Does diversity matter? A fresh inquiry into the energy, economy and environment nexus

ABSTRACT

The article extends the literature on the nexus among economy, environment and energy by incorporating an index of electricity generation diversity in production and emission functions. The index is mathematically equivalent to Herfindahl–Hirschman index. The index captures substantial information regarding the ongoing energy transition at the global level. The results obtained through pooled mean group estimation, on a dataset of fairly diversified group of countries, indicate that if diversity index increases by a percentage point, per capita income increases by 2.4% and per capita emissions are reduced by 0.71%. This is against the conventional wisdom in favour of specialization. The study has found some interesting long-run causal pathways. Firstly, the causality runs from diversification to income. Secondly, there is a causality running from electricity consumption to specialization. Thirdly, bi-directional causality runs between emissions and specialization. The results have interesting policy implications. The study supports the growth hypothesis that the electricity consumption drives the economy. As this inevitably increases emissions, a better pathway is through diversification. The fossil fuel intensive pathway may have been the preferred choice in the past for countries with low electricity consumption; the diversified portfolio appears to be prudent in the future.

KEYWORDS:

• Energy mix
• portfolio diversification
• energy transition
• policy

JEL CLASSIFICATION:

• C33
• Q40
• Q50

Acknowledgments

Authors are thankful to Prof. Joakim Westerlund for the GAUSS code for the Co-integration test. Authors are also thankful to the anonymous reviewer for the comments which has helped in improving the article.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This research did not receive any specific grant from funding agencies in the public, commercial or not-for-profit sectors.