Does fiscal decentralization and eco-innovation promote renewable energy consumption? Analyzing the role of political risk

Abstract

The role of fiscal decentralization is important not only for the promotion of cleaner energy sources but also for a sustainable environment and the achievement of the Paris Climate Agreement (COP21) in 2015 in general. Therefore, this study attempts to incorporate fiscal decentralization as a new determinant of renewable and non-renewable energy consumption along with political risk index, eco-innovation, and renewable energy research and development (R&D) for seven (Organization for Economic Cooperation and Development) OECD countries from 1990 to 2018. For empirical analysis, the test proposed in Banerjee and Carrion-I-Silvestre (2017) is employed for cointegration, while cross-section augmented autoregressive-distributed lag (CS-ARDL) is used for the short-run and long-run analysis, and to check robustness, a common correlated effect mean group (CCEMG) test is applied. The results confirm that fiscal decentralization and eco-innovation promote renewable energy consumption and lower non-renewable energy use. Moreover, the improvement of the political risk index and the rise of R&D in renewable energy increase renewable and decrease non-renewable energy consumption. For policy implications, this study recommends that transferring the power to the local governments will further improve energy efficiency and switch these countries' energy mix towards more sustainable sources of energy. This shall also help to reduce the use of non-renewable energy consumption, i.e., fossil fuels in the total energy mix.

Keywords: COP21; Eco-innovation; Fiscal decentralization; Political risk index; Renewable energy R&D.