The Effect of Oil Price Volatility on Renewable Energy Production
Sinha, Akshay K
Recent literature aims at understanding the linkages between macroeconomic factors and renewable energy growth, at both global and national levels. Most of these studies have focused on determinants such as income levels and carbon emissions, identifying a causal mechanism that has its foundation in climate change. This paper develops an economic argument to explain greater renewable energy growth. The guiding question is whether a greater degree of uncertainty caused due to volatility in fossil fuel prices incentivizes governments to increase the share of renewable sources in their overall energy portfolio. I also study factors that impede renewable energy growth, particularly "carbon lock-in", which refers to existing technical, political and economic structures that drive dependence on fossil fuels and hinder transition to sustainable energy systems. Utilizing over forty years of data from the Quality of Government Dataset and World Development Indicators, I employ a Generalized Method of Moments technique and find that increasing oil price volatility does have a positive effect on renewable energy growth. However, carbon lock-in has a mediating effect, and I dive deeper into identifying its potential sources as well as regional differences. The paper concludes by discussing implications for policymakers in crafting strategies to accelerate renewable energy growth worldwide.
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