How effective are energy efficiency and renewable energy in curbing CO2 emissions in the long run? A heterogeneous panel data analysis

Energy efficiency and renewable energy are considered to be two indispensable solutions to control GHG (greenhouse gas) emissions. Moreover, industrialization is at the center of discussions on the roles of countries to reduce CO2 emissions. However, the literature is underprovided to understand the long run contribution of energy efficiency, renewable energy and industrial composition in reducing GHG emissions at the macro level. In this study, we differentiate the effects of economic activity, energy efficiency, economic structure and use of renewable energy resources on CO2 emissions. We develop energy efficiency indices for thirty six countries for the period of 1971-2009 and use a CCE (common correlated effects) estimator model that is consistent under heterogeneity and cross-sectional dependence. We find a positive significant effect of energy efficiency on CO2 emissions in the long-run. Similarly, substituting renewable energy for non-renewable energy reduces CO2 emissions in the long-run. Our results ensure widely discussed roles of energy efficiency and renewable energy in curbing CO2 emissions. Furthermore, the scale of economic activity measured by real income and industrialization have significant positive effect on CO2 emissions.