Chapter Five - The effect of fiscal and financial incentive policies for renewable energy on CO2 emissions: the case for the Latin American region

Abstract

The impact of fiscal and financial incentive policies for renewable energy on CO2 emissions was examined in 12 Latin American countries over the period of 1980–2014. The Autoregressive Distributed Lag (ARDL) model in the form of Unrestricted Error Correction Model was computed. The outcomes of preliminary tests proved the presence of low multicollinearity, cross-section dependence, the unit roots in the variables, and the fixed effects in the model. In addition, cointegration was found between the variables, the Dynamic Fixed Effect estimator was appropriate, and the panel was homogeneous. The specification tests pointed to the presence of cross-section dependence, serial correlation in the panel-data model, and the existence of heteroskedasticity. The results of impacts (short run), elasticities (long run) of ARDL model showed that the fiscal/financial incentive policies for renewable energy are not able to reduce CO2 emissions in the short run, while in the long run the policies do reduce emissions. Moreover the economic growth of Latin American countries and the consumption of fossil fuels increases CO2 emissions in the short run and long run, while the consumption of renewable energy reduces them in the short run and long run. The impact of variables in the short run and long run and the Error Correction Model are statistically significant at the 1% and 5% level. Moreover the robustness test proved that the ARDL model is robust even in the presence of shocks. This study confirmed the hypothesis that renewable energy fiscal/financial incentive policies decrease CO2 emissions. This chapter extends the existing literature that looks at the impact of renewable energy policies on environmental degradation and opens the way for the development of new research that approaches the efficiency of renewable energy public policies.