The relationship between renewable energy consumption and trade openness: New evidence from emerging economies

Highlights

• We examine relationship between renewable, non-renewable energy and trade openness.

• Trade openness has an integrated with renewable and non-renewable energy use.

• Non-renewable energy consumption is the main cause of trade openness.

• Increase the use of renewable energy is important in order to reduce trade openness.

Abstract

In this study, the relationship between trade openness, renewable and non-renewable energy consumption for “Top Emerging Countries of Bloomberg” in 1980–2015 period is investigated. The long-run relationship between panels is examined with Dumitrescu-Hurlin (2012) panel causality test, Westerlund (2006) panel cointegration test with multiple structural break and Pesaran (2006) CCE-MG cointegration estimator. According to findings, it was found that the use of non-renewable energy is the one of main reason for the increase in trade openness. In addition, the increase in the use of renewable energy was founded to be an important factor in decreasing the trade openness for these Emerging Countries. The results of the study provide valuable information on how to increase the use of renewable energy for a sustainable economy in the long term for decision-makers, as well as for investors on the future of energy-related investments.

Introduction

Rapid population growth, technological development, industrialization, urbanization and rapid increases in commercial activities increase the energy demands of developing countries all over the world. The energy issue as an indicator of economic and social development of the countries attracts great interest. Energy has a strategic importance in terms of technical, legal, and economical aspects, international relations and environmental pollution. From an economic perspective, energy products, major import items causing foreign exchange outflow for countries that do not have energy sources, are important inputs for production, namely cost factor. In addition, energy, which affects many macroeconomic changes through secondary effects such as inflation and exchange rate increase, continues to be a prior issue. On the other hand, energy sector investments are other economic aspects for the issue. Therefore, significant improvements in energy production-consumption and energy supply security have been witnessed in many countries.

There is a close relationship between the consumption of energy and economic development, one of the basic inputs of economic and social development. Per capita primary energy and electricity consumption are important indicators used in international comparisons to determine the development levels of countries [21]; 295). Energy is the basic input of the production process required for social and economic development [43]; 193). The presence of energy is an important and repulsive force for raising the standard of living throughout the country [30]; 10275). The increase in energy demand has been growing above the rate of world population and continues to increase in parallel with the technological innovations [11]; 290). Today, energy and economy have become integrally interrelated, and the use and trade of fossil resources have become a major driver of global politics [20]; 473).

The need for energy has been provided from different sources to date. Traditional energy sources such as coal, oil and natural gas are the main fossil fuels formed in millions of years [22]. However, fossil fuels have been rapidly depleted as a result of the increasing world population and economic developments, and are likely to run out in the near future. In addition, fossil fuels cause significant harm to the environment, making it inevitable to return to renewable energy sources [23]; 159). Renewable energy sources such as hydropower, biomass energy, solar energy, wind energy, geothermal energy and wind energy [35]; 14 [3]; 8) are primary energy sources that can be used without making any changes as they come from nature [3]; 8). Although, the fossil resources are limited, and the steps can be taken about fossil resources are also limited, renewable resources can be effectively utilized since they are both theoretically unlimited and sensitive to the environment.

Renewable energy is one of the greatest source for handling energy increase issue. Strong growth in renewable energy is achieved through increased competitiveness of wind and solar energy. [7]; 95). The renewable energy sector continues to be one of the most dynamic, rapidly changing and transformer sectors of the global economy. The technological developments, the decline in costs and the huge impact of new financing structure have made the sector the driving force of economic growth all over the world. Above all, there is a global consensus on how to deal with the threat of climate change through the use of clean energy technologies in the world. The International Climate Treaty in Paris in December 2015 gave the countries a new impetus to support policy incentives for clean energy development (ITA 2016, 5).

On the other hand, the trade openness, which is an important macroeconomic variable, has become a problem with significant disruptive effects on other economic variables. One of the factors affecting the formation of the trade openness in energy-dependent countries is the import of energy products. As a result, the energy issue for such countries is prior for dealing with the trade openness problem. Energy consumption can affect the trade openness in different ways [36]; 127): First, the machinery and equipment in the production process require energy, an important input to energy production. Second, exporting or importing of goods or producing raw materials requires energy. In this context, without sufficient energy supply, the trade openness will be affected negatively. As a result, energy is an important input to the expansion of trade and sufficient energy consumption is essential to expand trade through expanding export-import.

Trade openness affects energy demand in three different ways as scale effect, technical effect and composite effect [36]; 126): while other factors are constant, the presence of trade openness increases economic activity, as well as domestic production and economic growth. The increase in domestic production is reshaping energy demand due to the expansion in domestic demand, called as scale effect. The trade openness allows emerging economies to import advanced technologies from developed economies. Adopting advanced technology reduces energy density. Economic results of advanced technology applications are less energy consumption and more production, often referred to as the technical effect. The composite effect reveals energy-intensive production as the result of economic development, such as the transition from agriculture to industry. In the initial stage of economic development, the transition occurs from the agricultural sector, in which the economy needs less energy to the industrial sector, where there is more energy use. In the maturation phase of the later economic development, the direction of transition is from the industrial sector to the service sector, where there is less energy need. Thus, energy density is reduced by composite effect.

Countries need to produce in order to provide economic growth. In this direction, one of the most important inputs required for production is the energy as described above. Developing countries, in which not only primary energy sources such as oil, natural gas, and coal, but also energy sources that require advanced technology such as nuclear energy are absent, are dependent on foreign countries. For this reason, it is possible that these countries will experience both economic growth and an increase in the current account deficit. In this respect, the motivation of the study is to determine whether the use of renewable energy will be beneficial to ensure sustainable economic growth of countries that are dependent on foreign countries for energy and to decrease the current account deficit permanently.

In previous empirical studies presented in the second chapter, total energy consumption was generally used for analysis and the relationship between total energy consumption and some variables was examined. In particular, the relationships between energy consumption, economic growth and the trade openness have often been investigated. This study extends the literature about this issue by focusing on the relationship between energy consumption and the trade openness. In this study, instead of all energy consumption, renewable energy consumption will be included to obtain more specific results. The relationship between panels was examined by Ref. [41] panel cointegration test with multiple structural breaks [28], CCE-MG coefficient estimator and [14] panel causality test.

Following the introduction of the study, the literature review is included in the second section. In the third section, the data and the method of the study are explained. The empirical results are presented in the fourth section of the study while the results and general conclusions are in the fifth and last part.