Estudios de Economía Aplicada ISSN: Asociación Internacional de Economía Aplicada. - PDF

Estudios de Economía Aplicada ISSN: Asociación Internacional de Economía Aplicada España MASLYUK, SVETLANA; DHARMARATNA, DINUSHA Renewable Electricity Generation,

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Estudios de Economía Aplicada ISSN: Asociación Internacional de Economía Aplicada España MASLYUK, SVETLANA; DHARMARATNA, DINUSHA Renewable Electricity Generation, Emissions and Economic Growth: Evidence from Middle- Income Countries in Asia Estudios de Economía Aplicada, vol. 31, núm. 1, enero, 2013, pp Asociación Internacional de Economía Aplicada Valladolid, España Available in: How to cite Complete issue More information about this article Journal's homepage in Scientific Information System Network of Scientific Journals from Latin America, the Caribbean, Spain and Portugal Non-profit academic project, developed under the open access initiative E STUDIOS DE E CONOMÍA A PLICADA V OL P ÁGS Renewable Electricity Generation, CO 2 Emissions and Economic Growth: Evidence from Middle-Income Countries in Asia SVETLANA MASLYUK Department of Economics, School of Business and Economics, MONASH UNIVERSITY, AUSTRALIA. DINUSHA DHARMARATNA Department of Economics, MONASH UNIVERSITY, AUSTRALIA. ABSTRACT Over the past three decades there has been a steady growth in total electricity generation in Asia. Although most of this electricity came from natural gas and coal, renewable electricity generation also has significantly contributed to total electricity generation, with hydro being the largest source of renewables-based electricity. In this study, we analyze the dynamics between economic growth, emissions of carbon dioxide (CO 2) and the share of renewable electricity in total electricity generation in eleven Asian developing countries over the period from 1980 to The Structural Vector Autoregression (SVAR) methodology is used to study the interactions among the variables and to analyze the impact of expansion of renewable electricity on per capita emissions and economic wellbeing. Our results show that the majority of middle-income countries in Asia are likely to face a trade-off between economic growth and environment sustainability at least in the early years. Therefore, such countries may need to implement policies complementing renewable energy generation and improving energy efficiency. Keywords: Renewable Energy, Electricity, Carbon Dioxide Emissions, Economic Growth. Generación de electricidad renovable, las emisiones de CO 2 y crecimiento económico: Evidencia de países de ingresos medios en Asia RESUMEN Durante las últimas tres décadas ha habido un crecimiento constante en la generación total de electricidad en Asia. Aunque la mayor parte de la electricidad proviene del gas natural y el carbón, la generación de electricidad renovable ha contribuido de manera significativa a la generación total de electricidad, siendo la hidraulica la mayor fuente de electricidad basada en energías renovables. En este estudio analizamos la dinámica entre el crecimiento económico, las emisiones de dióxido de carbono (CO 2) y el peso de la electricidad renovable en la generación total de electricidad en once países asiáticos durante el período de 1980 a Se aplica la metodología del Vector Autorregresivo Estructural (SVAR) para estudiar las interacciones entre las variables y analizar el impacto de la expansión de la electricidad renovable en las emisiones per cápita y en el bienestar económico. Nuestros resultados muestran que la mayoría de los países de renta media de Asia es probable que se enfrenten a una disyuntiva entre crecimiento económico y sostenibilidad del medio ambiente, al menos en los primeros años, y, por lo tanto, en estos países puede ser necesario aplicar políticas que complementen la generación de energía renovable y la eficiencia energética. Palabras clave: Energía renovable, electricidad, emisiones de dióxido de carbono, crecimiento económico. JEL Classification: Q42, C23 Artículo recibido en febrero de 2013 y aceptado en abril de 2013 Artículo disponible en versión electrónica en la página ref. ә ISSN (online) ISSN (print) 218 SVETLANA MASLYUK AND DINUSHA DHARMARATNA 1. INTRODUCTION Energy is an important input for economic development and the current world s energy supply is largely based on fossil fuels. Electricity, whether it is generated from fossil fuels or produced using renewable energy sources, is one of the most important inputs used in production of goods and services. The growth in renewable energy means creation of new jobs, changing the structure of the economy and has a lot of environmental benefits, however, since 1990 worldwide growth in renewable electricity generation was only 3 per cent on average, with average growth rates in OECD and non-oecd countries being 1.9 per cent and 4.2 per cent respectively (International Energy Agency, 2012). While the contribution of hydro energy has decreased (rom 18.2 per cent in 1990 to 16.1 per cent in 2010), the contribution of other renewable sources used to produce electricity grew from 1.3 per cent in 1990 to 3.4 per cent in 2010 (International Energy Agency, 2012). Out of these sources, during the last decade electricity generation from wind and solar photovoltaic (PV) grew on average by 27 per cent and 42 per cent respectively (International Energy Agency, 2012). As compared to other world regions, in Asia there has been a steady growth in total electricity generation over the past two decades. Although most of this electricity came from fossil fuels (natural gas and coal), a share of renewable electricity generation in total electricity generation has been growing with hydro being the largest source of renewables-based electricity (13.4 per cent in 2008) (International Energy Agency, 2012). Given the benefits that renewable energy offers in terms of creating jobs, establishing energy security and achieving sustainable development, currently governments of many countries are promoting the use of renewable energy and electricity supply. Yet, the current literature on the subject has not come to conclusion of how exactly the renewable energy contributes towards their economic growth and reduction of environmental pollution and can be divided into three strands. First are the studies investigating the contribution of energy towards economic growth; studies in the second strand focus on the relationship between economic growth (energy consumption) and emissions of greenhouse gases (GHG), and the third strand includes the literature on the relationship between economic growth, energy and emissions. While, literature from the first two strands is voluminous, literature from the third is relatively unexplored. Overall, using large array of econometric methods (for example based on univariate and panel causality and cointegration tests, Granger causality tests, Structural Equation modeling and other approaches) the literature could not uniformly confirm the relationship between energy consumption from different sources including renewable energy and which in some cases might be non-linear (Narayan et al., 2008; Sadorsky, 2009; Soytas & Sari, 2009). Following Payne (2009, 2010), some of the studies have confirmed the growth RENEWABLE ELECTRICITY GENERATION, CO 2 EMISSIONS ECONOMIC GROWTH: 219 hypothesis (energy consumption contributes towards higher economic growth), others analyzed the conservation hypothesis (economic growth drives consumption of energy) and a few studies analyzed the neutrality hypothesis (no causal relationship between economic growth and energy consumption). Among papers that study the impact of production of energy on economic wellbeing are Domac et al., (2005), Awerbuch and Sauter (2006), Chien and Hu (2007). Domac et al., (2005) and Awerbuch and Sauter (2006) proposed that the use of renewable energy (bioenergy in Domac et al. s terminology) can lead to the substantial improvements in country s efficiency. Domac et al., (2005) suggested that such improvements could arrive from two sources. First is the business expansion and growth in employment associated with renewable energy projects and second is the import substitution of energy. Using hierarchical regression Chien and Hu (2007) empirically tested Domac et al. s (2005) ideas by investigating whether renewable energy contributes to the improvement in macroeconomic technical efficiency for a panel of 45 economies from 2001 to They have confirmed the hypothesis that renewable energy improves technical efficiency particularly if decomposed into different categories. Awerbuch and Sauter (2006) have studied the microeconomic consequences of the oil -Gross Domestic Product () relationship and have found that oil- induced losses (after oil price shock) can be largely reduced through investments in renewable energy due to reduction of negative effects of oil price volatility and by providing energy security. Similar to the first strand of literature, the relationship between economic growth (or energy consumption) and different polluting substances have also been largely studied using different methodologies and theories (Silva et al., 2011). The existence of relationship between economic growth and pollutants is typically investigated in the context of an Environmental Kuznets Curve (EKC) (see for example Jalil and Mahmud, (2009); Jaunki, (2011); Saboori et al., (2012)). If originally literature focused on developed economies, the more recent literature changed focus to developing economies, GHG other than carbon dioxide (CO 2 ) and to investigating the role of energy from renewable energy sources in stabilizing or even reducing the concentration of GHG in the atmosphere (see Green et al., (2007)). In terms of the third strand of literature, the relationship between economic growth, energy and environment has not yet been well established, especially when it comes to supply of renewable energy. To date there is no clear cut answer on how exactly energy supply contributed to in the world with constrained fossil fuel supply and a need to reduce GHG emissions. This is because of several reasons. First, renewable energy sources are used differently in developing and developed nations. According to IAE (2011), in 2010, world Total Primary Energy Supply (TPES) was 12,782 million tons of oil equivalents 220 SVETLANA MASLYUK AND DINUSHA DHARMARATNA (Mtoe), of which 13 per cent, or 1,657 Mtoe, was produced from renewable energy sources per cent of global renewables supply (or 9 per cent of the TPES) can be attributed to developing nations. Such large share of renewables (largely solid biofuels) in developing nations is for non-commercial use (residential heating and cooking), while developed nations, particularly OECD, account for most of the world production and growth of solar and wind energy which can be used for the purposes of generating electricity (International Energy Agency, 2011, 2012). Second, following Domac et al., (2005) developing and developed economies understand and interpret renewable energy supply sector differently. While in developing nations, bioenergy is an important source of fuel for subsistence, which can contribute to income in the off-harvest season, in developed nations renewable energy (solar energy) can be used by the individuals to generate their own electricity for residential use. In developed economies, it is promoted by the governments due to its environmental benefits, job creation, industrial competitiveness and regional development (Domac et al., 2005). Third, in the developed countries there is a direct link between emissions and the supply of energy through climate change mitigation policies such as emissions trading schemes, renewable energy targets and environmental taxes. In the developing countries in Asia such link might not yet been established. For instance, while India and China have started pilot emissions trading schemes in selected provinces and cities, in other countries such initiatives are only at the early stages. Given the different nature of use of renewable energy sources, the contribution of renewable energy towards economic growth and emissions of GHG in developed and developing nations could be different. Among the few papers in this area are Silva et al., (2011), Azgun (2011) and Tiwari (2011). Silva et al., (2011) studied the impact of renewable energy sources on economic growth and emissions of carbon dioxide CO 2 in four developed countries (Denmark, Portugal, Spain and USA) with annual data over the period 1960 to 2004 using Structural Vector Autoregression (SVAR) methodology. They found that although an increase in the renewable electricity generation may initially harm economic growth for all countries except for the USA, it contributes to reduction in emissions. Azgun (2011) and Tiwari (2011) studied the impact of shock in renewable electricity generation on economic growth and CO 2 in developing economies. Tiwari (2011) used SVAR to analyze the dynamics of hydroelectricity consumption, economic growth and CO 2 emissions in India. He found that a positive shock on hydroelectricity consumption is likely to increase real and cause a reduction in CO 2 emissions. Azgun (2011) used SVAR to examine the impact of the aggregate and sub-components of electricity consumption on the real for Turkey. He found that while the impact of electricity consumption on was somewhat small, the innovations in have a more profound effect on electricity consumption. RENEWABLE ELECTRICITY GENERATION, CO 2 EMISSIONS ECONOMIC GROWTH: 221 In this study, we analyze the dynamics between economic growth, emissions of CO 2 and renewable electricity generation in middle-income (developing) countries of Asia. CO 2, our proxy for environment, was chosen because it is one of the most polluting GHGs and per capita growth was chosen as a proxy of the growth in economic wellbeing. In particular, this paper analyzes how per capita growth and percentage changes in CO 2 emissions have responded to exogenous shocks in the share of renewable electricity supply out of total electricity over the past three decades. The dynamic nature of renewable electricity generation makes this question well suited for SVAR models. SVAR models are extensively used in the applications where variables are jointly determined and the adjustment to the long run equilibrium relationship is not instantaneous which requires inclusion of lags in the model (Hausman et al., 2012). In addition, the dynamic nature of the model allows estimating forecast error variance decompositions (FEVDs) and the impulse response functions (IRFs). The former explains the percentage of variance arising from the specific shock, the latter allows tracing out the effect of the exogenous shock over time (Hausman et al., 2012). Demand for electricity is rapidly increasing in developing countries and if the present growth rates continue, social and economic development in many developing countries would suffer due to major constrains in the availability of energy. The inaccessibility of adequate energy sources and climate change mitigation are the major challenges to the development process in many developing countries. Therefore, renewable energy sources are very attractive and important in electricity generation in developing countries. In particular this refers to developing countries which achieved middle income status since these countries might be in a position to afford investments in renewable energy as compared to low-income countries. Asian countries are the focus of this study due to several reasons. First, economic growth in the Asian region has overtaken the rest of the world. Second, Asia is home for more than half of the world population. Third, energy poverty and access to electricity is a serious issue for Asia: out of 4.1 billion people living in Asia and Pacific, 1.9 billion people depend on burning traditional biomass for energy and 670 million do not have access to electricity services (International Energy Agency, 2011, 2012). The above mentioned reasons are exerting a huge pressure on the electricity generation in middle-income Asian countries. The paper contributes to the literature in three ways. First, in contrast to previous studies, we focus on the electricity production, not consumption and analyze electricity generation from the renewable resources. Second, to evaluate the effect and extent of economic and environment factors on renewable energy share, we focus on eleven low and upper middle income countries from Asia including China, Fiji, India, Indonesia, Lao People Democratic republic, Malaysia, Pakistan, Papua New Guinea, Philippines, Sri Lanka and Thailand from 222 SVETLANA MASLYUK AND DINUSHA DHARMARATNA 1980 to The choice of these countries was partly dictated by the data availability. Third, we utilize a tri-variate SVAR model. Although SVAR models are routinely used in the macroeconomic literature in the analysis of monetary, fiscal and technological shocks (Enders, 2004), in the energy literature these models are mainly used in the analysis of price or policy shocks. For instance, SVARs have been recently used to model the impact of shocks on biofuels (Cha & Bae, 2011; Zhang et al., 2007) the impact of ethanol on global oil markets (McPhail., 2011), impact of energy consumption and production on other macroeconomic variables (Azgun, 2011; Tiwari, 2011), impact of price shocks on the economy of different countries (Farzanegan & Markwardt, 2009), and model global energy market (Killian, 2010). The remainder of the paper is organized as follows. Section 2 briefly outlines countries in the middle-income Asia and data used in the paper. Section 3 presents methodology used in the paper. Discussion of the results is provided in Section 4 and Section 5 concludes the paper. 2. MIDDLE-INCOME COUNTRIES IN ASIA In this paper, countries are classified as middle-income based on the International Monetary Fund (IMF) country classification (International Monetary Fund, 2012). This classification divides nations according to Gross National Income per capita, calculated using the World Bank Atlas method. Based on the 2006 figures revised in 2007, the groups are: low income ($905 or less), lower middle-income ($906 - $3,595), upper middle-income ($3,595 - $11,115) and high income ($11,166 or more) (World Bank, 2012). There has been a steady growth in the total electricity generation in Asia; however, this growth is largely met with new gas and coal generation. Electricity generation using renewable resources is predominantly from hydro. Geothermal plants in Indonesia and Philippines contribute to electricity generation and expect to increase rapidly with new plants construction in both nations (International Energy Agency, 2011). In this section, we will briefly discuss countries used in the analysis. China (CHN) Electricity generation in China is mainly from fossil fuels. Coal dominates the electricity generation at 79 per cent and the next largest share is hydro (17 per cent) The rest of the electricity generation is met through other renewables (2.5 per cent) and nuclear power (1.5 per cent) (Central Intelligence Agency, 2012). China has ambitious nuclear and renewable plans for the coming decade to displace coal slowly. Electricity-related CO 2 emissions have increased over past 10 years even though the emission intensity of coal generation has improved (International Energy Agency, 2011). RENEWABLE ELECTRICITY GENERATION, CO 2 EMISSIONS ECONOMIC GROWTH: 223 Fiji (FJI) Fiji has a number of renewable energy resources such as hydro, biofuel, geothermal, wind, solar and ocean energy resources. Around 66.8 per cent of the country s electricity requirements are met from renewable energy sources which include; 62.1 per cent hydro, 0.6 per cent wind and 4.1 per cent other renewable resource. Imported petroleum for diesel back-up generators, meets the remaining balance of 33.2 per cent. Currently, the contribution of the electricity sector to is about 3.6 per cent (Fiji Department of Energy, 2010 ). India (IND) Coal dominates the power genera
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