatically increasing
along with the evolution in the quality of life, industrializa-
tion of developing nations and increase in the world popula-
tion. This increased rate of fossil consumption leads to an
increase in the rate of diminishing fossil fuel reserves and
has negative impact on environment, health risks and threat
of global climate change.
The society is slowly moving toward more sustainable
production methods, waste minimization, reduced air pollu-
tion from vehicles, distributed energy generation, conserva-
tion of native forests and reduction in greenhouse gas emis-
sions (Sims 2003).
Renewable energy sources (RESs) are called alternative
energy sources. RESs are energy sources that can be used
to produce energy again and again (Panwar et al. 2011). RE
is energy derived from natural sources such as wind and
sunlight. These sources are replenished at a faster rate than
they are consumed (International Energy Association 2015).
RESs include biomass, hydropower, geothermal, solar, wind
and marine energies. The renewables are the primary, clean
and domestic inexhaustible energy sources (Panwar et al.
2011) and they are more capital-intensive than traditional
energy (Meier et al. 2015). The International Energy Agency
defines the variable renewables as sources that fluctuates
13
W. Saad, A. Taleb
during the course of any given day or season; wind, solar,
wave and tidal energies are good examples.
Renewable energy (RE) is environmentally safe, and it
produces lower and negligible levels of pollutants when
compared with fossil energy sources they replace (Demir-
bas 2009). RESs meet domestic requirements and have the
potential to deliver energy services with no emissions of
greenhouse gases (GHGs) and other pollutants (Panwar et al.
2011).
Renewable energy sources have outputs examination that
rise and fall on daily and yearly basis. For almost all renew-
able sources of energy, fuel expanses are not significant.
RE usually gets financial aid from government to moderate
the adequate level of expenditures. Such elimination of cost
problems, in addition to the elimination of formal obstacles,
releases much more RE than endeavors to establish price
stimulants (Popescu 2015).
The increased demand for energy services will impel
renewable energy to degrees eclipsing current energy uti-
lizations. Several renewable energy technologies can be set
up at the moment of utilization in urban and rural contexts,
while others are chiefly used within complicated consider-
able energy arrangements.
Local RE preferences can be instrumental in energy secu-
rity objectives through varying energy reserves and reduc-
ing reliance on restricted providers (Edenhofer et al. 2012).
Renewable energy is expected to be the fastest growing
component of global energy demand over the next several
decades (Sadorsky 2011).
Types of renewable energy
Many forms of renewable energy have been developed. The
majority of these energies depend on sunlight, they are the
direct result of differential heating of the Earth’s surface, and
this leads to movement of air (wind). Using panels and col-
lectors, sunlight is converted to solar energy. Other renewa-
bles that do not depend directly on sunlight are the radioac-
tive energies such as geothermal, gravitational energies such
as waves or what is known as tidal energy.
Solar energy
Solar energy can be converted into heat or electricity. The
use of solar photovoltaic systems, or PV systems, allows
generating electricity directly from light without noise,
vibrations or emissions. Sunlight is free but power genera-
tion cost is exceptionally high, although prices are starting
to come down (Panwar et al. 2011). Employing this system
leads to reduction in the carbon dioxide (­ CO2) emission, but
it requires a large area for small amounts of energy genera-
tion (Topcu and Ulengin 2004).
The causal relationship between renewable energy consumption and economic growth: evidence…
Wind energy
The most economical renewable energy source used at the
present is wind energy. Expenses for wind exploitation have
been reduced remarkably to rival and compete with many
conventional technologies for energy production (Pekez
et al. 2016). The wind technology converts the energy avail-
able in wind to mechanical power or electricity through the
use of wind turbines (Balat 2009). Presently, onshore wind
accounts for more than one-third of the global renewable
capacity.
Biomass energy
The sources of this type of energy stem from animal wastes
and crop residues, municipal biodegradable wastes and resi-
dues from industrial sector, among others. The bioenergy
is described as an all-round energy source, which can be
used for production of electricity, heat and fuels (Destouni
and Frank 2010). Implementing bioenergy plants has a posi-
tive effect on creating direct employment and supporting the
related industries. Biomass energy is now being promoted as
a strategy to achieve sustainable development. It allows the
widespread production of energy at reasonable costs and can
assist in mitigating climate change, develop rural economies
and increase energy security (Angelis Dimakis et al. 2011).
Wave energy
Wave or tidal energy is a form of hydropower that converts
the energy of the tides into electricity or other useful forms
of power. It is environmentally friendly and provides grid
stability and reliability as well as balancing support to inter-
mittent renewable energy such as wind and solar power
(Destouni and Frank 2010).
Hydropower energy
Hydropower is presently the most important source for
electric power generation. It is environmentally friendly
and provides grid stability and reliability as well as balanc-
ing support to intermittent renewable energy such as wind
and solar power (Destouni and Frank 2010). Hydropower
accounts for one-fifth of new renewable additions and over
a quarter of generation growth (International Energy Asso-
ciation 2015). The annual growth of hydropower slows but
cumulative hydropower capacity growth is as large as the
current total power capacity (Pekez et al. 2016).
Geothermal energy
Geothermal energy is the heat that can or could be extracted
from the interior of the Earth. Geothermal energy, as natural
129
steam and hot water, has been exploited for decades to gen-
erate electricity in domestic heating and industrial processes
(Angelis Dimakis et al. 2011).
Geothermal energy is a low-temperature energy, which
cannot be used for electricity production if classical tech-
nologies are used. Thus, the use of geothermal energy could
be for various activities (Pekez et al. 2016) such as in: spas,
farms, agriculture for greenhouse heating, fish farm.
Policies and regulations of renewable energy
Many governments started to substitute the conventional
energy with the more suitable energy, the renewable energy
technologies (Ayari et al. 2012). The agreement made in
2009 on the Energy and Climate Package aims to promote the
use of energy from renewable sources to reach at least 20%
of the final energy consumption by 2020. With this agree-
ment, the European Union has made a strong obligations and
commitment toward renewable energy (European Renewable
Energy Council 2010). The EU Renewable Energy Direc-
tive was accepted by the European Parliament and Council.
The main objective was to promote technological innovation,
to ensure energy security and to provide opportunities for
employment in rural and isolated areas (Lind et al. 2013).
The focus of governments around the world is on innovation
and particularly on the eco-innovation to eliminate the car-
bon emissions (Doran and Ryan 2012). Taxes and additional
prices on the energy sources encourage the development of
new energy technologies and decrease the demand on the
conventional energy as it becomes costlier (Popp 2002).
The policies and regulations that are taken into considera-
tion by governments to promote renewables are: tax incen-
tives, tender schemes, tradable green certificates, feed-in
tariffs, direct cash grants and rebate, capital grants and sub-
sidies and heat obligations.
Empirical studies about policies of renewable energy
attempt to forecast their economic and environmental hori-
zons by 2030. Among others, Barker and Dagoumas (2009)
examine the macroeconomic long-run rebound effect for the
global economy stemming from energy-efficiency policies
by analyzing policies for the transport, residential and ser-
vices building and industrial sectors of the economy for the
period 2013–2030. They find that the total rebound effect,
arising from the version about energy-efficiency policies
reported in IPCC AR4 WG3, is around 50% by 2030.
Moreover, Vance et al. (2015) assess counterbalance the
relationship between energy demand and environmental
effect, GDP, population and energy efficiency. Their find-
ings indicate that a 100% increase in energy efficiency by
2030 is required in order to meet the 1977 environmental
impact levels. This is considered to be infeasible unless a
combination of policy and technology approaches is adopted
to tackle this critical challenge. This research puts insights
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130
on the difficulty of moving toward energy sustainability and
suggests possible solutions for policy and management of
renewable energy.
Renewable energy future scenarios
Although conventional energy demand is still high relatively,
the demand on renewable energy is being an important
source of energy today with a significant increase in demand.
The Energy Technology Perspectives and the Interna-
tional Energy Agency’s key scenarios in the World Energy
Outlook reveal that if no action is taken by 2050, coal
demand would almost triple (192%), gas demand would
be more than double (138%) and oil demand would rise by
about two-thirds (65%) (Pfluger 2010). The International
Energy Agency estimates that global demand for renewable
energy is expected to grow annually at a growth rate of 7.3%
between 2007 and 2030, with a world demand for primary
energy over the same period at growth rate of 1.5% annually.
Consequently, import dependency of most countries would
further increase if no actions are taken to improve energy
supply (International Energy Association 2009).
Renewable energy has not yet achieved widespread com-
petitiveness versus fossils, especially wind energy and solar
energy.
The future renewable energy share is expected to reach
35% of an estimated global primary energy supply and
50% of estimated global electricity production (Destouni
and Frank 2010). By 2050, renewable energy will provide
100% of the world’s power demand (Pekez et al. 2016). Cli-
mate change, fossil fuel depletion, energy security issues,
economic growth, sustainable development, new technolo-
gies, innovations and environmental conscious consumers
are powerful forces that shape the renewable energy sector.
Thus, the future of the renewable energy depends upon how
powerful these forces are and which combinations of forces
prevail. These forces constitute the bases of future scenarios
(Sadorsky 2011) that should be taken into account in order
to develop renewable energy.
The different scenarios focus on: (i) “Business as Usual”
is the name of the first scenario which is still less attrac-
tive since governments, leaders, individuals and businesses
lack the political will and economic commitment to adopt
RE and it is still very costly and suffers from lack of stor-
age. (ii) “Focus on Climate Change” is the second scenario
which constitutes the greatest threats to mankind, and if left
unchecked, it will seriously disrupt economic activity. Con-
sequently, government policies have to subsidize renewable
energy and tax fossil fuel as a future scenario. In addition,
publically funded renewable energy research and develop-
ment (R&D) is one area that currently needs a boost. (iii)
The third scenario is the focus on “Energy Security.” The
13
W. Saad, A. Taleb
main point to discuss in this scenario is that, due to the huge
lock-in effect primarily between transportation and fossil
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-
lessness of energy sources, amounts, location, prices, and
we could extend the definition to include economic, social
and environmental quality. (iv) “Clean and Secure Energy
Future,” this fourth scenario is the best and the long time
frame 2010–2100. This time frame is necessary to ensure
that enough time is given for hydrogen fuel cells to play an
important role in meeting our energy needs. This scenario is
an extension of the previously discussed scenarios.
Thus, in addition to climate change, this scenario is an
ongoing process of continuous improvement to the energy
system. The starting point is climate change and energy
security issues, but the main goal will be then carbon energy
infrastructure. This opens the possibility of a green-tech,
where technological developments bring about evolutions
in supplying renewable energy and widespread adoption of
RE leads to more technological energy innovation. Clean
and secure energy future begins with the realization that four
things must be done:
(a) Efficient energy in building, transportation, industries,
power generation and agriculture,
(b) Halting deforestation,
(c) Immediate actions to put such technologies like solar,
wind, wave and geothermal,
(d) More distant technologies like advanced battery stor-
age, fuel cells and next-generation biofuels (algae) need
to be invested in today.
Literature review
The empirical literature on the causal relationship between
energy consumption and economic growth could be syn-
thesized into four testable hypotheses: growth hypothesis,
conservation hypothesis, feedback hypothesis and neutrality
hypothesis (Omri et al. 2015). In this case, energy conserva-
tion policies devoted to reduce energy consumption will have
no impact on economic growth. However, there are sometimes
certain results of empirical studies that show that there could
be a mixed hypothesis contributing to the causal relationship.
To estimate the causality between renewable energy
consumption and economic growth, many researchers have
studied the available data and information about a variety
of developed and developing countries around the world.
However, there are different results contributing to different
hypothesizes. It is a controversial issue.
The growth hypothesis suggests that there is a uni-
directional causal relationship from renewable energy
The causal relationship between renewable energy consumption and economic growth: evidence…
consumption to economic growth; thus, renewable energy
consumption plays a significant role in economic growth.
This role may directly or indirectly enhance the economic
growth through the production process as a complement to
labor and capital. In this case, energy conservation policies
aimed at reducing consumption will have negative impact
on economic growth.
For the USA, Payne (2011) examines the causality by
using the Toda–Yamamoto (TY) causality tests for Granger
causality within a multivariate framework for the period
1949–2007. The empirical findings supported the growth
hypothesis.
A unidirectional causality running from economic growth
to renewable energy consumption is postulated by the con-
servation hypothesis. When the country experiences eco-
nomic growth, this helps in the growth of the renewable
energy consumption as well. In this situation, energy con-
servation policies that may prevent energy consumption will
have negative impact on economic growth.
Sari et al. (2008) use the ARDL approach to test the
causal relationship between renewable energy consumption
and economic growth in theUSA. Their study asserts that
a conservation hypothesis is valid. Sadorsky (2009) also
affirms that a conservation hypothesis exists for 18 emerg-
ing countries. Moreover, Menyah and Wolde-Rufael (2010)
apply a Granger causality test and find that a conservation
hypothesis exists for a group of developed countries.
The feedback hypothesis reveals that there is a bidirec-
tional causal relationship between renewable energy con-
sumption and economic growth. A feedback hypothesis
implies that the consumption of energy, regardless if this
energy is traditional or renewable energy and economic
growth are inherited and may well serve as complements
to each other (Omri et al. 2015). In this case, the validity
of the hypothesis energy conservation policies designed to
reduce energy consumption may decrease economic growth
performance, and likewise, changes in economic growth are
reflected back to energy consumption.
Apergis and Payne (2010, 2011, 2012a, b) examine the
causal relationship between economic growth and renew-
able energy consumption for 13 Eurasia countries, 20 OECD
countries, 6 Central American and other 80 random coun-
tries. Using the panel data methodology, they find out that
the feedback hypothesis exists. Salim and Rafiq (2012) test
causal relationship between renewable energy consumption
and economic growth; their findings show that feedback
hypothesis is valid.
Belk et al. (2011) investigate the long-run relationship
between energy consumption and real GDP in 25 OECD
countries over the period 1981–2007 and find that there is a
bidirectional relationship between these two variables.
When there is no existence of causal relationship between
economic growth and renewable energy consumption, this
131
is the neutrality hypothesis. So, if a country follows either
conservative or expansive policies, no impact will be seen
on economic growth. Payne (2009) uses TY approach, and
he affirmed that neutrality hypothesis exits for 25 developing
countries. Menegak (2011) uses a multivariate panel frame-
work in getting the causality direction of 27 European coun-
tries. His findings reveal that neutrality hypothesis does exist.
Tugcu et al. (2012) use the Hatemi-J causality test to
study and investigate the causality between renewable
energy consumption and economic growth for G7 coun-
tries. The results indicate that neutrality hypothesis exists for
France, Italy, Canada and USA, while the feedback hypoth-
esis exists for England and Japan. Germany stands for the
conservation hypothesis. For the USA, Yildirim et al. (2013)
assert that growth hypothesis results from a causality from
biomass-waste-derived energy, while neutral hypothesis runs
from other sources of renewable energy. Al-Mulali et al.
(2013) examine the causal relationship between renewable
energy consumption and economic growth. They report that
the findings of the study of 108 countries are 79% feedback
hypothesis, 2% conservation hypothesis and 19% neutrality.
In this study, we examine the cointegration property in more
precise terms within a panel-econometric framework. Firstly,
in order to explore the relationship between renewable energy
consumption and economic growth in 12 European Union
countries, we apply panel vector error correction model using
annual data from 1990 to 2014. Secondly, we use Granger cau-
sality test to investigate whether there is any causal relationship
between the variables involved in this study.
Data, methodology and empirical results
In this section, we present a data description and display the
methodology used in order to explore the causal relationship
between economic growth and renewable energy in EU over
the period 1990–2014. The main results obtained from the
regressions are reported and analyzed in this section.
Data description
The purpose of this study is to investigate the causal rela-
tionship between renewable energy consumption and eco-
nomic growth in 12 European countries. This would help
us to indicate whether renewable energy consumption is
important for a country’s economy and whether it plays a
significant role in increasing economic growth and improv-
ing the development plans or not. The included countries in
this study are Austria, Denmark, Finland, France, Germany,
Italy, Netherlands, Poland, Portugal, Romania, Spain and
Sweden. The availability of the required data had limited
the number of European countries chosen.
13

132 W. Saad, A. Taleb

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

13
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
Results for panel cointegration tests that are presented in
Table 2 show that the null hypothesis of no cointegration
is rejected in seven out of eleven tests. Although four tests
show an insignificant level for cointegration but a majority
of seven tests indicate the rejection of the null hypothesis.
Moreover, Kao residual cointegration test indicates that the
null hypothesis of no cointegration among the variables is
rejected. Thus, the variables are cointegrated.
In order to determine the long-run equilibrium relation-
ship, the fully modified ordinary least squares (FMOLS)
technique for heterogeneous cointegrated panels is used
(Table 3).
All the coefficients are positive and statistically signifi-
cant at 1% significance level. The results indicate that each
1% increase in renewable energy consumption increases real
GDP by 2.23%; a 1% increase in gross fixed capital forma-
tion increases real GDP by 0.36%, and a 1% increase in labor
force increases real GDP by 0.47%.
To explore the causal relationship between the variables,
a panel vector error correction model is estimated to perform
the short-run and long-run causality through this model.
With respect to Eqs. 2–5, a short-run causal relationship is
determined by the significance of the F-statistics. A long-run
causal relationship is revealed by the statistical significance
of the respective error correction term using a t test.
The optimal lag length of the panel VAR model is lag 4
according to Schwarz criterion (see Table 4). Since we used
data that are not stationary at level but stationary at first dif-
ference, then lag 3 is taken as an optimal lag length for the
panel VECM.
Wald tests of the “differenced” explanatory variables give
us an indication of the “short-run” causal effects, whereas
the “long-run” causal relationship is implied through the
significance of the t test(s) of the lagged error correction
term(s) that contains the long-term information since it is
derived from the long-run cointegrating relationship(s). The
results of these tests are presented in Table 5.
The coefficient of the lagged error correction term, how-
ever, is a short-term adjustment coefficient and represents
the proportion by which the long-run disequilibrium (or
Table 5  VECM and Wald Source of causation
causality test
Short-run Chi-square statistics
ΔLnGDP
ΔLnGDP … 2.5677
ΔLnGFCF 5.1630
ΔLnLBR 6.6853**
ΔLnREC 7.3332**
**, * Significance at 5 and 10%, respectively
13
W. Saad, A. Taleb
imbalance) in the dependent variable is being corrected in
each short period.
The ECT values in Table 5 indicate that there is a bidi-
rectional causality between economic growth and renewable
energy consumption. Thus, the feedback hypothesis exists.
This term is negative and statistically significant in ΔLnGDP
and ΔLnREC equations, which reveals a mutual causal rela-
tionship between these two variables and indicates that these
variables readjust toward a equilibrium after the occurrence
of a shock.
With respect to the short-run causality, the results in
Table 5 show that there is unidirectional causality running
from labor force to gross fixed capital formation, labor force
to renewable energy consumption and economic growth to
renewable energy consumption. Finally, there is a bidirec-
tional causality between economic growth and labor force.
The empirical findings of this study are in line with the
studies of Apergis and Payne (2010) for 20 OECD countries,
Apergis and Payne (2011) for six Central American coun-
tries, Apergis and Payne (2012a, b) for 80 countries, Al-
Mulali et al. (2013) for 108 countries, Pao and Fu (2013) and
Cho et al. (2015) for less developed countries. This study
shows that in the long run a bidirectional causality occurs
between renewable energy consumption and economic
growth; thus, the feedback hypothesis exists and implies
that an increase in energy consumption leads to an increase
in economic growth and vice versa.
The short-run results that showed the existence of the
conservation hypothesis, i.e., a unidirectional causality run-
ning from economic growth to renewable energy consump-
tion, are consistent with the results of the studies performed
by: Sari et al. (2008) in the USA and Sadorsky (2009) who
affirms the existence of a conservation hypothesis for 18
emerging countries. Moreover, Menyah and Wolde-Rufael
(2010) apply a Granger causality test and find that a conser-
vation hypothesis exists for a group of developed countries.
In time-series analysis, two well-known versions of a
portmanteau test are available for testing the autocorrelation
in the residuals of a model: It tests whether any of a group
of autocorrelations of the residual time series are different
from zero.
Long-run coefficients
ΔLnGFCF ΔLnLBR ΔLnREC ECT
7.2329** 1.3960 − 0.0140**
… 6.5067** 4.3261 − 0.0022
1.4668 … 4.8330 − 0.0007
4.92123 9.5853* … − 0.0696**
The causal relationship between renewable energy consumption and economic growth: evidence…
Recommendations and conclusion
In today’s world, renewable energy sources are increasingly
incorporated by many countries since they are clean, are
sustainable and have less negative environmental effect.
The attention toward sustainable development has acceler-
ated renewable energy consumption in recent decades, and
many countries are moving toward new sources of energy
to decrease the harmful effects of non-renewable energy
sources on the economy and environment.
The objective of this study was to explore the relation-
ship between renewable energy consumption and economic
growth in twelve EU countries over the period 1990–2014.
To do so, panel vector error correction model (VECM) was
applied using annual data for the variables in question. In
addition, Granger causality tests based on the VECM were
performed to investigate direction of causality between these
variables if it exists. The focus in this study was on both the
short-run and the long-run causalities. This could help to
conclude important policy implications for renewable energy
consumption.
The empirical findings do not support the point of view
that stipulates a neutral relationship between renewable
energy and economic growth. The results indicate the pres-
ence of unidirectional Granger causality running from eco-
nomic growth to renewable in the short run and bidirectional
Granger causality between these variables in the long run.
This reveals the presence of a feedback between the vari-
ables in question in the long term. This result indicates that
the 12 countries exhibit a sort of energy dependence in the
sense that an adequately large supply of energy appears to
lead to higher economic growth (Lee and Lee 2010).
The conservation hypothesis, which assumes that energy
conservation and energy demand management policies do
not have an adverse impact on economic growth, is con-
firmed in the 12 EU countries in the short run. This indi-
cates that an increase in economic growth is a core factor
to improve renewable energy consumption. The causality
running from economic growth to renewable energy con-
sumption is generally referred to a kind of mismanagement
of the energy sources, such as failing to use the rich sources.
Moreover, renewable technologies that are used to produce
the renewable energy require large and expensive invest-
ments. Hence, the 12 EU countries need to put financial and
economic plans to enhance investments in the renewable
energy technologies in order to develop them and make them
more affordable.
However, in the long run, the results show that an increase
in economic growth causes renewable energy consumption
and vice versa. This reveals the growing role of renewable
energy in stimulating economic growth in the targeted 12
EU countries in the long term.
135
The policy implications stemming from this study suggest
that cooperation among the 12 EU countries, in terms of
joint projects, or joint support schemes, should be intensi-
fied in order to enhance the investments in renewable energy
for the economic and environmental benefits. This is what
actually many EU countries are aiming to achieve through
“The Paris Agreement for Climate Change.” Besides, reduc-
ing the increased dependence on imported fossil fuels from
non-EU countries will lessen the energy price volatility and
will contribute to the decarburization strategy.
Renewable energy projects can also bring economic ben-
efits to many regional areas, as most projects are located
away from large urban centers and suburbs of the capital
cities in Europe. However, it should be noted that achieving
a more efficient use of energy cannot be designed without
considering other economic and environmental factors than
those evoked in this study. Future studies should take into
consideration the national and international factors that may
affect energy-efficiency production and use.
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