Are Trade Liberalization policies aligned with Renewable Energy Transition in low and middle income countries? An Instrumental Variable approach

Abstract

This paper attempts to empirically analyze the compatibility of national trade liberalization policies with regards to promoting widespread use of renewable energy resources across 71 low, lower-middle and upper-middle income countries from South Asia, East Asia, Pacific, Central Asia, Latin America, Caribbean islands and Sub-Saharan Africa. Annual time series data from 2000 to 2017 is employed to perform panel data cointegration and regression analyses. The results from the cointegration analyses show long-run associations between trade liberalization policies and the renewable energy consumption indicators. The Instrumental Variable Two-Stage Least Squares panel data estimator is employed to control for the endogeneity in the dataset. The overall results broadly point towards the effectiveness of greater trade openness in facilitating renewable energy transition only in the low-income economies while prolonging the transition periods in the lower and upper-middle income countries. The marginal impact of a rise in the trade openness index is estimated to enhance the renewable energy share in total energy consumption within low-income countries by 0.24% as opposed to lowering this share by 0.19% within lower-middle income economies. However, trade liberalization is found to attribute to greater efficiency of renewable energy use across all the three income groups. Thus, these findings have critically important policy implications for the respective governments.