The Link Between Good Governance, Economic Development and Renewable Energy Investment: Evidence from Upper Middle-Income Countries

Abstract

Renewable energy (RE) can play a vital role in ensuring a sustainable energy platform for the future, and in addressing climate change. Investment in RE in the upper middle-income countries (UMICs), which are a major contributor to global carbon dioxide (CO[Formula: see text] emissions, can be an important recovery strategy for mitigating climate change damage. Existing literature suggests that governance (also referred to as ‘institutional quality’) is an important determinant of renewable energy investment (RE investment). Yet, governance conditions in UMICs have remained almost unchanged in the recent past, despite the substantive increases in income levels and investment in the RE sector. This paper outlines an investigation into the role of governance in RE investment in UMICs and considers whether the influence of governance on RE investment depends on a country’s income level. This analysis used pooled ordinary least squares (OLS), panel-corrected standard errors and panel-fixed effects models to evaluate data from 35 UMICs, from 1996 to 2017. The results suggest that good governance raises RE investment in UMICs. In particular, the control of corruption, government effectiveness, regulatory quality and rule of law are statistically significant aspects of good governance that boost RE investment. However, this effect is conditional on the level of economic development (income level) of a country. The marginal effect of governance on RE investment is larger in lower income countries and vice versa. Among the controls, trade openness in UMICs is predicted to have an adverse impact on RE investment.