Renewable Energy, Energy Efficiency, and CO2 emissions in Developing Countries: Evidence from the Pesaran's Common Correlated Effects Model

While global warming has emerged as a major concern to be addressed, energy efficiency and renewable energy have been identified as two key solutions to slow it down. This study investigates the contribution of these two factors on CO2 emissions using economic growth, industrial share and population as additional variables. Extending Ozbugday and Erbas (2015)’s contribution, I focus on 27 developing and highly polluting countries over the period 1971-2017. I apply the Mean Group (MG) estimator from Pesaran and Smith (1995) and the Common Correlated Effects Mean Group (CMG) estimator from Pesaran (2006) allowing for cross-sectional dependence. Empirical findings displayed at the sample and country levels suggest that, improving energy efficiency as well as shifting from non-renewable to renewable sources of energy, reduce sharply CO2 emissions in the long-run. However, when applied on a sample of 21 advanced economies, these models provide estimates with much smaller magnitudes and significance. Overall, my results bring an in-depth discussion on the potential role of developing countries in achieving environmental targets, as well as on the key factors to reach them.