The relationship between energy prices, economic growth and renewable energy consumption: Evidence from Europe

Abstract

This paper revisits the renewable energy-economic growth nexus in seven European countries for the 34-year period of 1985–2018. As the data is in annual frequency, panel data methodologies are employed to benefit from increased explanatory power of the econometric analysis. Electricity generation share weighted price indexes of coal and natural gas are included in a demand specification together with real GDP in explaining renewable energy consumption. Long-run causality is found to flow from all three explanatory variables to renewable energy consumption. Short-run causality is also detected from the two fossil fuel prices to renewable energy consumption. Our results provide empirical support to the important role of economic growth and non-renewable energy prices in the renewable energy transition. On the other hand, renewable energy consumption, capital and labour enter a production equation in determining economic output. The findings show no evidence of Granger causality from renewable energy consumption to economic output.