HỌC VIỆN NGÂN HÀNGBÁO CÁO TỔNG KẾT ĐỀ TÀI THAM DỰ CUỘC THI “SINH VIÊN NGHIÊN CỨU KHOA HỌC” CẤP HỌC VIỆN NGÂN HÀNG NĂM HỌC 2023-2024 TÊN ĐỀ TÀI: The impact of Financial Development, Glo
The urgency of the Research
Over the past fifty years, the increase in CO2 emissions has significantly impacted global climate change, with the average temperature rising by over 1°C since pre-industrial times This highlights the critical role of the energy transition in fostering economic development and achieving sustainable development goals (SDGs) Governments and policymakers are increasingly focused on energy policy as a key issue of our time Notably, renewable energy consumption surged by 12.6% between 2011 and 2021, prompting further exploration of the factors influencing renewable energy adoption.
Recent research has explored the connection between financial development and renewable energy consumption, alongside the traditional focus on energy use, economic growth, and environmental pollution Financial development encompasses the growth of financial activities within a nation, including foreign direct investment (FDI), bank credit provision, and capital market evolution According to Chang (2015), a robust financial system can enhance the demand for renewable energy by offering loans and capital for energy initiatives This can lead to increased financial resources for the renewable sector at reduced costs, thereby fostering investment in sustainable projects (Anton & Nucu, 2020) However, studies examining the interplay between financial development and renewable energy remain relatively scarce.
The interplay between globalization and renewable energy in developing countries warrants thorough exploration, particularly regarding its potential to drive economic growth Globalization can significantly enhance the promotion of renewable energy in these regions by facilitating access to advanced technologies and financial resources necessary for building the required infrastructure for renewable energy investments.
Foreign direct investment (FDI), capital investment, financial flows, and international trade play a crucial role in boosting renewable energy investments (Awosusi et al., 2022) Globalization enhances business competitiveness, leading to reduced production costs for renewable energy in host countries, improved energy efficiency, and increased FDI for technology implementation Furthermore, greater globalization fosters societal awareness of environmental quality and heightens sensitivity to environmental issues and climate change.
Research Question
This study focuses on 3 main research questions to investigate the correlation between financial development, environmental pollution, and globalization on the consumption of renewable energy in 40 countries:
1 How does financial development influence the consumption of renewable energy?
2 In what manner does environmental pollution affect the consumption of renewable energy?
3 What is the impact of globalization on the consumption of renewable energy?
These questions will assess the level of impact and identify specific indicators of financial development, environmental pollution, and globalization on the consumption of renewable energy
Research Objective
The research team aims to thoroughly investigate the impact of financial development, environmental pollution, and globalization on renewable energy consumption from 1990 to 2020 This study focuses on both practical and theoretical aspects of economic, environmental, and globalization factors influencing renewable energy usage in a group of Asian countries The primary goal is to analyze and quantify the relationship between development indicators, environmental pollution metrics, globalization indices, and the consumption of renewable energy.
Research Gap
This research stands out from previous studies by focusing specifically on renewable energy consumption, an area that has been largely overlooked in existing literature Additionally, it is among the first to examine the interplay between globalization, financial development, economic growth, and environmental pollution in relation to renewable energy consumption Finally, the study is based on a robust panel data set from 40 countries, covering an extensive period from 1990 to 2020.
Research Outline
This article is structured into several key sections: Section 2 offers a comprehensive overview of the relevant literature, while Section 3 formulates the research hypotheses Section 4 outlines the methodology and data utilized in the study, followed by Section 5, which presents the empirical results and discussions Finally, Section 6 concludes with the implications of the findings.
Current status of the Research
The Status of Renewable Energy
The increasing energy demands of developing countries like China and India are driving a surge in fossil fuel consumption, highlighting the urgent need for sustainable energy solutions.
Figure 1: Renewable Energy Consumption in total output (%) (1990 – 2025)
In recent years, global renewable energy consumption has experienced significant growth, with a remarkable 50% increase in production last year, reaching 507 gigawatts, as reported by the World Economic Forum This milestone in achieving net-zero emissions is largely attributed to the rapid development of solar photovoltaic (PV) systems, which constituted three-quarters of the new installations, according to the International Energy Agency.
Figure 2: Evolution of global electricity demand by region (left) and regional shares
Source: The World Economic Forum
By the end of 2022, global renewable energy production soared to approximately 3,372 Gigawatts, primarily driven by wind, solar, and hydro sources This remarkable increase from 1,567 Gigawatts in 2013 highlights the significant consolidation of renewable energy's role in the global energy landscape, showcasing its potential to effectively replace fossil fuels in the near future.
Figure 3: Global Renewable energy capacity 2013 - 2022
Source: IRENA - International Renewable Energy Agency
In 2022, China emerged as a global leader in renewable energy production, adding 160 Gigawatts of power, which accounts for nearly half of the world's total capacity As part of its 14th Five-Year Plan, China is committed to further developing renewable energy to achieve net-zero emissions as soon as possible This initiative involves significant investments in solar photovoltaic (PV) and wind energy, ensuring continued growth in the sector for years to come.
In 2022, the European Union (EU) emerged as a leading contributor to green energy, generating over 50 Gigawatts from renewable sources—a remarkable 45% increase from the previous year This growth is partly driven by the energy crisis stemming from the Russo-Ukraine conflict, which has led many countries to revert to coal-powered generators to meet winter energy demands In response to fossil fuel dependence, the REPowerEU Plan has been introduced, with policies designed to boost renewable investments in the coming years, as highlighted by the European Council and the International Energy Agency in 2023.
The United States is making significant strides in renewable energy advancements, driven by new funding from the Inflation Reduction Act (IRA) This initiative aims to accelerate research and development projects in renewable energy, focusing investments on new power plants and manufacturing The goal is to create a more competitive market for green technologies while facilitating the country's transition to a low-carbon economy in the near future.
The development of renewable energy not only promotes sustainable economic growth but also enhances job security and social development According to the Renewables 2024 Global Status Report, the renewable sector employed 13.7 million people worldwide in 2022, highlighting its significant potential for job creation and economic contribution Additionally, the renewable sector's demand for skilled labor can address brain drain in developing countries, where high-skilled job opportunities are limited, ultimately fostering economic resilience.
Figure 4: Number of employees in the renewable energy sector in 2022, by branch (in millions)
Source: Irene Energy and Jobs: Annual Review 2023
The green development initiative has significantly reduced the number of people without access to electricity, with a decline of 11 million individuals from 756 million in 2022 to 745 million in 2023, as reported by the Renewables 2024 Global Status Report The ultimate aim of energy development is to ensure affordable and easy access for all Renewable Energy has played a crucial role in this progress, demonstrating its importance in improving energy access and promoting social equity, particularly in developing regions.
The renewable energy sector is poised for remarkable growth, with projections indicating that 42% of global power will derive from green sources by 2028 The World Economic Forum highlights that by 2023, wind and solar photovoltaic (PV) technologies will contribute to 25% of this renewable share, underscoring their dominance and the financial incentives driving investment in the energy market.
Figure 5: Cumulative renewable electricity capacity (2023 – 2028) and Net Zero Scenario
Source: The World Economic Forum
The International Energy Agency (IEA) forecasts that by 2025, renewable energy will overtake coal as the primary source of electricity generation, with solar PV expected to exceed nuclear power's contribution to total electricity output by 2026 These predictions highlight a significant shift from fossil fuels and nuclear energy towards renewable, green energy sources as the dominant contributors to global energy production.
BloombergNEF’s 2H 2023 report, about $358 billion was the amount of global renewable energy investment in the first six months of 2023, increasing 22% compared to that of 2022
In the first half of 2023, $335 billion was dedicated to small-scale solar and asset financing projects, reflecting a robust energy transition This investment marks a 14% increase compared to the same period in 2022, highlighting the growing momentum of renewable energy initiatives.
Figure 6: Renewable Energy Investment in 1H 2023
In the first half of 2023, renewable energy companies experienced significant financial growth, with a 25% rise in venture capital and private equity commitments, amounting to $10.4 billion for startups in the sector Additionally, the public markets saw a 25% increase in new stock raised, totaling $12.7 billion compared to the same period in 2022.
In 2023, global clean energy investment reached a record $1.8 trillion, marking a 17% increase, according to the Energy Transition Investment Trends 2024 report China dominated the renewable energy market with $676 billion, accounting for 38% of the total global investment Meanwhile, the implementation of the Inflation Reduction Act boosted US investments by 22% annually, totaling $303 billion.
US, UK, and EU together finally managed to exceed China
Numerous nations have implemented policies like subsidies, tax incentives, and mandatory renewable energy targets to promote the development of renewable energy These initiatives are significantly speeding up the shift from fossil fuels to cleaner energy sources.
The European Union has been working on climate and renewable energy policy for more than
20 years, with the ultimate objective of decarbonising the entire EU economy by 2050
The European Union's policy framework emphasizes the establishment of renewable energy targets, aiming for at least 32% of energy consumption to come from renewable sources by 2030, as mandated by the Renewable Energy Directive Recently, the European Commission proposed increasing this target to 40%, and negotiations are currently underway between the European Parliament and the Council to finalize the directive.
The new plan from the European Commission to achieve climate neutrality for the EU by
Financial Development
Financial development encompasses the enhancement and expansion of a nation's financial institutions, markets, and systems, leading to improved availability and efficiency of services like banking, insurance, and investment It aims to enhance access to financial resources for individuals and businesses, promote efficient capital allocation, and support economic growth and stability As a vital driver of economic growth and sustainable development, the level of financial development varies significantly across countries, influenced by their economic development, financial structures, and policies.
Developed countries, particularly the United States and the United Kingdom, boast advanced and diverse financial systems that effectively support businesses and investors The U.S is home to the largest capital markets globally, featuring a wide array of financial instruments and a significant presence of fintech companies like PayPal and Square Additionally, the robust stock markets in these countries are characterized by major exchanges that facilitate investment opportunities.
Stock exchanges like NYSE and NASDAQ play a vital role in sustaining economic competitiveness, while the United Kingdom boasts a sophisticated financial system featuring major banks and top insurance firms London, as a key financial hub, draws international investments through the London Stock Exchange (LSE), fostering economic growth and reinforcing its status as a leading global financial center.
In developing countries such as India and Nigeria, financial development is being propelled by reforms and the expansion of financial systems India has experienced significant growth in microfinance and digital payment systems, driven by banking reforms aimed at modernizing its financial landscape Platforms like UPI and Paytm have improved financial access, fostering economic growth and reducing poverty Similarly, Nigeria's mobile banking services, including Paga and OPay, have extended financial services to rural areas Government-led banking reforms in Nigeria have bolstered the financial system, attracted foreign investment, and supported small and medium enterprises, further promoting economic growth.
Financial development is crucial for fostering economic growth and promoting sustainable development Countries, whether developed or developing, are focused on optimizing their financial systems to improve access to finance, support business initiatives, and attract investment.
Domestic credit to the private sector is a vital component of financial development, representing the financial resources provided by institutions to the private sector, including loans and trade credits, typically expressed as a percentage of GDP This credit plays a crucial role in advancing renewable energy initiatives by supplying essential capital for infrastructure investments and fostering innovation through research and development in renewable technologies Additionally, it supports the transition from fossil fuels to renewable energy by financing necessary upgrades, thereby promoting sustainable practices and economic growth within the sector Ultimately, the availability of domestic credit significantly boosts private sector investments in renewable energy projects, driving the industry forward.
Financial support for technological advancements drives innovation in renewable energy, improving efficiency and reducing costs Improved financing options boost adoption rates among businesses and individuals, leading to greater consumption of renewable energy solutions and enhancing industrial value added.
Global trends highlight the significance of domestic credit to the private sector, with World Bank data from late 2022 revealing that the global average reached around 145% of GDP This indicates a substantial pool of financial resources available for diverse investments, particularly in renewable energy.
Figure 7: Domestic credit to private sector by region (%GDP) 2018-2022
In 2022, domestic credit to the private sector significantly influenced renewable energy investments across various regions Europe led with an index value of around 110% of GDP, facilitating substantial investments in wind and solar power Asia followed closely with an index value of approximately 130% of GDP, propelling major investments in renewable energy, particularly in China and India, where China's financial backing established it as a global leader in solar and wind capacity Conversely, Africa's index value was only about 25% of GDP, restricting renewable energy investments despite its vast solar potential, highlighting the importance of international funding and NGOs South America's index value reached around 50% of GDP, aiding the development of bioenergy and hydropower in Brazil, though additional financial support is essential to harness its solar and wind energy capabilities North America also played a significant role in the renewable energy landscape.
The highest index value of around 170% of GDP has enabled substantial investments in the United States and Canada, resulting in considerable growth in solar and wind power capacity These regional differences highlight the crucial role of domestic credit in promoting renewable energy on a global scale.
Industrial value added is a crucial indicator of financial development, representing the net output of the industrial sector after deducting intermediate inputs Expressed as a percentage of GDP, it highlights the industrial sector's significant contribution to the economy This metric is essential for driving energy efficiency, encouraging corporate responsibility in renewable energy adoption, and achieving economies of scale in renewable energy production and consumption As industries focus on sustainable practices and grow, they enhance energy efficiency and are more likely to integrate renewable energy into their operations, thereby supporting the development of large-scale renewable energy projects that capitalize on economies of scale.
Figure 8: Industrial value added by region (%GDP) 2018-2022
As of late 2022, World Bank data reveals that the global industrial value added constituted between 20% to 30% of GDP, indicating diverse levels of industrialization worldwide In Europe, this figure stood at about 25% of GDP, reflecting its developed industrial base and supportive policies for renewable energy, which have significantly boosted the share of renewables in energy consumption Meanwhile, Asia exhibited a higher industrial value added of approximately 35% of GDP, driven by major industrial powers such as China.
India is advancing its renewable energy initiatives to combat pollution and satisfy its vast energy demands, driven by industrial growth that has led to large-scale projects In Africa, where the industrial sector contributes around 25% to GDP, renewable energy development is hindered by moderate industrial value and limited financial resources, though countries like South Africa and Kenya are making strides in wind and solar investments South America, with an index value of approximately 30% of GDP, sees nations like Brazil and Chile capitalizing on their industrial strength to explore renewable energy, particularly in bioenergy and hydropower In North America, the index value is around 20% of GDP, with the United States and Canada benefiting from a robust industrial foundation and significant financial support, resulting in considerable investments and growth in renewable energy production and consumption These regional dynamics highlight the critical role of industrial value added in promoting renewable energy adoption and improving energy efficiency globally.
The synergy between financial development and industrial growth is vital for enhancing renewable energy consumption Increased domestic credit to the private sector and substantial industrial value added lead to greater investments in renewable energy infrastructure and technology This trend is particularly observable in Europe, Asia, and North America, where robust financial resources and industrial expansion have significantly boosted renewable energy use In Europe, a strong credit environment and advanced industrial capabilities have facilitated major investments in wind and solar energy Similarly, in Asia, nations like China and India have leveraged financial support to emerge as leaders in solar and wind power capacity In North America, especially the United States and Canada, high levels of credit and solid financial backing have driven considerable growth in renewable energy production and consumption.
Globalization
Is an index measuring the globalization of 122 countries It was created by Axel Dreher at the Konjunkturforschungsstelle of ETH Zurich, Switzerland The index was first published in
2002 and covers the period from 1970 until that year The KOF Globalization Index measures three main aspects of globalization:Economy: Measures the degree of integration of countries
The globalization index assesses countries across three dimensions: economic, social, and political It evaluates trade, investment, capital flows, social interactions, migration, travel, and participation in international organizations Higher scores indicate greater globalization, with Switzerland ranked as the most globalized country, followed by Belgium and the Netherlands Despite a rise in the index since the 1970s, particularly after the Cold War, it has not fully rebounded from the COVID-19 pandemic and remains below 2019 levels.
Figure 9: Top nations with highest KOF globalization index in 2023
Switzerland exemplifies a high globalization index, reflecting a robust synthesis of economic, social, and political factors With one of the world's strongest economies, it boasts a developed banking system and a transparent, stable financial policy The country enjoys a high level of international economic integration, characterized by a significant export-to-GDP ratio and membership in various international economic organizations like the WTO Socially, Switzerland attracts a diverse workforce and cultural richness, supported by advanced education and healthcare systems.
Switzerland attracts numerous international students and experts due to its high level of internet and information technology usage, fostering global social integration Politically, the country benefits from a stable system and a neutral stance, which enhances its diplomatic relations with various nations Switzerland actively participates in international organizations like the United Nations and the WTO, as well as peace and development conferences, while its flexible and effective foreign policy bolsters its strong position on the global stage.
Despite having a lower globalization index compared to developed countries, India exhibits significant engagement in various components of globalization Economically, India boasts a rapidly growing economy with robust participation in international trade, bolstered by liberalization policies since the 1990s that have increased exports and attracted substantial foreign direct investment, particularly in sectors like IT, manufacturing, and services Socially, the rise of the internet and media has enabled Indian citizens to access global cultural products, while many Indians working abroad contribute significantly to the economy through remittances, and a notable number of students studying overseas indicates social international integration Politically, India plays a crucial role in international affairs as a member of organizations like the United Nations, WTO, and BRICS, maintaining diplomatic relations and engaging in trade agreements while actively participating in UN peacekeeping missions, especially in the Asia-Pacific region.
The globalization index is crucial for evaluating the integration, development, and interaction among countries worldwide To foster future trade opportunities, both developed and developing nations must actively enhance the components of the globalization index.
Imports and exports play a crucial role in a nation's economic vitality, development, and integration into the global market Achieving a balance between these activities is key to fostering sustainable growth, raising living standards, and strengthening a country's global standing To fully leverage the advantages of trade, effective policies and international collaboration are vital.
Developed countries like the United States, Germany, Japan, and the United Kingdom boast highly diversified economies, primarily exporting high-value-added products and services while importing raw materials and finished goods They are key players in the global market, exporting high-tech goods such as electronics, machinery, and automobiles, alongside significant service exports in finance, insurance, information technology, and tourism To sustain their manufacturing sectors, these nations rely on importing essential raw materials, components, and energy resources.
Figure 10: World leading exporter in 2023 (US Billion Dollars)
Total import and export figures reflect the trade dynamics among countries, allowing for an assessment of a nation's economic position and influence relative to others By analyzing the overall volume of goods traded, one can gauge how a country interacts with its trading partners and its role in the global market.
Foreign Direct Investment (FDI) involves investments made by foreign businesses, organizations, or individuals through purchasing shares, establishing subsidiaries, forming joint ventures, or opening branches in another country FDI serves as a crucial source of capital, playing a significant role in economic growth and development.
18 economic growth, creating jobs, improving competitiveness and international integration of receiving countries
Foreign Direct Investment (FDI) plays a vital role in driving economic growth in both developed and developing nations, though its characteristics, movement, and effects can vary greatly between these two categories.
Figure 11: List of countries by received FDI
Foreign Direct Investment (FDI) is crucial for the economic development of both developed and developing nations, albeit in different ways Developed countries gain from stable, high-value investments that improve their technological advancements and global integration Conversely, developing countries experience capital inflows that stimulate economic growth, facilitate technology transfer, and enhance infrastructure, despite encountering various challenges To fully leverage the benefits of FDI, effective policy frameworks and international collaboration are essential for both groups.
Environment Pollution
Global carbon dioxide (CO2) emissions from energy use and industry reached a new peak in
2023, reflecting ongoing challenges in curbing greenhouse gas emissions despite significant advancements in clean energy technologies According to the International Energy Agency
(IEA), CO2 emissions increased by 1.1% in 2023, driven by the resumption of economic activities post-COVID-19 and adverse weather conditions affecting energy consumption patterns (IEA)
Recent trends indicate that global emissions may be approaching a pivotal shift, with the IEA predicting that CO2 emissions could peak as early as 2023 Following this peak, substantial reductions are anticipated, especially in advanced economies, where emissions have reverted to levels not observed in the past fifty years (Carbon Brief).
Figure 12: Global energy-related CO2 emissions and their annual change (1900-2023)
Emissions distribution varies widely by region and sector, with China and India experiencing increases due to energy-intensive growth and adverse weather, heavily relying on coal for energy-related emissions In contrast, advanced economies such as the United States and European Union have seen a decline in emissions, thanks to the shift towards cleaner energy sources and improved energy efficiency measures.
The transportation sector, particularly road transport, has been a major focus for emissions reduction The electrification of road transport has accelerated, with global sales of electric
In 2022, electric vehicles (EVs) represented 14% of new vehicle sales, a remarkable rise from just 2.6% in 2019 This significant growth in EV adoption is anticipated to persist, leading to a reduction in emissions from the transportation sector in the years ahead, according to McKinsey & Company.
Industries and agriculture predominantly rely on coal, oil, and natural gas as their primary fuels These energy sources continue to be extensively utilized and will be fully harnessed to satisfy the growing global market demand.
Coal, oil, and natural gas are essential energy sources, primarily used for electricity generation, transportation, and industrial processes However, their combustion leads to significant CO2 emissions, contributing to air pollution and greenhouse gas effects that adversely impact human health Additionally, these fossil fuels face challenges such as fluctuating production costs and resource scarcity.
Fuel prices, particularly for fossil fuels like oil, coal, and natural gas, experience significant fluctuations influenced by various factors Key elements impacting these prices include global supply and demand dynamics, geopolitical tensions, and changes in production levels In recent years, these factors have led to notable variations in fuel prices, reflecting the complex nature of the energy market.
COVID-19 Pandemic (2020): Oil prices fell sharply due to reduced demand and lockdown measures WTI crude oil prices even fell to negative levels in April 2020
Figure 13: WTI & Brent Crude oil Price in 2020
Post-Pandemic Recovery: As the global economy begins to recover, oil prices rebound, reaching highs in 2021 and 2022 Specifically, WTI oil prices have reached a high of
$123.70/barrel at times, and Brent oil prices on March 8, 2022 reached $127.98/barrel
The Russia-Ukraine conflict that erupted in 2022 led to significant concerns over oil supply disruptions, causing prices to surge above $100 per barrel As one of the world's largest oil exporters, Russia's involvement in the conflict triggered a dramatic spike in oil prices, reflecting global anxieties about energy security.
Figure 14: WTI & Brent Crude oil Price at the start of the Russo – Ukraine war
- Natural gas: Europe (2021-2022): Gas prices hit record highs due to supply shortages and the Russia-Ukraine conflict, causing an energy crisis in Europe
Figure 15: Natural Gas Futures, ICE Dutch TFF
Coal prices have surged in recent years, driven by robust demand from major economies like China and India, alongside decreased production in certain regions.
Figure 16: Thermal coal 5-years chart
Meanwhile, there are alternative fuel solutions, mentioned such as wind, solar, biomass, There have been improvements in production and consumption technology for the motor
The automotive industry is increasingly shifting towards electric and solar-powered vehicles, offering a sustainable alternative to traditional gasoline and oil-powered cars and motorbikes While conventional vehicles provide convenience in terms of refueling, they come with high fuel costs and significant CO2 emissions, contributing to environmental pollution In contrast, renewable energy sources such as solar, wind, and biomass are emerging as viable replacements for coal and natural gas, enhancing electricity production and promoting a greener future.
Literature Review
The Relationship between Financial Development and Renewable Energy Consumption
Research on the relationship between financial development and energy consumption has yielded mixed results However, a study by Anton and Nucu (2019) utilizing panel data from 28 European nations between 1990 and 2015 revealed that financial development—specifically through bond markets, banking, and capital markets—positively impacts renewable energy consumption This relationship operates through three main channels: enhancing capital provision for companies to invest in efficient technologies, enabling economies to hold more reserves which boosts energy consumption, and facilitating access to financial intermediaries that reduce risks and costs while ensuring project liquidity Additionally, Wu and Broadstock highlighted the significant influence of financial development on renewable energy consumption in 22 emerging market economies from 1990 to 2010 Furthermore, research by Minier, Sadorsky, and Paramati indicates that stock market development reallocates capital toward environmentally friendly energy projects, thereby increasing the demand for renewable energy.
Coban and Topcu (2013) found no significant relationship between financial development and energy consumption in the EU27, while noting that financial development does affect energy consumption in former member countries Their analysis utilized panel data from 1990 onwards.
2014 for 32 developed countries, Topcu and Payne pointed out that an increase in the stock
The 24 market index shows a slight decrease in renewable energy consumption, which may be attributed to the complex interactions between financial development and energy use This relationship is influenced by various factors, including regulatory frameworks, technological progress, and socio-economic conditions.
Financial development can influence energy consumption through economic growth, either positively or negatively According to Zhao and Luo (2017), economic growth in China has a negative impact on fossil energy consumption Conversely, Apergis and Payne (2010) found that renewable energy consumption positively affects economic growth in 13 Eurasian countries from 1992 to 2007 Lin and Moubarak (2014) further supported this by demonstrating a bilateral relationship between economic growth and renewable energy consumption in China from 1977 to 2011 The increasing demand for renewable energy in China is driven by sustainability trends, leading to greater investment in renewable infrastructure and technologies, which in turn fosters job creation, innovation, and further economic growth, establishing a mutually reinforcing cycle.
A study by Kutan et al highlighted that advancements in stock market development and foreign direct investment (FDI) can significantly boost renewable energy consumption (REC) in China, India, Brazil, and South Africa Additionally, Eren et al employed annual time series data to further explore this relationship.
From 1971 to 2015, a study in India utilized Dynamic Ordinary Least Squares (DOLS) to explore the relationships among economic growth, financial development, and renewable energy consumption (REC) The findings revealed a significant and positive impact of both economic growth and financial development on the consumption of renewable energy.
The relationship between financial development (FD) and renewable energy consumption (REC) is intricate, with varying viewpoints in the literature Some researchers, such as Kemmler and Spreng (2007) and Vasylieva et al (2019), contend that increased REC fosters financial and economic growth In contrast, Apergis et al (2020) argue that financial development is the driving force behind the growth in renewable energy consumption Recent studies highlight the critical role of REC, with significant investments being funneled into clean energy projects, as noted by Bloomberg New Energy Finance.
(2014) Despite this, concerns persist regarding FD's impact on REC, as highlighted by Ji and Zhang (2019)
Financial development (FD) plays a crucial role in mitigating financial risks, reducing credit costs, and enhancing transparency (Sadorsky, 2010) Additionally, advancements in FD are linked to increased utilization of renewable energy sources (Khan et al., 2020; Qamruzzaman and Jianguo, 2020) While FD can drive economic growth, it also poses a risk of environmental degradation (Pata, 2018) However, by supporting new technologies and enforcing climate regulations, FD has the potential to mitigate these negative impacts.
Mukhtarov et al [48] investigated the relationship between energy usage and financial development in Kazakhstan using the VECM technique, revealing a positive impact of financial development on energy consumption Raza et al analyzed the asymmetric effects of financial development on renewable energy consumption globally through the PSTR methodology, finding a significant negative correlation in low financial development contexts, which shifts to a positive correlation as countries advance to higher financial development levels Furthermore, Tamazian and Rao highlighted that improvements in financial intermediation reduce investment costs for renewable energy projects, promoting the adoption of sustainable energy sources.
The Relationship between Globalization and Renewable Energy Consumption
Economic globalization significantly drives technological advancement through foreign direct investment (FDI) and trade openness, leading to an anticipated positive correlation between economic globalization and renewable energy demand in OECD countries High-level technology is essential for renewable energy investments, and multinational corporations play a crucial role in shaping these investments As globalization progresses, capital flows and international trade facilitate the transfer of technology across borders, transforming global production and consumption patterns.
26 facilitates the transfer of technology from developed countries to developing countries more easily
A study by Rahman and Miah (2017) found a negative relationship between globalization and renewable energy in 26 countries from 1990 to 2010, attributing this to the inability of these countries to harness the benefits of international trade for clean technology development The findings indicated that emissions from oil and coal combustion adversely affected globalization, with higher emissions leading to reduced global integration Consequently, the study suggests that globalization negatively impacted fossil fuel reliance, thereby creating opportunities for renewable energy to emerge as a sustainable alternative Similar research by Padhan and colleagues supports these conclusions.
(2020) also found equivalent results, establishing a clear inverse relationship between globalization and CO2 emission
Research indicates that economic globalization positively influences renewable energy demand, as demonstrated by Gozgor et al (2020) and Subramaniam and Masron (2021), who noted similar effects on biofuel energy However, Urom et al (2021) highlighted that the impacts of globalization on renewable energy deployment in G7 countries are asymmetric and contingent on the nature of globalization shocks, resulting in varying outcomes across different nations This complexity is further supported by studies from Leitao (2014) and Yazdi & Shakouri.
(2017) confirm the two-way causal relationship between globalization and renewable energy
Total exports and imports play a crucial role in renewable energy consumption, as economic globalization fosters the use of renewable energy sources through foreign direct investment (FDI) and trade openness Numerous studies, including those by Baek et al (2009), Copeland and Taylor (1994), Lean and Smyth (2010), Ozturk and Acaravci (2013), and Shahbaz et al (2013), have shown that trade openness can reduce energy consumption by facilitating access to imported technology and enhancing environmental quality However, Copeland (2005) argues that trade openness may lead to increased per capita energy consumption Additionally, mixed results have emerged, such as those found by Shahbaz et al (2014), who explored the causal relationship between energy consumption and trade openness across 91 countries.
A study conducted across 27 countries, representing a spectrum of income levels, revealed intriguing findings regarding trade openness and regional economic cooperation (REC) In low and middle-income nations, a U-shaped relationship was observed, indicating that as trade openness increases, so does REC Conversely, among high-income countries, an inverted relationship was identified, suggesting that greater trade openness may correspond with reduced REC.
Foreign Direct Investment (FDI) plays a significant role in influencing the demand for renewable energy, as highlighted by Kutan et al (2018), who found that FDI and stock market development are vital for promoting renewable energy consumption in Brazil, China, India, and South Africa from 1990 to 2012 FDI facilitates the transfer of technology, innovative production processes, and managerial skills, positively impacting economic growth and subsequently increasing the demand for renewable energy However, Salim et al (2017) observed that while FDI positively affects energy consumption in the short term in China (1982-2006), it has a negative impact in the long run, particularly on non-renewable energy consumption.
Research by Mohd Arshad Ansari, Salman Haider, and Tariq Masood indicates that globalization and urbanization significantly enhance renewable energy consumption in countries from 1991 to 2016, as evidenced by panel unit root and cointegration tests Similarly, a study by Jungho Baek, Yongsung Cho, and Won W Koo, covering 50 countries from 1960 to 2000, reveals a negative long-run relationship between SO2 emissions and income in developed nations, while developing countries exhibit a positive correlation, supporting the Environmental Kuznets Curve Their findings suggest that in developed countries, increased trade and income lead to improved environmental quality, whereas in most developing nations, higher SO2 emissions negatively impact income and trade, with a unique inverse relationship observed in China Additionally, research by Zhe Liu, Imtiaz Ahmad, Zainab Perveen, and Shahzad Alvi focuses on 20 countries from 2000 onwards, further contributing to the understanding of these dynamics.
2018 found that importing capital goods in developing countries from three parts of the world
A study by Zhilin Huang, Hong Zhang, and Hongbo Duan (2020) analyzed data from 98 countries between 1980 and 2016, sourced from the U.S Energy Information Administration, revealing that economic, social, and political globalization significantly boosts renewable energy usage Their regression modeling indicates that increased globalization accelerates energy consumption peaks by fostering enhanced communication and cooperation across these domains This underscores the positive relationship between globalization and renewable energy adoption.
The 2011 analysis titled "An Overview of Energy Consumption of the Globalized World Economy" examines the energy embodiment across 112 regions in 2004 It found that interregional trade leads to energy surpluses in 77 regions, while 35 regions experience energy deficits This indicates that interregional trade positively impacts the majority of the regions studied.
The Relationship between CO2 Emissions and Renewable Energy Consumption
Research by Sadorsky (2009) indicates that, over the long term, per capita CO2 emissions positively influence renewable energy consumption in G7 countries from 1980 to 2005 The rise in real GDP per capita and CO2 emissions are key drivers of increased renewable energy usage CO2 emissions serve as crucial indicators of the effectiveness and sustainability of energy sources, and reducing these emissions from renewable energy is vital for meeting greenhouse gas reduction targets and promoting environmental preservation This understanding encourages governments worldwide to implement policies that support the production and use of clean energy A subsequent study by Apergis revealed that, in the short term, nuclear energy consumption significantly contributes to CO2 emissions reduction, while renewable energy has a lesser impact Furthermore, addressing CO2 emissions from renewable sources is not only a national concern but also a global commitment to combating climate change and protecting the environment.
Salim and Rafiq (2012) discovered that in Brazil, China, India, and Indonesia, renewable energy consumption is significantly influenced by CO2 emissions, revealing a two-way causal relationship in the short term Conversely, Menyah and Wolde-Rufael (2010) reported that no causal relationship exists between renewable energy consumption and CO2 emissions in the United States.
From 1960 to 2007, a one-way causal relationship existed between CO2 emissions and alternative energy sources like nuclear power, with renewable energy's impact remaining neutral due to its minimal share in total energy consumption compared to nuclear energy Factors such as long-term restructuring in the electric power sector and a dramatic drop in natural gas prices made renewable energy less appealing during that period However, the current geopolitical landscape, marked by Russia's unstable economy due to the war in Ukraine and US sanctions, suggests a rising trend in natural gas prices This shift makes alternative energy sources increasingly relevant, as fossil fuels become more replaceable, creating an opportunity for renewable energy to play a significant role in the energy market.
Studies on the relationship between renewable energy consumption (REC), economic growth, and CO2 emissions present inconsistent findings While research by Mohammad (2015) indicates that increasing REC can significantly lower CO2 emissions, other studies, such as those by Apergis (2010), argue that REC does not contribute to emission reductions Salim et al (2012) highlight that income levels and CO2 emissions are crucial factors affecting REC use in countries like China, India, Brazil, and Indonesia Additionally, researchers like Shafiei (2014) and Azam (2021) suggest that REC consumption can improve environmental standards The discrepancies in these studies may stem from issues such as inadequate storage capacity for renewable energy and a continued reliance on fossil fuels by electricity suppliers to meet peak demand.
The global focus on environmental concerns, particularly rising CO2 emissions, has prompted many countries to acknowledge the importance of renewable energy sources such as hydroelectricity, solar, wind, geothermal, and biomass (Sinha et al., 2017) As a result, the consumption of renewable energy is significantly increasing, reflecting its growing share in total energy demand.
This study uniquely explores the relationship between renewable energy consumption and financial sector development by considering factors such as economic development, globalization, and CO2 emissions Financial sector development encompasses enhancements in banking activities, capital utilization, and bond market operations A review of existing literature reveals a gap in research that quantitatively analyzes the interplay between renewable energy consumption, globalization, CO2 emissions, and financial development The intricate connections among these variables underscore the significance of our research, which aims to assess how variations in financial development can positively, negatively, or neutrally impact renewable energy consumption, ultimately contributing to environmental sustainability.
Hypothesis Development
The global infrastructure heavily relies on fossil fuels, particularly in sectors like shipping and air transport, which currently lack alternative energy methods Transitioning to renewable energy necessitates significant financial investment and advanced capital management to support the development of new technologies A well-developed financial system, encompassing banking, capital management, and intermediaries, is essential for this transformation Therefore, a strong correlation between financial development and renewable energy consumption is anticipated.
Recent studies highlight the significant positive impact of financial development (FD) on renewable energy consumption (REC) across various regions and time frames Wu and Broadstock (2010) analyzed data from 22 emerging market countries, finding that FD notably enhances REC Similarly, Coban and Topcu (2011) utilized the GMM Model for the EU and confirmed that FD boosts energy consumption among older EU members In Azerbaijan, Mukhtarov et al (2015) employed the ARDL technique, revealing a significant positive relationship between FD and REC Lin et al (2011) focused on China's electricity sector, using the VECM and cointegration methods to conclude that FD promotes REC Furthermore, Eren et al (2011) examined India's situation from 1971 to 2011 with the DOLS method, reinforcing the notion that FD positively influences REC.
Research indicates a positive and statistically significant relationship between financial development (FD) and energy consumption (REC) Studies conducted by Sadorsky across 22 developing countries and nine Central and Eastern European nations demonstrate that financial development significantly influences energy consumption patterns.
● Hypothesis 1: Financial development has a positive impact on the consumption of renewable energy
Globalization fosters an interconnected environment that promotes the adoption of renewable energy by expanding markets and facilitating technology transfer It also attracts international cooperation, enhances supply chains, harmonizes policies, and raises consumer awareness Therefore, it is evident that globalization has a positive impact on renewable energy consumption.
Numerous studies have explored the relationship between globalization and environmental issues, suggesting that globalization positively influences renewable energy consumption Research by Jungho Baek et al (2009) indicates a negative correlation between income in developed countries and SO2 emissions, while also showing a positive relationship between income and long-term SO2 emissions Similarly, Giray Gozgor et al (2020) found that economic globalization significantly boosts renewable energy demand in OECD countries Additionally, the study by Muhammad Shahbaz et al (2017) reveals a strong causal link between globalization and energy consumption in 25 developed nations, indicating that increased globalization correlates with higher energy consumption Overall, the majority of research supports a clear connection between globalization factors and environmental and energy-related issues, confirmed through both qualitative and quantitative analyses.
● Hypothesis 2: Globalization has a positive impact on the consumption of renewable energy
Environmental pollution significantly hinders the adoption of renewable energy due to its harmful impacts on ecosystems and human health The pollution generated by fossil fuels highlights the critical necessity for cleaner energy solutions Consequently, it is reasonable to conclude that environmental pollution adversely influences the uptake of renewable energy sources.
Contrary to the common belief that CO2 emissions negatively impact renewable energy consumption (REC), several studies suggest a reverse effect, indicating that environmental pollution can positively influence the adoption of renewable energy sources As pollution levels rise, nations and communities increasingly recognize the urgency of transitioning to renewable energy to mitigate adverse health and environmental effects Research conducted in OECD countries reveals that high pollution levels have spurred the implementation of renewable energy policies aimed at enhancing air quality and reducing CO2 emissions Additionally, regions severely impacted by air pollution, such as South Africa, are investing significantly in renewable energy to lessen their reliance on non-renewable sources and combat pollution Thus, environmental pollution emerges not only as a challenge but also as a critical driver for the advancement and utilization of renewable energy Furthermore, while per capita CO2 emissions and energy consumption in developing countries remain lower than in developed nations, their energy consumption per unit is notably higher, establishing a significant positive correlation between energy use and CO2 emissions.
● Hypothesis 3: Environmental pollution has an impact on the consumption of renewable energy
Data and Methodology
Data
The study examines the impact of financial development, environmental pollution, and globalization on renewable energy consumption across a sample of top 40 countries ranking
Between 1990 and 2020, the analysis utilizes secondary data sourced from The World Bank Development Indicators (2022), focusing on variables such as renewable energy consumption, GDP per capita, industry value added, total imports and exports, and CO2 emissions The study employs these indicators to assess economic performance and environmental impact, drawing insights from the International Monetary Fund.
(2022) - (FDI inflows and Domestic credit to the private sector), and the KOF Globalization Index (2022) - (Globalization Index)
Sampling the top 40 countries by Gross Domestic Product (GDP) is crucial for scientific research due to factors like data availability, quality, and validity Representing approximately 90-95% of global GDP, these nations significantly influence global economic trends and dynamics Moreover, the research encompasses an extensive time frame, enhancing the reliability of the findings.
With a substantial sample size spanning 30 years, this research allows for empirical testing capable of identifying smaller effects with high confidence and precision The findings from these countries are expected to be highly generalizable to the global context, as they significantly influence global trends and policies Consequently, the results are likely to be broadly applicable and relevant to various countries and regions around the world.
Countries with higher GDP typically possess more reliable data, enabling comprehensive collection across various indicators Access to high-quality data, such as that provided by the World Bank and IMF, allows for a more effective exploration of complex relationships and dynamics Furthermore, the availability of robust data sources strengthens the study's research objectives and hypotheses with empirical evidence, ultimately enhancing the credibility and validity of the results.
The sample will be split into 3 groups, based on the overall trend of the REC variable as follow:
● Increasing: Sweden, Denmark, Netherlands, Germany, Italy, Ireland, Belgium, Austria, Japan, United Kingdom, United States, France, Switzerland, Poland and Uruguay
● Neutral: Russia, Norway, Australia, South Korea, Canada, Israel, Singapore, Saudi Arabia, Iran, Brazil and Nigeria
● Decreasing: Pakistan, Mexico, South Africa, Colombia, Bangladesh, Malaysia, Philippines, Indonesia, Chile, Vietnam, Egypt, India, China and Peru
Analyzing countries separately based on Renewable Energy Consumption (REC) trends enables a systematic examination of their diverse developmental paths This approach aids researchers and policymakers in identifying necessary interventions to promote progress and address obstacles to development Moubarak and Lin (2014) highlighted the significance of understanding varying REC trends, emphasizing that such insights are crucial for formulating effective policies.
Different groups face unique drivers and challenges that shape Renewable Energy Certificate (REC) trends An increase in RECs offers significant advantages for nations, including supportive policy frameworks, technological advancements, and enhanced public backing for renewable energy Conversely, countries experiencing stagnant or declining RECs face obstacles such as policy uncertainties, financial limitations, and dependence on traditional energy sources Analyzing these contextual factors provides essential insights for creating targeted interventions, aligning with the findings of Anton and Nucu (2020), which emphasize the importance of policy frameworks and technological progress in managing REC growth.
A three-group analysis provides a framework for creating targeted policies to effectively enhance renewable energy certificate (REC) development Countries with rising REC should prioritize scaling incentives, investing in infrastructure, and promoting innovation Conversely, neutral REC countries require policy reforms to stimulate growth Additionally, capacity building and financial support mechanisms are crucial for progress, as highlighted by Shahbaz et al (2018).
1.1 Financial Development and Economic Growth Variables
Financial development encompasses the advancement of the financial sector within an economy or region and can be analyzed holistically or through its individual components Drawing on the research of Anton and Nucu (2019) and Kutan et al (2017), we explore the intricate relationship between financial development and renewable energy consumption Our analysis reveals that various elements of financial development operate within a unified framework, significantly influencing the consumption of renewable energy.
35 consumption In addition, the Economics Growth aspect is also taken due to its bilateral relationship with Renewable Energy Consumption and Financial Development as stated in the Literature Review
To analyze the impact of financial development on renewable energy consumption in a nation, we utilized key variables from the World Bank Development Indicators (2022) Domestic credit to the private sector (DCPS), expressed as a percentage of GDP, serves as a proxy for banking sector development, while industry value added (IVA) indicates capital utilization For economic growth, we employed GDP per capita (ECDE) to represent income and the consumer price index (CPI) as a proxy for energy prices, following the methodology of Anton and Nucu (2019) Additionally, GDP growth in annual percentage (EGCR) was included as an augmented variable for robustness checks of the empirical results.
1.2 Environmental Pollution and Globalization Variables
Our research analyzes financial development while incorporating insights from existing literature on renewable energy consumption To ensure a comprehensive analysis, we include two additional independent variables: globalization and CO2 emissions Renewable energy consumption is represented as a percentage of total final energy consumption, drawing from relevant experimental studies Globalization is measured using three proxy variables: the Globalization Index, total imports and exports as a percentage of GDP, and Foreign Direct Investment as a percentage of GDP Lastly, CO2 emissions, measured in kilotons, will be used to assess environmental pollution.
The use of GI - Globalization Index, TIE - Total Import and Export (% of GDP), and FDI - Foreign Direct Investment (% of GDP) as indicators of globalization is supported by previous research that has examined the effects of globalization on renewable energy consumption, carbon footprints, and environmental issues For instance, the study by Mohd Arshad Ansari, Salman Haider, and Tariq Masood (2020) titled “Do renewable energy and globalization enhance ecological footprint: an analysis of top renewable energy countries?” utilized the KOF Globalization Index as a primary measure of globalization Similarly, the research conducted by Taghi Ebrahimi Salari, Ahmad Roumiani, and Emad Kazemzadeh (2021) also incorporated the GI variable to analyze globalization's impact.
The study by Bashir Muhammad and Sher Khan highlights the significance of the variable TO, representing total openness, calculated as the sum of imports and exports divided by GDP This variable shows a comparable level of statistical relevance to TIE, which denotes total imports and exports as a percentage of GDP.
In 2021, the analysis incorporates two key variables: Total Import and Export (% of GDP) and Foreign Direct Investment (FDI) (% of GDP) While FDI is not typically recognized as a primary indicator of globalization, its inclusion represents a significant innovation This is particularly relevant as countries are increasingly seeking to invest in developing nations to support the realization of green energy projects.
Table 1: Variables employed in the panel data analysis
REC Consumption of Renewable Energy (% of total final energy consumption) The World Bank
DCPS Domestic credit to the private sector (% of
IVA Industry value added (% GDP) The World Bank
ECDE The Log of GDP per capita The World Bank
CPI Consumer Price Index (20100) The World Bank
TIE Total import and export (% of GDP) The World Bank
FDI Foreign Direct Investment (% of GDP) International Monetary Fund
CO 2 CO 2 emission (kt) The World Bank
GI Globalization Index KOF Globalization Index
ECGR GDP growth (annual %) The World Bank
Table 2 presents descriptive statistics from a comprehensive unbalanced panel dataset involving forty countries and 1,240 observations, revealing significant cross-country disparities in renewable energy consumption from 1990 to 2020 The standard deviation of renewable energy consumption percentage (RECP) is 21.654, indicating notable diversity in renewable energy usage across the sample Nigeria recorded the highest renewable energy consumption in 2009 at 88.68%, although this figure requires cautious interpretation due to its low overall energy consumption and reliance on biomass In contrast, Sweden achieved a remarkable RECP peak of 58.4% in 2020, primarily from sustainable sources like wind and solar energy, positioning it as a global leader in renewable energy transition Conversely, Saudi Arabia had the lowest renewable energy consumption at just 0.01% during the same period, reflecting its heavy dependence on oil; however, recent governmental initiatives signal a shift towards a greener economy and improved sustainable practices Additionally, significant inter-country and temporal discrepancies in financial development are observed, with developing countries showing higher domestic credit values linked to rising renewable energy consumption, while those with declining trends exhibit lower financial metrics Similar variations are noted in other control variables, including economic development, consumer price index, and foreign direct investments.
Variable Obs Mean Std Dev Min Max
Table 3 presents the correlation matrix of dependent and independent variables Similarly, to
Renewable energy consumption exhibits a negative correlation with financial development indicators while showing a strong positive correlation with economic development The consumer price index (CPI) also demonstrates a significant relationship with economic development Although domestic credit provided by the financial sector correlates with economic development, it is included in the energy consumption model to reduce biases in estimating economic development's impact on renewable energy Correlation coefficients between GDP and financial development indicators range from 0.245 to 0.654, indicating no multicollinearity issues The findings align with previous literature, suggesting that renewable energy consumption can be modeled as a function of economic development, CPI, financial development, and foreign direct investment, with correlation coefficients between 0.092 and 0.513 Additionally, variance inflation factor (VIF) tests confirm the absence of multicollinearity among the variables, as the mean VIF of 1.55 is below the acceptable threshold.
Methodology
Following the most relevant previous studies by [4], additionally with [47] on Globalization and [59] on CO2 emission; we established a linear regression model to conduct empirical analysis as follow:
RECi,t = β1 + β2FDi,t + β3FDINIi,t + β4TIEi,t + β5GIi,t+ β6LOGCO2i,t + β7EDCEi,t + β8CPIi,t + ci
● β1, β2, β3, β4, β5, β6, β7, β8 are the coefficients of lagged renewable energy consumption, financial development, and environmental pollution, respectively
● ut represents the random error term and c represent an unknown country-specific constant (the fixed effect)
● i and t indicate country and year, respectively
REC represents the level of renewable energy consumption, GDP.PCAP represents GDP per capita, DCPS represents domestic credit to private sector (% of GDP), CPI represents the
The Consumer Price Index (CPI) for 20100 reflects inflation trends, while Industry Value Added (IVA) indicates its contribution to GDP Foreign Direct Investment (FDI) measures net inflows as a percentage of GDP, alongside total imports and exports (TIE) which also represent GDP proportions The globalization index (GI) assesses the level of global integration, and CO2 emissions (LOGCO2) are quantified in kilotons, highlighting environmental impacts associated with economic activities.
According to the method outlined in [4], the random effects model assumes that individual effects are not correlated with the explanatory variables, whereas the fixed effects model indicates a correlation between individual effects and the independent variables, particularly in relation to the EDCE variable.
This paper will employ a fixed-effect model for unbiased estimation, utilizing panel data to enhance the analysis As noted by [79], panel data offers significant advantages, including increased data variability, reduced collinearity, and overall greater efficiency.