Effects of trade openness on renewable energy consumption in OECD countries: New insights from panel smooth transition regression modelling

Abstract

This paper investigates the effects of trade openness on renewable energy consumption in 35 OECD countries for the period between 1999 and 2018. A panel smooth transition regression model is built. Imports, exports, and total trade are used as proxy variables of trade openness. To reduce the error of omitted variables, a control variable pool is constructed, consisting of foreign direct investment, access to electricity, international remittances, GDP per capita, domestic inflation rate, and carbon emissions. The empirical results demonstrate the existence of a strongly nonlinear relationship between trade openness and renewable energy consumption. In terms of imports, three structural breakpoints are identified: 33.732, 40.945, and 76.395. When the imports reach 40.945% of the GDP, their effect on renewable energy consumption will switch from promoting to inhibiting. Both exports and total trade have one structural breakpoint and can constantly promote renewable energy consumption. The analyses on the temporal and spatial variations of the effects show that imports, exports, and total trade all positively impacts renewable energy consumption between 1999 and 2018. Their effects first follow a downward trend, which later change to an upward trend. Imports, exports, and total trade exert the least impact on renewable energy consumption of OECD Asia Oceania. Regarding specific countries, exports and total trade most strongly impact the renewable energy consumption in Mexico and exert the least impact on the renewable energy consumption of the United States.