Sustainable energy consumption and capital formation: Empirical evidence from the developed financial market of the United Kingdom

Abstract

Financial transaction in the United Kingdom is one of the largest in the world, how sustainable energy consumption influence the sustainability of the UK’s developed financial market transactions vis a vis the country’s economic growth and capital formation is to date not established. To achieve parsimonious results, the study used time series data from 1970 to 2013. The study applied the Zivot-Andrew structural break test, the Bayer-Hanck combined cointegration test; the ARDL bounds testing approach to cointegration and the Johansen cointegration test. The findings from the ARDL estimation was validated using the innovation accounting test and the impulse response function. The results confirmed the existence of cointegration among the variables. The study discovered the relationship between the developed financial market and energy consumption to have an inverted U-shape pattern of exacerbating the model arrangement of energy consumption in the UK. This suggests that energy demand rises with financial market development and start to decline after a threshold level of the markets’ operational peak. Implying that the global financial transaction that flows from other countries to the UK are an indirect form of additional pressure to the country’s electricity predicaments, and this need to be investigated by energy policy makers. In addition to that, the study found economic growth to have a significant influence on sustainable energy consumption, while, capital formation is positively linked with energy demand. The causality analysis, on the other hand, exposed the existence of bidirectional causal relationship pointing out how sustainable energy consumption could lead to the resilience of the UK Financial market and the country’s economic growth prospects. How and in what manner can this happen is clearly discussed in this study. In addition to that, the implications of our findings to the currrent BREXIT debate is also discussed.