Does the Financial Sector Contribute to Increasing Renewable Energy Consumption?

Carbon dioxide emissions are one of the major causes of climate change. Developing the renewable energy industry is essential to tackling climate change since that decreases reliance on fossil fuels. As the European Union strategizes for smart, sustainable, and inclusive growth, it prioritizes increasing the ratio of renewable energy to 20 percent of gross financial energy consumption by 2020. A recent study by Sorin Gabriel Anton and Anca Elena Afloarei Nucu sheds light on the relationship between renewable energy consumption and the financial industry in European countries.

The costs and prices of renewable energy are higher than those of conventional energy. As a result, the renewable energy industry needs to spend more money on research and development to find a way to produce energy more efficiently. There are three main sources for the renewable energy industry to raise funds: bank loans, equity, and bonds. Better access to such funding resources is of great significance for the renewable energy industry. For instance, if there are many banks which can afford to lend money to new industries in a country, renewable energy firms could get a bank loan at reasonable interest rates. It would enable renewable energy companies to produce energy in a more cost-efficient way, which then leads to the increasing consumption of renewable energy in the country.

Anton and Nucu researched the relationship between access to monetary resources and renewable energy consumption at the national level. After analyzing panel data consisting of the 28 European Union countries from 1990 to 2015, they concluded that the consumption of renewable energy in a country is positively correlated to the ease with which firms in the country can access funding resources.

In the paper, the authors derive three variables: (i) Domestic credit provided by the financial industry (the proxy for accessibility to bank loan), (ii) Stock market turnover ratio (proxy for equity market), and (iii) Outstanding international private debt securities (proxy for bond market). In other words, the higher these variables are, the more easily firms — including renewable energy companies — have access to the financial industry to raise money. The authors examine the relationship between these three variables and renewable energy consumption, measured by the share of renewable energy in total final energy consumption.

They argue that there is a positive correlation between all three variables and renewable energy consumption. For instance, one percentage point increase in domestic credit provided by the financial sector (percent of gross domestic product) is on average associated with an almost 0.03 percentage point increase in the ratio of renewable energy to total final energy consumption. This result suggests that a well-functioning financial industry makes it easy for the renewable energy industry to raise money needed for investment in research and development. The investment enables renewable energy companies to produce energy more cost-efficiently, which results in the increase of renewable energy consumption in a country.

The authors note that there are few preceding studies examining the relations between renewable energy consumption and the financial industry, and also say “this paper is among the first to analyze quantitatively the impact of financial development on renewable energy consumption in the European Union” (Anton and Nucu, 2020). The research’s findings show that financial developments may play an important role in raising renewable energy consumption and offer some rationales to the European Union’s current efforts for financing renewable energy. One of such efforts is to develop the market of the green bond, which is issued by entities like firms, governmental bodies, and others to finance their projects of environmental preservation. In June, the European Union published a proposal for an EU Green Bond Standard, aiming to deepen the green bond market in the European Union by improving the market’s credibility and transparency.

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Anton, Sorin Gabriel, and Anca Elena Afloarei Nucu. 2020. “The effect of financial development on renewable energy consumption. A panel data approach.” Renewable Energy 147, Part 1 (March): 330-338. https://doi.org/10.1016/j.renene.2019.09.005.