Does increasing environmental policy stringency enhance renewable energy consumption in OECD countries?

Abstract

The literature lacks enough evidence on the effect of environmental policy stringency on renewable energy consumption. Therefore, the main objective of this study is to investigate the causal effect of the revised version of the Environmental Policy Stringency Index (EPS) and its components on Renewable Energy Consumption (REC), taking into account environmental innovation, trade openness, economic growth and consumer price index. To this end, we carry out dynamic and static analyses of the yearly data of 32 OECD countries during the period from 1990 to 2019. The two-step system GMM estimator and the forward-orthogonal deviations-GMM technique are used to deal with the potential endogeneity, serial correlation and cross-sectional dependence in the dynamic regression, while the Driscoll-Kraay standard errors technique and quantile regression are employed to estimate the static model. Unlike the existing literature, our results reveal that increasing environmental policy stringency can promote renewable energy. Both market and non-market-based environmental policies and technical support policies show positive effects on green energy use. These results imply that OECD governments can play a vital role in achieving the goal of net zero CO2 emissions by 2050. Increasing the stringency of the policies that put a price on pollution (such as energy taxes) raises the cost of polluted energy use, leading to a shift toward clean energy under the substitution effect. In addition, increasing the public R&D expenditure on solar and wind energy technologies can reduce renewable energy costs and prices, thus facilitating its generation and diffusion.