From Transition Risks to the Relationship between Carbon Emissions, Economic Growth, and Renewable Energy

Abstract

Currently, energy consumption has increased exponentially. Using fossil fuels to produce energy generates high shares of carbon dioxide emissions and greenhouse gases. Moreover, financial authorities at the global and European levels have recognized that climate change poses new risks for individual financial institutions and financial stability. The analysis contributes to the literature in two critical ways. First, the research attempts to develop a map of the transition risk of the EU. In detail, it defines an indicator that will identify the transition risk the EU bears. Second, it analyzes any relationships between the CO2 emissions, economic growth, and the renewable energy of each European country from 1995 to 2020, highlighting the short and long-run relationships. The methodology used is the ARDL. The results show the long-run relationship between GDP, renewable energy consumption, and CO2 emissions is evident. Indeed, economic growth may increase environmental pollution in Europe, while an increase in using renewable energy may reduce CO2 emissions. Therefore, this implies the trade-off between economic development and CO2 emissions. Furthermore, the results indicate the difference in the short-run relationship across countries. However, the results demonstrate that the choice of the European Union to increase the use of renewable energies is more than fair.