The joint and independent effects of financial development and renewable energy on energy consumption in the Trans-Pacific countries

Abstract

While the independent effect is widely examined, the joint effect of financial development and renewable energy on energy consumption has largely been ignored in the current literature. Eleven members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) must balance the simultaneous requirements of supporting financial development, increasing renewable energy usage, and minimizing the adverse effects of energy consumption on the environment. Unlike previous studies, the paper examines the joint and independent effects of financial development and renewable energy on energy consumption for the CPTPP countries during the 1971-2019 period using the second-generation estimator analysis. Our variables are carefully selected based on solid hypotheses and empirical studies. Our results confirm an inverted U-shaped relationship between energy consumption and economic growth. We claim that financial development affects energy consumption depending on the level of renewable energy consumption. The bidirectional causality effect between financial development, energy consumption, and economic growth is also confirmed. Robustness checks have been conducted using sub-samples based on the per capita income threshold of $39,054. Policy implications have emerged based on these findings. An increase in renewable energy consumption can help these nations achieve the dual objectives: (i) to support financial development and to enhance economic growth and (ii) to reduce an adverse effect of financial development and economic growth on the environment.