The heterogeneous impact of oil price shocks on traditional and modern renewable energy in developed and developing countries
Abstract
The prevalence of renewable energy helps solve environmental problems and strengthens energy security with less dependence on nonrenewable energy, mainly fossil fuels. One important aspect is that renewable energy consists of two components: traditional and modern renewable energy. This paper examines the effects of an oil price shock on these two different types of renewable energy consumption by applying a local projection method to panel data from 147 countries during the period from 1993 to 2015. Our results show that the effects of an oil price shock depend on the development level and the dependence on nonrenewable energy. In highly nonrenewable energy-dependent countries, traditional renewable energy is sensitive to oil price changes, irrespective of their development levels. However, both traditional and modern renewable energy are insensitive to oil price changes in less nonrenewable energy-dependent countries, regardless of their development levels. Meanwhile, an oil price shock positively affects modern renewable energy in developed countries with high dependence on nonrenewable energy, but not in developing countries. These results provide important policy implications for policymakers and investors to foster modern renewable energy and call for balancing macroeconomic development with environmental benefits and costs.
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