The effect of financial development on renewable energy demand: The case of developing countries

Abstract

The global economic costs of environmental pollution increase the importance of renewable energy sources. This paper analyzes the impact of financial development on renewable energy consumption in 34 upper middle income developing countries from 1994 to 2015. The long-term relationship between variables is estimated by applying Panel Pedroni cointegration and Kao cointegration tests. The long run effect of financial development on renewable energy consumption is investigated by using Fully-Modified OLS (FMOLS) approach. The empirical results indicate the presence of long run relationship between renewable energy consumption and financial development. Moreover, financial development increases the demand for renewable energy. Economic growth has a negative effect on renewable energy consumption, but consumer prices have a statistically insignificant impact on renewable energy consumption. The empirical evidence reveals that financial development triggers in increasing demand for environmentally friendly energy sources, i.e., renewable energy. Renewable energy consumption reduces the amount of greenhouse gases in nature as opposed to fossil energy consumption. Therefore, to achieve sustainable development goals, governments should implement incentives and tax policies that increase the demand of enterprises for renewable energy resources. In addition, investment opportunities in renewable energy resources to be created by public-private cooperation via financial arrangements should be increased.