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Development level and the impact of technological factor on renewable energy

production

Narges Bamati, Ali Raoofi

PII: S0960-1481(19)31791-4
DOI: https://doi.org/10.1016/j.renene.2019.11.098
Reference: RENE 12646

To appear in: Renewable Energy

Received Date: 06 April 2019

Accepted Date: 17 November 2019

Please cite this article as: Narges Bamati, Ali Raoofi, Development level and the impact of
technological factor on renewable energy production, Renewable Energy (2019), https://doi.org/10.
1016/j.renene.2019.11.098

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Development level and the impact of technological factor on

renewable energy production
Narges Bamati a,* , Ali Raoofib
a Department of Energy Economics, Faculty of Economics, Allame Tabataba’I University, Beheshti St.,Tehran, Iran

b Department of Theorical Economics, Faculty of Economics, Allame Tabataba’I University, Beheshti St.,Tehran, Iran

Abstract
This study provides a comprehensive analysis of the drivers of renewable energy
production by employing variables of technological factors, economic factors, and
environmental factors for two panels of developed and developing countries. Using
GLS (Generalized Least Square) panel data estimation method, this paper finds that
the determinants towards renewable sources vary in accordance with the level of
income. The results reveal that renewable energy production is significantly
determined by high technology export in developed countries, while high
technology export is not statistically significant in explaining the use of RE sources in
developing countries. Oil price has the smallest impact on renewable energy
production in both groups. Although GDP per capita yields a positive impact on
renewable energy production per capita in both groups, per capita CO2 emission
shows considerably different impacts in developed and developing countries.
Keywords: Renewable energy, Renewable energy production, CO2 emission,
Technological factor, Development level
*Corresponding author.
E-mail addresses: Nargesbamati@gmail.com (Narges Bamati), Aliraoofi1@gmail.com(Ali Raoofi).

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1. Introduction
International efforts to increase the use of renewable energy sources were originally
spurred by the oil price shocks of the 1970s and the desire for sources of energy that
are less prone to geopolitical risks.
More recently, the main driver of renewable energy production has been the need
for increasing actions to mitigate climate change, global warming, energy security,
and the need to move away from the fossil fuels, that dominate global energy
systems. This led to a step change in the development and deployment of a range
of renewable energy technologies, infrastructure, markets and institutional
frameworks that advance and facilitate expanded deployment of renewable
energy[1].
Global energy demand expands by 30% between 2016 and 2040, which is equivalent
of adding another China and India to today’s global demand [2]. According to the
Fourth Assessment Report from the Intergovernmental Panel on Climate Change
(IPCC, 2007) 75% of the CO2 emissions come from the use of fossil fuels in energy
production, transport, industrial processes and land-use changes. All relevant
studies have come to the same basic conclusion that fossil fuels through its release
of carbon dioxide into the atmosphere is the main driver behind environmental
issues, that is why the debate about implementing renewable energy production
continues to evolve.
Although Mackenzie [3] argues that the less developed countries (LDCs) should be
permitted to burn fossil fuels for some time to allow them industrialize, some
developing economies have already started to commit substantially on non-fossil
fuel energy sources. It is because growth in primary energy demand has occurred
largely in these countries so that they are finding themselves facing an energy
security issue that is similar to that most of the developed economies.
The International Energy Outlook 2017[4] states that renewable energy is the fastest
growing energy source amongst other energy sources, which means renewable
energy use will increase the most till 2040. Renewables, including hydropower, are
the fastest growing sources of electricity generation over the period of 2015-2040,
rising by an average 2.8% per year as technological improvements and government
incentives in many countries support their increased use.

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Supporting the uptake of RE is dependent not only on energy policies, and

regulations that directly lead to the greater deployment of RE, but also on a wide
range of economic policies and strategies, social factors such as the dissemination
of information and social acceptance, technical and infrastructure factors, and
financing and market conditions [5].
Although There is a wide literature about the impact of socio-economic variables on
RE like Sadorsky[6,7], Payne[8], Salim and Rafiq[9], Lean and Smyth[10], Smyth[11],
Apergis and Payne[12], Marques and Fuinhas[13], Omri and Nguyen[14], Omri et
al.[15], Liu et al.[16], technological factor has not been applied in renewable energy
production and this allows us to include new drivers such as high technology export
in the analysis. In addition, to the best of our knowledge, this is the first study to
compare the impacts of renewable energy driving factors based on development
stage(a country's energy mix depends on the balancing of its income level and
environmental degradation, which will be closely related to its development stage)
which enables us to capture how level of development influence the impacts of RE
determinants on renewables development and to confirm their discrepancies
among the two different income groups.
The majority of previous studies show that increases in per capita GDP and per
capita CO2 emissions, drive the per capita renewable energy production in the long
run. These studies show that per capita GDP has a positive impact on renewable
energy production while the impact of fossil fuel price and per capita CO2 emissions
can be seen in both negative and positive effect on RE production.
The analysis is made at groups depending on the income level according to the
World Bank Development Indicators. In each group, countries with higher level of
RE production have been selected, based on data availability.
In this study, we apply panel data technique to answer following questions:
What are the elasticity estimates associated with renewable energy production per
capita with respect to real GDP per capita, carbon dioxide emissions per capita, oil
price, and high technology export in developing and developed countries?
Are the impact of GDP per capita, CO2 emission per capita, oil price and high
technology export on RE production in developed countries greater than developing
countries?

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The task of this study is to extend the recent research on the determinants of
renewable energy to the case of 10 developed countries and 15 developing
countries (refer to Appendix1) from 1990 to 2015 and to discover the group-specific
features in terms of the impact that potential factors have on renewable energy
production. The special significance the economic structure have in designing
accurate policies require policy-makers to grasp major factors leading to RE
development and the aim of this study is to highlight major determinants of RE
production in each group.
The remainder of this paper is structured as follows: section 2 discusses the debate
on RE and model development; section 3 presents the Data and econometric
method; section 4 shows the empirical results; section 5 presents concluding
remarks.

2. The debate on RE and model development

A range of factors drive or inhibit renewables development and deployment. IEA
[17] for the first time has put cross-cutting enablers that can together support
enhanced deployment of RE, in five overarching categories. They include:
 Financial and economic factors;
 Regulatory and institutional factors;
 Technical, infrastructure and innovation factors;
 Social factors;
 Environmental factors.

2.1 Financial and economic factors

Deployment of renewable energy is directly dependent on economic and financial
factors and financial factors actually are highly affected by economic (or
macroeconomic) conditions.
Reorienting available financial instruments towards newer, low-carbon
technologies require firstly considerable money and then dedicated policy support
to target barriers such as perceptions of high risk. This has been an important barrier
to renewables deployment in many countries and has required policy intervention

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to provide greater certainty for investors. It remains a particularly important

challenge in many developing countries.
Another substantial challenge to the deployment of RE is that it must compete
against other CapEx1 priorities with higher internal rates of return. Loans can be hard
to obtain where RE is unfamiliar to financial institutions [5].
Facilitating investment absorption is essential in addressing financial Policy
framework in both developed and developing countries.

2.1.1 GDP Per capita and renewable energy

Any model attempting to model renewable energy production needs to include

income that is mostly proxied by GDP or GDP per capita.
On the one hand, higher income (GDP) could allow supporting regulatory costs to
promote renewable sources, originating in a positive effect. On the other hand, the
costs of renewable technologies have usually been higher than those of fossil fuels.
Additionally, the costs of replacing heavy infrastructures based on traditional energy
sources, such as fossil sources with other renewable-based ones are considerable.
In spite of having an upward trend, renewable energy production is still limited due
to its relatively high costs in many developing countries. Higher income countries
are more likely to have access to or the development of new technologies that are
important to the increased production and use of renewable energy.
While the econometric approaches and data sets differ between studies, almost all
studies come to the same conclusion that economic factors mainly drive renewables
production, especially income level. Thus a positive linkage between income and
renewable energy production is expected.
An analysis by Shah et al. [18] suggests that countries where there is little support
for the renewable energy sector, investment in this sector will depend more on
macroeconomic aspects. According to Sadorsky [6] real national income is an
important driver of renewable energy use in G-7 countries.
Another study by Menyah and Wolde-Rufael [19] investigated the causal
relationship between renewable energy use and real gross domestic product (GDP)

1 Capital Expenditure

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for the USA between 1960 and 2007. The study found a unidirectional causality
running from GDP to renewable energy use.
Also, using a panel error correction model, Apergis et al. [20] examined the causal
relationship between renewable energy use and economic growth for a group of 19
developed and developing countries for the period 1984-2007. They found a
bidirectional causality between renewable energy use and economic growth.

Apergis and Payne [12] investigated causal dynamics associated with renewable
energy consumption per capita for a panel of 11 South American countries over the
period 1980 to 2010. The study revealed a bidirectional causal relationship between
renewable energy consumption per capita and real GDP per capita in both the short-
run and long-run.

Using the panel data technique on 23 countries in Europe for the years 1990-2013,
Al-Mulali et al. [21] discovered that GDP growth is the main factor that prominently
as well as positively influences the renewable energy use in those countries.
Nguyen and kakinaki [22] compared the relationship between renewable energy
consumption and output based on countries' development stage and found out that
RE consumption is positively correlated with output for high-income and middle-
income countries, with greater correlation for high-income countries.
Alam and Murad [23] investigated the short-term and long-term impacts of
economic growth, trade openness and technological progress on renewable energy
use in 25 OECD countries for 43 years. They found that economic growth
significantly influence renewable energy use over the long-term in OECD countries.
Irandust [24] examined the relationship between renewable energy consumption,
technological innovation, economic growth, and CO2 emissions in the four Nordic
countries (Denmark, Finland, Norway, and Sweden) for the period 1975-2012. The
findings indicate a unidirectional causality running from growth to renewable
energy.

2.1.2 Oil price and renewable energy

Prices of traditional energy sources are usually pointed out as determinants of RE
deployment. Depending on either oil is the most prevalent fossil fuel energy source
or not, we can consider two different mechanisms:

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Suppose an oil-rich country, high levels of GDP are generally supported by massive
infrastructures based on oil sources. That is why financial and economic factors
notably depend on oil prices and incomes. During the higher oil price, developed
oil-rich countries are expected to invest in promoting RE capacity through their
investment-fund (, whereby they stay secure from oil price volatility by saving oil
incomes) because they are more concerned with energy security issues. However,
some countries strengthen commitment to traditional sources, through increasing
investment in existing fossil-based infrastructure, which hampers the deployment of
renewable energy sources.
Now, suppose an oil importing country, higher oil price cause energy security issues
and enhance renewable energy production, implying a negative relationship
between the demand for renewable energy and its substitute. Thus, in this case a
higher price of traditional energy sources promotes the use of renewable energy.
However, as mentioned before, public policies and regulations directly impact the
above mechanisms. We cannot clearly state our expectations of oil price volatility on
RE production, Because each group conclude both oil-importing and oil-exporting
countries.
Omri et al. [15] use oil price as a determinant of renewable energy demand and find
some evidence of significant effects from oil prices. According to their study a
negative link between oil prices and renewable energy demand is expected because
rising oil prices would encourage businesses and households to reduce its
consumptions, purchase more energy efficient product and switch to renewable
energy sources.
Using panel cointegration and error correction modeling for a panel of 11 South
American countries, Apergis and Payne [12] found that there is a long-run
equilibrium relationship between renewable energy consumption per capita and
real oil prices and it yields a positive impact on renewable energy consumption per
capita. Also they noticed that in the short-run, an increase in real oil prices increases
renewable energy consumption per capita in response to a substitution from fossil
fuel prices with a feedback effect from the increase in renewable energy
consumption per capita in lowering real oil prices.

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Henriques and Sadorsky [25] find that stock prices of alternative energy companies
respond more to a shock to technology stock prices (or a technology index) than to
oil price.

2.2 Technical, infrastructure and innovation factors

2.2.1 High tech export and the renewable energy

Technology advances reduce costs and rise penetration of renewables in many

countries. Ongoing technology innovation is critical for a least-cost transition to
modern, efficient, low-carbon energy systems. Energy systems are comprised not
only of supply and demand technologies, but of infrastructures that connect them.
Enabling technologies help foster a greater uptake of renewable energy in all
sectors. Although, electricity systems are often the main focus of discussions about
technological change and innovation [5].
The IEA (2017) has indicated that there is an important potential convergence of
electricity systems with digital and information technologies. Digital infrastructure
will be a key enabler to a smarter and more responsive electricity system. However,
non-technological factors, such as the institutional and regulatory environment, are
also a crucial part of the technological innovation story [1].
Technologies that share the potential to facilitate and advance the deployment and
use of renewable energy include [26]:

 End-use technologies (e.g., electric vehicles and heat pumps)

 Energy storage (e.g., pumped storage; home-, commercial- or grid-scale
batteries; thermal storage)
 Demand-side energy management technologies (e.g., energy management
systems in buildings; interruptible industrial load)
 Energy supply and delivery management technologies (e.g., advanced
distribution network management and systems control options) .

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None of these technology groups has been developed for the specific purpose of
facilitating wider deployment of renewable energy, but these technologies present
significant opportunities to bring additional benefits by creating new markets for
renewable energy in buildings, industry and transport. For example, electrification
of vehicles not only reduces local air pollution, but also allows for rapidly growing
renewable power technologies to displace fossil fuels in a sector where renewables
other than biofuels previously were barred from entry. Air quality is enhanced
further, along with other benefits of expanded renewables deployment.
Overall, enabling technologies comprise both the physical infrastructure and the
automation technology required to support, for example, greater systems
integration, data collection and dissemination of system resources, and effective
and efficient demand response. This can enhance the function and efficiency of
energy systems and thereby facilitate greater deployment and use of renewable
energy [26].
It is widely believed that technological progress in any nation is paramount if
renewable energy use is to be promoted and implemented. Improved technologies
are vital for the process of generating renewable energy, which may result in less
external cost and thus less environmental pollution [23].
An analysis by Alam and Murad [23] reveals that technological progress significantly
influence renewable energy use over the long term in OECD countries. Since most
OECD countries are in fact high income, enjoy a high level of technological progress
and deeply involved in international trade, their access to and utilization of improved
technological resources for generating renewable energy are relatively easier than
any other nations.
Studies also argued that technological progress is crucial for improving energy
efficiency [27-30]. That said, technological progress is crucial for achieving energy
efficiency, which in turn promotes the use of renewable energy.
Irandust [24] examined the relationship between renewable energy consumption,
technological innovation, economic growth, and CO2 emissions in the four Nordic
countries (Denmark, Finland, Norway, and Sweden) for the period 1975–2012. The
results show unidirectional causality running from technological innovation to
renewable energy.

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2.3 Environmental factors

2.3.1 CO2 emission and renewable energy

Carbon dioxide, chlorofluorocarbons, methane, nitric acid and ozone are

greenhouse gases associated with the climate change phenomenon. They play a
major role in degrading the environment.
Carbon dioxide emissions per capita is used for the environmental factors. It’s
because, the most common GHG2 is carbon dioxide, which has been under policy
pressure, and has led to several political measures and guidelines [13].
Global energy demand expands by 30% between 2016 and 2040[2]. Along with an
increase in energy use, comes an increase in CO2 emissions coupled with increased
concern over global warming.
The development of our energy systems has been, and will continue to be, markedly
affected by a variety of environmental concerns. Any serious attempts to deal with
global warming and environmental issues is going to have to decarbonize our energy
system and there is no one way to achieve this. But for sure we know that we have
to reduce dependence on fossil fuels that is likely to lead to increase production of
renewable energy.
Identifying how renewable energy consumption relates to CO2 emissions is a
debatable issue. On the one hand, higher CO2 per capita worsening the
environmental conditions, exert political pressure to develop cleaner energy and
thus creates demand for a cleaner environment and encourages usage of renewable
energy, as emphasized in Omri and Nguyen [14] and Nguyen and Kakinaki [22], thus
a positive relation between renewable energy production and CO2 emission is
expected.
On the other hand, the prevalence of renewable energy with green technology
mitigates environmental problems of carbon emissions, which implies the negative
association of renewable energy consumption and CO2 emissions.
These two effects have been reported in the literature (e.g. Sadorsky [6], Marques
and Fuinhas [13], and Nguyen and Kakinaki [22]). If the second effect prevails, then

2 Greenhouse Gas

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a negative impact is observed. Given the argument that renewable energy and the
adoption of green technology tend to be more emphasized and prevalent in
advanced countries, the negative relationship dominates the positive relationship in
high-income countries, but it is dominated by the positive relationship in less
developed countries [22].
A Policy framework that inclusively addresses issues like air quality issues, acid rain
,global warming and climate change with local, regional, national and international
solutions in the energy sector and environmental conditions will impact developed
and developing countries alike.
A number of studies have examined the effect of pollutant emissions on renewable
energy consumption (e.g. Sadorsky [6], Salim and Rafiq [9], Omri et al. [15]). Most of
these studies show a positive impact of CO2 emissions on renewable energy
consumption. For example, Sadorsky [6] investigates the determinants of renewable
energy for the G7 countries and shows that increases in per capita CO2 emissions
are a major force to drive per capita renewable energy consumption in the long-run.
By considering six major emerging countries, Salim and Rafiq [9] find evidence of a
short-run bidirectional casual relation between CO2 emissions and renewable
consumption.
Apergis and Payne [12] investigate causal dynamics associated with renewable
energy consumption per capita for a panel of 11 South American countries over the
period 1980 to 2010. They find that in the short-run, an increase in carbon dioxide
emissions per capita increases renewable energy consumption per capita while an
increase in renewable energy consumption per capita reduces carbon dioxide
emissions per capita.
Nguyen and kakinaki [22] examine the relationship between renewable energy
consumption and carbon emissions in associated with the development stage by
applying a panel cointegration analysis to 107 countries during the period from 1990
to 2013. The analysis shows the clear differences between the groups of low-,
middle-, and high-income countries. Renewable energy consumption is negatively
associated with carbon emissions for high-income countries and middle-income
countries, while the relationship is opposite for low-income countries.
Omri and Nguyen [14] apply dynamic panel data analysis to identify determinants of
renewable energy consumption in 64 countries during the period of 1990_2011 and
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reveal that CO2 emissions are an important factor to promote renewable energy
demand, while oil price has a negative impact only in middle income countries.
Irandust [24] finds a unidirectional causality running from renewable energy to CO2
emissions for Denmark and Finland and a bidirectional causality between these
variables for Sweden and Norway.

2.4 Social factors

the successful implementation of RE is dependent not only on energy and economic
policies and strategies, technical and infrastructure factors, but also on social factors
such as the dissemination of information and social acceptance.
Numerous non-technical barriers can block the deployment of technically sound and
cost-effective technologies, including lack of information, consumer indifference
and lack of immediate benefit [5].
In a study published in 2013, Viardot [31] identifies a number of possible constraints
to renewable energy use which includes technological constraints, physical
constraints, financial and legal constraints and finally ontological and social
constraints.
Involvement of local committees and NGOs for RE deployment is particularly
important for garnering societal acceptance and usage of technologies that are
perceived as new and unfamiliar [5].
Training and Human capacity building is also required for large-scale production of
RE. Setting up a network for specialized capacity in the energy sector is critical,
especially for design, operation and management of continually advancing
technologies [5].
The lack of data on social factor makes it almost impossible to appraise the impact
of it on RE production.

2.5 Regulatory and institutional factors

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This includes not only regulations, policies and laws that directly lead to greater
deployment of RE, but also covers wider energy and economic policies and
strategies, social factors regulations such as the dissemination of information,
technical and infrastructure factors regulations such as modernization of energy
infrastructure, and regulations in financing and market conditions such as
Investment “absorption” in order to invest across climate technologies, the
residential, services, transport, and industrial sectors[5].
Integrative policies that consist of above factors simultaneously, constituted huge
steps toward stimulating renewable energy use. In fact, Integrative policies, enabling
factors and market conditions are highly inter-related which incites an approach
where policies for the deployment of RE is developed to function holistically with
policies in other sectors that may support RE deployment [5]. Lack of such
regulations or inattentiveness to one of them can cause inhibition in deploying RE.
Lack of regulatory and institutional platform may also cause non-technical barriers
to block the deployment of RE. Some countries produce technologies, export them,
and see less domestic market adoption, which demonstrates that the technical
capacity exists in the country but market policies are insufficient in attracting
industrial and investor interest, so crucial will be policy and market incentives that
create the frameworks for such technologies to operate [5].
Increasing the use of RE involves the commitment of both governments and citizens.
Policy makers and regulators have to respond dynamically to the market, monitor
and review progress toward objectives, and fine-tune measures in light of successes
and failures.
Public incentives are important drivers for promoting renewable deployment.
However, it should be noted that, regulatory and institutional factors highly depends
on economic factors. Higher income (GDP) could support regulatory costs to
promote renewable sources. There is a set of public policy incentives toward RE.
Most of these incentives are very recent (mainly in the early 2000), making it difficult
or even impossible to assess their full impact because data on these policies is not
available and most of these policies were made recently [13].
Gan et al. [32] state that regulatory instruments appear to have been most effective
in promoting renewable energy development.

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A study by Liu et al. [16] focuses on a panel of 29 typical countries for the time span
2000-2015 to characterize the effectiveness of public policies regarding renewables.
The empirical results indicate that fiscal and financial incentives, market-based
instruments, policy support, and research, development and deployment, are
demonstrated to be significant to the improvement of renewable energy capacity.
The ranking of aggregate policies impacts is, market-based instruments, research,
development and deployment (RD&D), fiscal and financial incentives, and policy
support. They found that synergy effects do exist among specific policies, so it is vital
for policy makers to incorporate specific mix and economic conditions into the policy
design.

3. Methodology
3.1 Data
One possible way of evaluating the development of RE is to measure the total
amount of RE produced. Another is to measure its replacement of traditional energy
sources in the total energy supply or RE share in energy mix. In this paper, we use as
dependent variable the total amount of RE produced.
The explanatory variables are chosen in accordance with IEA [17], and in line with
the literature. We classify these variables by factors. In order to pursue our aims, we
control for four variables:
1) CO2 emissions per capita as environmental factor,
2) GDP per capita as financial and economic factor,
3) Oil price as financial and economic factor,
4) High tech export as technological factor
For this study, annual data for the group of developed and developing countries is
collected on renewable energy production, gross domestic product (GDP), CO2
emission, high technology export, oil price and population.
The renewable energy variable used in this paper is a composite variable reflecting
renewable energy from several different sources(including hydroelectricity,
geothermal, solar photovoltaic, solar thermal, solid biofuels, gas from biomass,

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renewable municipal waste, tide, wave and ocean, wind, liquid biofuels, non-
renewable municipal waste and industrial waste).The annual renewable energy
production data are obtained from International Energy Agency (IEA) in Gigawatt-
hours for each country that are expressed in per capita terms by dividing into
population. Table 1 provides useful information on variables employed in this study.
Income is measured using per capita GDP, PPP (current international $). Data on
high- technology exports (% of manufactured exports), the population (millions) and
income are sourced from World Bank Development Indicators (WDI). Per capita CO2
emissions in metric tons of carbon dioxide is taken from International Energy Agency
(IEA). Oil prices are measured using the spot price on West Texas Intermediate (WTI)
crude oil [33]. WTI has a long history of being used as a benchmark for oil prices.
Table1: Model variables

variable unit abbreviation source

Renewable Energy Production per capita
GDP PPP per capita
Carbon dioxide emission
High-technology export
Oil price
Gigawatt-hours (GWh) RE https://www.iea.org/
current international $ GDP https://www.worldbank.org/
metric tons(Mt) CO2 https://www.worldbank.org/
%of manufactured exports HT https://www.worldbank.org/
US dollars per barrel($/bbl) OP https://www.bp.com

The dataset for a panel of 25 countries spans the period from 1990 to 2015.

3.2 Empirical model and estimations

This paper performs panel data analysis to identify elasticity of renewable energy in
terms of income, pollutant emission, oil prices and high technology export in
developed and developing countries.
The variables employed in this research are selected on the basis of economic theory
and data availability. Based on the findings of previous studies and our discussions
about the expected linkages between variables under consideration in section 2 and
renewable energy, the following empirical model can be used to examine the
determinants of renewable energy production:
RE= F (CO2, GDP, OP, HT) (1)

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Where RE represents the renewable energy production per capita which is a

function of four potential drivers including per capita CO2 emissions (CO2), oil price
(OP), per capita GDP(GDP), and High-technology exports (% of manufactured
exports) (HT). Equation 1 can be rewritten in a logarithm form and a panel data form
as follows:
ln re it   it  1i ln co 2it   2 i ln gdp it   3i ln oil it   4 i ln htex it   it (2)

Where i (i=1, 2… n) denotes panel individual (country) over the time period t (t=1,
2… t). The error term, 𝜀𝑖𝑡 is assumed to be independent and identically distributed
with a zero mean and constant variance.
At the outset, we separately examine time series properties of the variables under
consideration for each group. The statistical properties of data determine the
appropriate estimation model. Investigative procedures used in this study are
depicted in figure 1.
Fig. 1. Flow chart of the investigative procedures used in the study

Unit Root Test of (Chow Test): Pool or

Cointegration Test
dataset Panel?

(Hausman Test):
Model Estimation Fixed or Random
Effect?

3.2.1 Panel unit root tests:

In this paper, five types of panel unit root tests are computed (Levin et al. [34];
Breitung [35]; Im et al. [36]; Augmented Dicky Fuller (ADF) [37], and Phillips and
Perron (PP) [38]).
The test proposed by Levin et al. [34] and Breitung [35] assume that there is a
common unit root process across the cross-sections. For these tests, the null
hypothesis is that there is a unit root while the alternative hypothesis is that the
variable is stationary.

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The other tests assume individual unit root processes across the cross-sections. For
these tests, the null hypothesis is that there is a unit root while the alternative
hypothesis is that some cross-sections do not have a unit root.
Table 2 reports panel unit root tests for LRE, LCO2, LOP, LHT and LGDP in developed
countries. The test contain an intercept and a time trend. For all panel data series,
each panel unit root test indicates the presence of a unit root at level, while the first
differences are stationary.
Table 3 reports panel unit root tests for LRE, LCO2, LOP, LHT and LGDP in developing
countries. For LGDP, LCO2 and LOP data series, each panel unit root test indicate the
presence of a unit root at level. Panel unit root test at first difference will be checked
for all panel data series. All the variables seem to be stationary at their first
difference.
The results show that the LRE and LHT panel data series for developing countries are
mixed with four of the panel unit root tests (Levin, Lin & Chu, Im, Pesaran and Shin
W-stat, ADF - Fisher Chi-square, PP - Fisher Chi-square) indicating no evidence of a
unit root test and one test indicating the presence of a unit root. Based on result of
the Breitung [35] both series contain unit roots.
Table 2: Panel unit root test (level & first difference) for developed countries

Level First Difference

Panel unit root test method
lRE lHT lGDP lOP LCO2 lRE lHT lGDP lOP lCO22

1.82 -0.84 1.68 4.72 1.07 -4.23 -5.43 -4.49 -1.41 -3.95
Levin, Lin & Chu t*
(0.97) (0.20) (0.95) (1.00) (0.86) (0.000) (0.000) (0.000) (0.080) (0.000)

1.91 -0.85 1.57 4.79 3.22 -4.90 -5.10 -1.99 2.39 -3.24
Breitung t-stat
(0.97) (0.20) (0.94) (1.000) (1.000) (0.000) (0.000) (0.020) (0.990) (0.000)

1.14 0.05 0.96 1.32 2.70 -7.23 -5.12 -3.59 -3.30 -7.01
Im, Pesaran and Shin W-stat
(0.87) (0.52) (0.83) (0.91) (1.000) (0.000) (0.000) (0.000) (0.000) (0.000)

16.85 15.53 11.57 7.96 14.09 85.28 63.16 44.86 41.03 82.63
ADF - Fisher Chi-square
(0.66) (0.75) (0.93) (0.99) (0.83) (0.000) (0.000) (0.000) (0.000) (0.000)

27.74 16.06 4.64 11.57 21.58 440.43 124.41 48.79 63.03 253.17
PP - Fisher Chi-square
(0.12) (0.71) (1.000) (0.93) (0.36) (0.000) (0.000) (0.000) (0.000) (0.000)

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Table 3: Panel unit root test (level & first difference) for developing countries

Level First Difference

Panel unit root test method
lRE lHT lGDP lOP lCO2 lRE LHT lGDP LOP lCO2

-1.73 -2.61 0.19 5.78 -0.015 -10.01 -6.01 -2.49 -1.73 -5.13
Levin, Lin & Chu t*
(0.040) (0.004) (0.575) (1.000) (0.493) (0.000) (0.000) (0.006) (0.041) (0.000)

-0.75 1.61 4.33 5.86 0.30 -7.58 -4.70 1.77 2.93 -5.38
Breitung t-stat
(0.220) (0.946) (1.000) (1.000) (0.620) (0.000) (0.000) (0.962) (0.998) (0.000)

-2.55 -1.59 1.20 1.61 0.748 -9.67 -5.33 -2.29 -4.04 -5.95
Im, Pesaran and Shin W-stat
(0.005) (0.055) (0.885) (0.946) (0.772) (0.000) (0.000) (0.010) (0.000) (0.000)

51.66 46.74 18.09 11.94 27.34 139.55 108.63 50.38 61.54 92.77
ADF - Fisher Chi-square
(0.008) (0.026) (0.957) (0.998) (0.605) (0.000) (0.000) (0.011) (0.000) (0.000)

49.42 51.08 15.152 17.35 33.297 698.58 408.70 89.45 94.54 537.97
PP - Fisher Chi-square
(0.014) (0.009) (0.988) (0.968) (0.309) (0.000) (0.000) (0.000) (0.000) (0.000)

3.2.2 Panel cointegration tests:

To identify long-run relationships among the variables under study we use

cointegration test proposed by Kao [39]. The finding of cointegration between a set
of variables implies that there exist at least some evidence of contegration (Long-
run relationships) between renewable energy production, income, CO2 emission, oil
price and high tech export in both groups. Table 4 shows Kao panel cointegration
test for developed and developing countries.

Table 4: Kao panel cointegration test for developed & developing countries

Developing Countries Developed Countries

t-Statistic Prob. t-Statistic Prob.
ADF -2.049643 0.0202 ADF 1.821075 0.0343
Residual variance 0.056170 Residual variance 0.013092
HAC variance 0.047619 HAC variance 0.013272

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3.2.3 Specification Tests:

In order to discriminate between pooled and panel estimate models, we use chow
test and examine the null hypothesis that data are pooled. The rejection of this
hypothesis would imply that pooled data technique is inappropriate. Table 5 reports
Chow test for developed and developing countries.
Table 5: Chow Specification Tests for developed and developing countries

Developed Countries Developing countries

Effects Test Statistic d.f. Prob Effects Test Statistic d.f. Prob

0.0
Cross-section F 217.70 (9,246) 0.00 Cross-section F 439.0 (14,341)
0
0.0
Cross-section Chi-square 570.26 9 0.00 Cross-section Chi-square 1060.4 14
0

According to chow test Panel data analysis is appropriate for both groups.
Additionally, in order to choose between the FE3 and RE4 models, the Hausman
specification test is used to examine the null hypothesis that random effects are
consistent and efficient. If this hypothesis rejected, then the estimation results
provided by the FE model are more robust than others.
Table 6 shows Hausman specification test for developed and developing countries.

Table 6: Hausman specification test for developed and developing countries

Developing Countries Developed Countries

Chi-Sq. Chi-Sq. Chi-Sq. Chi-Sq.
Test Summary Prob. Test Summary Prob.
Statistic d.f. Statistic d.f.
Cross-section random 21.322 4 0.000 Cross-section random 11.51 4 0.021

The Hausman specification test rejects the null hypothesis that the RE models are
appropriate and more efficient, which thus leads us to conclude on the better
suitability of the FE models than the RE models.

3 Fixed Effect
4 Random Effect

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4. Results and Discussions

The proliferation of panel studies which has been greatly motivated by the
availability of data and greater capacity for modeling the complexity than a single
cross-section or time series data has led to the rise of challenging methodologies for
estimating the datasets. Much controversy on these methodologies is the under-
estimation of the standard errors leading to wrong conclusions of the involved
hypothesis test as well as making inappropriate inference to the underlying model
parameters. This is due to the heteroscedasticity and autocorrelation nature of the
disturbance term in the classical linear regression model.
Generalized Least Squares technique is used to deal with such situations in which
the OLS estimator is not BLUE (Best Linear Unbiased Estimator) because one of the
main assumptions of the Gauss-Markov theorem, namely that of homoscedasticity
and absence of serial correlation, is violated. In such situations, provided that the
other assumptions of the Gauss-Markov theorem are satisfied, the GLS estimator is
BLUE.
This study sought to estimate linear-panel model parameters using Generalized
Least Squares techniques which have the capacity to address the correlation and
heteroscedasticity problem.
GLS estimates of Eq. (2) are reported for developed and developing countries in
table 7 and 8 respectively and the parameter estimates of models can be
interpreted as elasticities.
The GLS estimate of the income elasticities are positive and statistically significant
at the 5% level of significance in both groups. A 1% increase in GDP per capita raises
per capita RE production by 0.38 in developed countries and by 0.13 in developing
countries. Income elasticity for RE production in developed countries is higher than
income elasticity for RE production in developing countries, i.e., equal rise in GDP
lead to RE development to a greater extent in developed countries than in
developing countries. This finding conform to Nguyen and Kakinaki[22] findings, who
study the relationship between renewable energy consumption and output based
on countries' development stage and find out that RE consumption is positively

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correlated with output for high-income and middle-income countries, with greater
coefficient for high-income countries.
In the case of CO2, elasticities show considerable difference between two groups.
CO2 elasticities are different in value and also in sign. CO2 elasticity is negative and
statistically significant at the 5% level of significance for developed countries. And it
is positive, statistically significant and much different in value compare to developed
countries. Estimated CO2 emission elasticity is 0.29 in developing countries, while it
is -1.4 in developed countries. This results are consistent with the work of Nguyen
and Kakinaki [22]. Clarifying the association between RE production and CO2
emissions is complex. Large CO2 emissions enhance the desire for a cleaner
environment and the usage of renewable energy, as emphasized in Omri and
Nguyen [14]. This argument suggests that renewable energy consumption is
expected to have a positive relationship with CO2 emissions. On the other hand, the
prevalence of renewable energy with green technology mitigates environmental
problems of carbon emissions, which implies the negative association of renewable
energy consumption and CO2 emissions. Thus, the balancing of the positive and
negative links determines the long-run relationship between them. Given the
argument that renewable energy and the adoption of green technology tend to be
more emphasized and prevalent in advanced countries, the negative relationship
dominates the positive relationship in high-income countries, but it is dominated by
the positive relationship in less developed countries [22].
These results suggest that a 1% increase in high technology export increases per
capita renewable energy production by 0.49% in developed countries but it is
negative and statistically insignificant in developing countries(refer to estimated
coefficient and prob. In association with LHT in table 8). High technology export do
not seem to have impact on renewable energy production in developing countries
and this could be due to the fact that these countries do not seem to have
remarkable high technology export (except for china) or at least technologies which
could affect promoting RE. The panel estimated elasticities of RE production in
developed countries are consistent with the view that, higher income countries have
the money to invest in RE. At these countries, increase in high technology export
seems to mainly drive the production and use of renewable energy. Higher income
countries are also more likely to have access to or the development of new
technologies that are important to the increased production of RE. As shown in

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table7, technological and infrastructure factor is of paramount importance in

promoting RE use in these countries (United States, Netherlands, Germany,
Denmark, Canada, United Kingdom, France, Japan, Italy, and Spain).
As can be seen in table 7 and 8, the oil price elasticities are also positive and
significant at the 5% level of significance, observed for both groups. But oil price
seems to have least impact on renewable energy production. These results conform
to Sadorsky’s [6, 7] and Salim & Rafiq [9] Findings. A 1% increase in oil price increases
RE production by 0.18% in developed countries and by 0.04% in developing
countries. As Salim & Rafiq [9] state, these exogeneity of oil price variable may be
due to the fact that real oil prices were falling for much of the estimation period.
Furthermore, another reason might be that for most of these countries oil prices
have been subsidized to avoid any adverse effect on the economy.
Overall, our empirical analysis demonstrates that the elasticities of renewable
energy use with respect to GDP, CO2 emissions, high tech export, and oil price
depend on the development stage.

Table 7: Renewable energy elasticities (GLS estimate of Eq. (2)) for developed countries

Variable Coefficient Std. Error t-Statistic Prob.

LGDP 0.384391 0.110471 3.479565 0.0006

LHT 0.497780 0.121913 4.083073 0.0001
LCO2 -1.401617 0.138824 -10.09635 0.0000
LOP 0.186405 0.054269 3.434817 0.0007
C 4.206242 1.126200 3.734898 0.0002

Table 8: Renewable energy elasticities (GLS estimate of Eq. (2)) for developing countries

Variable Coefficient Std. Error t-Statistic Prob.

LGDP 0.139952 0.027187 5.147761 0.0000

LCO2 0.298447 0.044095 6.768250 0.0000
LHT -0.005478 0.013881 -0.394655 0.6933
LOP 0.047556 0.018114 2.625433 0.0090
C 4.533138 0.157072 28.86023 0.0000

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5. Conclusion and Implications

Increasing the usage of renewable energy is of great importance for all countries,
but especially so for developing countries since developing countries are the ones
that are going to experience the greatest increase in energy demand and carbon
dioxide emissions. Balanced against this upsurge in energy demand are energy
security issues and climate change. Renewable energy can play an important role in
reducing a country’s dependence on fossil fuels and in helping to address climate
change issues through reduced emissions of greenhouse gasses.
This paper investigates the contribution of critical factors that influence production
of renewable energy among CO2 emission (as the indicator of environmental
factors), income and oil price (as the indicator of economic factors) and unlike other
studies high technology export was into consideration in this study to examine the
effect of technical, infrastructure and innovation factor- a factor that has been going
to grow in importance in recent years - by considering two panels of countries
according to their income level.
Our results show that the panel data with fixed effect is the best-suited method
among the static estimation technique. Using GLS modeling, we found that the
determinants towards renewable sources vary in accordance with the level of
income, i.e., development stage. The special significance of economic structure in
designing accurate policies requires policy-makers to grasp major factors leading to
RE development and the aim of this study is to highlight major determinants of RE
production in each group.
While renewable energy production is significantly determined by high technology
export and GDP in developed countries, high technology export is not statistically
significant in explaining the use of RE sources in developing countries. GDP and CO2
emissions seem to be major drivers toward RE production in developing countries.
The results reveal that GDP per capita yield a positive impact on renewable energy
production per capita. A 1% change in income has a bigger effect on RE production
in developed countries than in developing countries. A 1% increase in GDP per capita
causes 0.3 % increase in RE production in developed countries, while it leads to a
0.1% increase in RE production in developing countries. This difference may arise
from increasing concern over environmental sustainability from higher-income

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countries. High-income countries seem to have more environmental concern while

they enjoy a high level of technical and infrastructure progress that facilitate RE
development. Additionally, most high-income countries investigated in this study
stand in later stages of development, where they focus on addressing environmental
issues instead of economic growth.
The variable CO2 emission behaves distinctly in these countries. Higher CO2 per
capita worsens the environmental conditions, exerts political pressure to develop
cleaner energy and thus creates demand for a cleaner environment and encourages
renewable energy usage. This argument suggests that renewable energy
consumption is expected to have a positive relationship with CO2 emissions. On the
other hand, the prevalence of renewable energy mitigates environmental problems
of carbon emissions, which implies the negative association of renewable energy
consumption and CO2 emissions. Thus, the balancing of the positive and negative
effects determines the long-run relationship between them. Given the fact that RE
production per capita is considerably higher in developed countries, the negative
effect (the second mechanism) dominates the positive effect, but in developing
countries the first effect prevails and a positive relationship is observed. The long-
run of renewable energy consumption with carbon emissions depends on countries'
income level, i.e., the development stage. In the other word, development level and
whether the country is in its early stages of development or later stages of
development is of special significance regarding RE and CO2 emission association.
Our results, based on GLS method, point to the fact that high technology export is
not statistically significant in explaining the use of RE sources for developing
countries. As mentioned before, this may be due to the fact that high technology
export is not considerable in such countries. However, it turns out to be the main
driver for renewable energy production in developed countries. The higher the level
of innovative technological industries, the higher is access to technologies which
could affect promoting RE.
With respect to all of these countries, oil price seems to have lesser, positive impact
on RE production. The oil prices only marginally explain the dynamics of renewable
energy production.

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These results have important implications for policymakers, since the discrepancies
in these relationships mean that a country's renewable energy policies should be
compatible with its development stage.
According to our analysis, to mitigate environmental problems, developing countries
need to take initiatives that encourage implementing RE projects that lead to greater
RE share in a country’s energy mix. To achieve this, regulators should design
effective energy policies whose purpose is to escape much of the reliance on non-
renewable energy by substituting RE. With the aim of increasing RE share in energy
mix, some energy-intensive sectors, such as industrial and transportation,
developing countries are advised to utilize renewables. Simultaneously, this
initiatives should encompass financial incentives (taxes exemption, preferential
taxes, credit loans, and land lease) and provide investment certainty that accelerate
investment absorption, access to and utilization of green technologies and the
technical expertise. Energy policies should also target investment barriers as well as
institutional barriers.
Furthermore, increasing international cooperation between developed and
developing countries in terms of technology transfer will promote renewable energy
production in developing countries.
Policymakers in developed countries need to support demand-side market policies
and any policy decisions that focus on eliminating barriers related to institutional
constraints in energy markets and improving social and institutional factors that
encourage RE use. Some developed countries produce technologies, export them,
and see less domestic market adoption, which demonstrates that the technical
capacity exists in the country but market policies are insufficient in attracting
industrial and investor interest, so crucial will be policy and market incentives that
create the frameworks for such technologies to operate. Moreover, it is essential for
regulators to promulgate regulations related to prices or costs of renewable energy
production and consumption (e.g., quota policies, feed-in-tariff policies, and
subsidies policies) such that the regulations encourage individuals and firms to
effectively substitute renewable energy for non-renewable energy.

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Acknowledgment
The author would like to thank anonymous reviewers for their useful comments.
Any remaining errors are my own.

Nomenclature
GLS Generalized Least Square
RE Renewable Energy
GDP Gross Domestic Product
CO2 Carbon Dioxide
OECD Organisation for Economic Co-operation and Development
NGO Non-governmental Organization
GDP, PPP Gross Domestic Product using Purchasing Power Parity
OLS Ordinary Least Squares

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Appendix 1: List of Countries

Developing countries Developed countries

India United states
Malaysia Netherlands
Kazakhstan Germany
Romania Denmark
Turkey Canada
Mexico United kingdom
Iran France
Bulgaria Japan
Brazil Italy
Thailand Spain
Colombia
china
South Africa
Ecuador
Paraguay

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Declaration of interests

☒ The authors declare that they have no known competing financial interests or personal relationships
that could have appeared to influence the work reported in this paper.

☐The authors declare the following financial interests/personal relationships which may be considered
as potential competing interests:
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Highlights

 Determinants toward renewables vary in accordance with the

development level
 Technological factor and GDP manily drive renewable energy use in
developed countries
 GDP and CO2 emission mainly drive renewable production in developing
countries
 Technological factor cannot explain renewable energy dynamics in
developing countries
 Oil price only marginally explain the dynamics of renewable energy
production