Geopolitical risks, financial system and the energy trilemma

Abstract

The literature on the intersection of geopolitical risks, financial development energy trilemma remains sparse. This study, therefore, seeks to investigate the influence of geopolitical risk and financial development on energy trilemma (energy security, energy equity and environmental sustainability). The energy trilemma presents a more comprehensive measure for understanding the effect of geopolitical risks on energy and environment: energy security, energy equity and environmental sustainability. Using the Feasible Generalized Least Squares, Discroll-Kraay technique and Lewbel's Two Stage Least Squares method and data from 40 countries from 2000 to 2021, our findings suggest a positive effect of geopolitical risks on both energy security and energy equity. In essence, an increase in geopolitical risks could potentially enhance countries' energy transition, improving their resilience and ability to recover quickly from shocks to the energy systems, thereby boosting their achievement of universal access and affordable energy for all. The results, however, generally suggest a negative effect of geopolitical risks on environmental sustainability. Further results indicate that the financial development measures show a nonlinear U-shaped relationship with the energy trilemma. We also show that the effect of geopolitical risk on energy trilemma is moderated by financial development. The relevance of this paper hinges on the growing global geopolitical risks and the urgent push for a clean and just energy transition that concurrently safeguards a secure, equitable, and sustainable future.