The Effect of Renewable, Non- Renewable and Biomass Energy Consumption and Economic Growth on Co2 emission in Ethiopia

Table of Contents

Title Pages

ABSTRACT

Acknowledgment

Table of Contents

List of Tables

List of Acronyms

Chapter one
Introduction
1.1 Background of the study
1.2 Statement of the problem
1.3 Data source and type
1.4 Significance of the study
1.5 Objective of the study
1.6 Organization of the paper

Chapter two
Review of Theoretical and Empirical Literature
2.1 Review of Theoretical Literature
2.1.1 Introduction
2.1.2 Energy, Growth and Environment
2.1.3 Renewable energy, Economic Growth and the environment
2.2 Empirical review
2.2.1 International studies
2.2.2 Studies on Ethiopia

Chapter three
Overview of Energy and Emission in Ethiopia
3.1 Ethiopia’s Energy sector overview
3.2 Overview of Ethiopia’s Emission Profile
3.3 Institutional and Policy Commitments and Developments

Chapter four
Data, Model and Methodology
4.1 Data, variables and model
4.2 Econometric methodology
4.2.1 Stationary or unit root test
4.2.2 Co integration and Error correction Model
4.2.3 Short run and long run models
4.2.4 Diagnostic and stability tests

Chapter five
Empirical Results and Discussion
5.1 Descriptive Analysis
5.2 Unit Root Test Results
5.3 Test Result for Co integration- bound test approach
5.4 Diagnostic and stability test results
5.5 Long Run Model Estimation result
5.6 Short Run Error Correction Model Estimation Results

Chapter six
Conclusion and Implication
6.1 Conclusion
6.2 Implications
6.3 Future research direction

References

APPENDICES

ABSTRACT

The Effect of Renewable, Non- Renewable and Biomass Energy Consumption and Economic growth on emission in Ethiopia.

Zerebruk Gebrekristos

Addis Ababa University, 2017

Recognizing the fact that the current reliance on traditional sources of energy is unsustainable, particularly from environmental grounds, the international community considers renewable sources of energy as a possible solution. But the effect of renewable and other sources of energy has to be evaluated in each country context separately. Hence the current study aim to examine the effect of consumption of energy from different sources (biomass, non-renewable and renewable) and economic growth on the emission of CO2 (the major gas emitted from the energy sector) in Ethiopia (a country embarking to modern renewable energy sources) using Autoregressive Distributive Lag (ARDL) methodological framework. Results of unit root test shows that all the variables are non-stationary in their level forms and stationary in their first difference. Bound test for co integration shows the existence of long run co integrating relationship among the variables. From the results, biomass energy is found to positively affect emission of CO2 in the long run. Non-renewable energy consumption also increases emission of the gas in both in the short run and long run significantly. In addition economic growth of the country under the study period leads to increase in emission of the gas. Therefore; it can be inferred that non-renewable (fuel) energy, biomass energy consumptions and the general economic growth of the country results in increase in emission of CO2 in Ethiopia and are not in harmony with the country’s objective of making the energy sector and the overall economic activity benign to the environment.

Key words: CO2 emission, Biomass, Renewable and non-renewable energies,

Autoregressive Distributive Lag, Ethiopia

Acknowledgment

First and for most no word can express my love and gratitude to my God and his mother St. Marry for helping me in my life.

My heartfelt gratitude also goes to my Advisor Dr Tekie, who is also my teacher both in undergraduate and master level studies. The present study is complete partly because of your valuable comments and suggestions -doctor. I am also thankful to Dr. Zelalem Gutu for your helpful suggestions for this research work. In addition questions and suggestions of both my internal and external examiners enabled the present study to have this form and hence deserve my gratitude. I am also indebted to all teachers who thought me at different levels.

Adaye enate and Gerye abate - it’s your effort and dedication to educate me that always strengthen me to pass all those difficult stages and complete my study. I am very grateful to all my family members too. I am also indebted to my uncle Yibra, Teshe and Moku.

ZZZAKHE, Eyob kindu, Mulay, and all other friends too deserve my gratitude. I would also like to thank all my classmates for the wonderful time we had together.

All CBE, Finfine branch staff members particularly Buzye, Bethi, Abye, Micky,Jerry and Emuye paid part of your time and money for my cause and deserve my gratitude. Mar-Je vous remercie. I also have to thank Alex and all the management staff for considering my class schedule while arranging the branch shifting programs. In addition I thank CBE credit association and its staffs for facilitating credit fund for my study.

I would also say thank you to music and all other who directly and indirectly support me while being in their own life struggle.

List of Tables

Table 5.1 Descriptive analysis table

Table 5.2 ADF test result

Table 5.3 Bound test result

Table 5.4 Long run model estimation results

Table 5.5 Short run model estimation result

List of Figures

Figure 3.1 Share of greenhouse gas emission by sector in 2010

Figure 5.1 CUSUM recursive residual test

Figure 5.1 CUSUMsq recursive residual test

List of Acronyms

ADB: African Development Bank

ADF : Augmented Dickey-Fuller

AIC : Akaiki Information Criteria

ARDL: Autoregressive-Distributed Lag

BAU: Business As Usual

BEC: Biomass energy consumption

Co2 : Carbon di oxide

CO2eq: Carbon di oxide equivalent

CRGE: Climate Resilient Green Economy

EEA: Ethiopian Economics Association

EIAGS: Environment Impact Assessment Governance system

EKC: Environmental Kuznets Curve

EPA: Environmental Protection Authority

EU: European Union

FDI: Foreign direct investment

FDRE: Federal Democratic Republic of Ethiopia

GERD: Grand Ethiopian Renaissance Dam

GHG: Greenhouse gas

GTP I: Growth and Transformation Plan I

IPAT: Population Affluence and Technology identity

IPCC: Intergovernmental Panel on Climate Change

Kg: Kilo gram

MENA: Middle East and North Africa

MoFED: Ministry of Finance and Economic Development

MoWE: Ministry of Water and Energy

MREC: Modern Renewable Energy Consumption

MT: Metric tone

MW: Mega Watt

NAFTA: North American Free Trade Agreement

NAMA: Nationally Appropriate Mitigation Action

NREC: Non-Renewable Energy consumption

RGDP: Real Gross Domestic Product

SDG: Sustainable development goals

UN: United Nations

UNEP: United nation environmental program

USA: United State of America

VAR: Vector Auto Regressive

VECM: Vector Error Correction Model

WDI: World Development Indicators

Chapter One

Introduction

1.1 Background of the study

Energy plays a vital role in economic and social development. Basically it is one major infrastructure that determines economic growth and development of a country. It is a vital input for economic and social development of any nation because it improves productivity of other factors and living standards. Fast and sustainable energy supply is crucial to economic growth. The high economic growth experienced by developing countries is achievable only with the consumption of a large quantity of energy use (Hailu et al, 2010).

A country with heavy consumption of energy is thought to have a high standard of living. Robust economic growth relies on the development of heavy industries, export and investment in fixed assets etc. which demand large energy consumption. Generally, energy is the life blood of modern economy. Though it is a key factor for economic activities, inefficient and wasteful utilization and distribution of energy causes environmental degradation. (Hailu et al, 2010; Kumar, 2012; Kulionis, 2013; Yangqing, 2012).

This heavy use of energy and other natural resources for economic activities causes environmental degradation because high energy consumption causes high carbon emission which is the main source of rising temperature and climate change.

Climate change is now affecting every country on every continent. It is disrupting national economies, affecting lives and costing people and countries. Caused by both the earth’s natural processes and human activity, over the past hundred years the mean global temperature has increased and the concentration of greenhouse gas in the atmosphere has risen, causing growing incidence of extreme weather conditions such as droughts, floods and hurricanes (Gross,2002).

Given this, the development-environment debate is one of the most important issues of the present time. Particularly the developing economies are expected to undertake their growth process without causing serious environmental damage. But, given the existing technology and science, it is not possible to grow without polluting the environment. That is, given the way the living style of the world’s population is constructed, the way production is undertaken and the way goods and services are consumed, pollution and general environmental degradation is expected. Countries meet their ultimate goal of reaching higher level of economic growth and development with different costs, among which is environmental damage or pollution.

World’s climate is changing due to both natural process with in itself and human economic activities. Burning of fossil fuel for energy consumption, clearing of forests for agricultural and other purposes and large industrial production are the main activities that lead to increase emission of the anthropogenic greenhouse gas to the atmosphere.

Various alternative means are recommended to reduce the emission of greenhouse gas. Among them energy consumption which is considered as the main responsible sector for the emissions is often criticized for causing global warming and climate change. (Ferhani and Rejeb, 2012; EEA, 2009). So in order to prevent climate change and global warming emission of greenhouse gas must be reduced by relying on efficient and environment friendly alternative energy sources.

Therefore, here is the paradox. Countries have to develop and relieve their citizens from poverty and help them lead decent standard of living. In order to grow and develop they have to produce and consume and this process requires the use of inputs, and energy is the main one. On the other hand, given the present inefficient use of energy, the use of this input leads to degradation of the environment which intern threats the very existence of living in the entire world.

Given this paradox the dilemma between economic growth and environment protection and the coordinated development of energy, environment and the economy and the achievement of sustainable development have become the center of attention (Yangking, 2012).

De-growth, energy efficiency and energy transformation are the three basic options for policy with respect to emission from the energy sources (ADB, 2012). The first option, which will curtain economic growth in their current position, is unthinkable since growth should be a must non-stoppable process given the fact that the world population is growing rapidly. The other two options are the way forward which requires the development of better technology in the sector. International environmental institutions like Intergovernmental Panel on Climate Change (IPCC) and different governments propose the need to shift to alternative environmentally friendly energy sources.

In this context many countries started to shift from traditional polluting energy sources to renewable alternatives such as wind, solar, geothermal and hydropower which are more environmentally friendly (Bozkurt and Yusuf, 2014).

The fact that renewable energy consumption is less harmful to the environment compared to non-renewable energy sources triggers the quest for renewable energy sources and consumption. This source is increasingly gaining share in national energy fuel mixes across both developed and less-developing economies. While developed economies are largely supporting the non-exhaustible energy sources for strengthening security of supply and mitigating climate change impacts through reduced greenhouse gas emissions, renewable energy sources provide favorable option for intensifying rural electrification and improve electricity access in less-developing economies where electricity infrastructure remains mostly low (Nepal,2008).

As stated in the IPCC special report (2012), though the exact contribution of these energy sources to sustainable development has to be evaluated in country specific context, they can offer the opportunity to increase energy access, mitigate climate change and environmental impacts and energy security. It is these and other advantages that initiate different institutions to advocate and countries to redirect their energy policy towards renewable alternatives.

Ethiopia, as one of the most vulnerable and hard-hited nation by the adverse impacts of global warming, has a good reason to participate and contribute to the global efforts at reducing greenhouse gas emission (EEA, 2009).

Energy consumption in Ethiopia is largely dominated by biomass energy sources which accounts for about 88 percent of the total consumption. The remaining balance is met by modern sources of petroleum and electricity. As a least developed country, total energy consumption and associated contribution to the global greenhouse gas emission of the country is among the lowest in the world (MoWE, 2012).

But the country being in the tropical region is with a high potential of modern renewable energy sources including solar, wind, geo thermal and hydropower.

As it is narrated frequently, the country’s economy is growing fast and the nation aims to reach middle income status before the year 2025 G.C., and hence the demand for more energy is inevitable. Unless the country is able to develop and utilize its alternative renewable energy sources, continuing with the traditional sources of energy, will result in enormous economic, social and environmental problems.

Cognizant of this fact, the FDRE government has initiated a Climate Resilient Green Economy (CRGE) strategy to protect the country from the adverse effects of climate change and build a green economy that will help realize its ambitions of reaching middle income status before the year 2025 G.C. while keeping greenhouse gas emissions low. Among the four pillars which the initiative identified as the green economy opportunities that can help the nation to reach its ambition are 1) expanding electricity generation from renewable sources of energy for domestic and regional markets and 2) leapfrogging to modern and energy efficient technologies in transport, industrial sectors and buildings. In line with this, the government is developing a lot of alternative energy sources particularly hydropower, wind, geothermal and solar energy.

Therefore studying the emission of greenhouse gas (which is the main one) of these different energy sources has a paramount importance for the nation embarking to alternative sources of energy.

1.2 Statement of the problem

The fact that growth and development are the only solution for ever growing human needs and the present way of undertaking this process is environment degrading makes the academia to devote to the study of this interaction.

The growth- environment interaction is the focus of research over the decades based on the environmental Kuznets curve (EKC) hypothesis. EKC is a hypothesized relationship between various indicators of environment degradation and income per capita. It states that the relationship between economic growth and pollution can be represented in an inverted U curve. Pollution increases in an early stage of economic growth and after a certain level of development it will present a downward trend (Stern, 2003; Zerbo, 2015).

This study of the relationship between economy and environment is pioneered by the path breaking works of Grossman and Krueger (1991). Using different environmental indicators and controlling for various factors affecting environment, they tried to assess the relationship between North American Free Trade Agreement (NAFTA)- a trade agreement between USA, Mexico and Canada on the environment (of Mexico particularly). They found out that general economic growth in Mexico is expected to alleviate pollution problems given that the country’s per capita GDP reached the level that further growth should generate increased political pressure for the environmental protection and a change in private consumption behavior.

In 1992 Shafik and Bandyopadhyay explored the relationship between economic growth and environmental quality on 149 countries. Their panel regression results suggest that some environmental indicators improve with rising income, others worsen and then improve and others worsen steadily reflecting social choices about environmental quality at different income levels.

Following these pioneer studies many researchers tried to study the economy-environment interaction in different contexts, countries, using different methodologies and hence obtained different results. These studies can be categorized in to two or three lines. The first line of research considers the environmental implications of the growth process via testing the EKC hypothesis. That is representing environment by CO2 emission, deforestation or other variable, they try to analyze the effect of growth activities in these parameters. Gossman and Krueger (1995), Tekalign (2015) are among the studies in this line.

The second lines of studies are those that try to examine the dynamic link between energy use, economic growth and environmental pollution together in a multivariate framework. These are studies that made energy consumption-environment pollution relationship their main focus. These Includes Magazzino (2014), Zerbo (2015), Ferhani and Rejeb (2012), Cetin and Ecerit (2015), Linh and Lin (2015), Tekalign (2016).

The studies by Magazzino(2014), Zerbo (2015)(for some countries), Kohller(2013) and Cetin and Ecerit (2015) indicate that higher energy consumption significantly and positively affect economic growth and pollution while other studies like Zerbo (for some countries) found no effect or negative effect on both growth and pollution. Others like Tiwari (2012) obtained no effect of energy on growth but negative effect to pollution which has important policy implications for energy development, growth and environmental policies.

The common nature of the above two lines of studies is that there is no consensus on the area, particularly the relationship between energy and environment. This might be due to the difference in the countries per capita GDP level and other methodological differences. That is, in wealthier countries time related effects that reduce environmental impacts overwhelms the scale effect which increases pollution and other degradation. On the other hand the scale effect dominates the time related effects in developing countries (Stern, 2003).

Recently researchers are trying to treat energy in a disaggregated form. Here rather than considering different energy sources with different environmental implications in aggregated form, they try to treat them differently as renewable and non-renewable etc. These kinds of researches are more practical and have better policy implications than the previous studies for planners and various institutions to act accordingly by providing practical and specific recommendations. Among the researches in this line are studies by Yazdi et al (2013), Farhani (2015), Jebli and Yousef (2015), Silva et al (2012),Abolhosseini et al (2014), Kulionis (2013).

The studies by Yazdi et al (2013) for Iran, Ferhani (2015) for 12 MENA countries and Jebli and Youssef (2015) for Tunisia found out that increase in renewable energy consumption lead to a decrease in emission of in the respective countries though its share in most of the countries is small. Silva et al (2012) for a sample of four countries, Kulionis (2013) for Denmark and Abolhosseini et al (2014) for EU-15 member states studied the causal relationship between renewable energy, GDP growth and emission using a VAR framework and found that renewable energy development and consumption will reduce emission in all countries in comparison to no-renewable energy.

Almost all of the above studies that treat energy in disaggregated forms found out that renewable energy is less harmful to the environment than non-renewable energy sources. From these empirical findings it can be inferred that renewable energy sources can be a good environmental friendly alternative source of energy to the traditional sources.

Though these results suggest that renewable energy sources are less harmful to the environmental than non-renewable sources, the exact contribution of renewable sources for emission of greenhouse gas has to be evaluated in each country specific context (CRGE, 2012).

In Ethiopia, to the best of the researcher’s knowledge, there is no major study dedicated to analyze the comparative effect of alternative sources of which is very demanding given the fact that the country is investing a lot in a renewable sources especially hydropower, wind, solar and geothermal.

Therefore, current study will fall in this more recent and rare line of studies which treat energy sources in disaggregated form and tries to fill the gap. The study has no intention of checking the validity of EKC hypothesis even though it looks at the relationship between economic process and environmental pollution through checking the effect of different energy sources on the emission of in the country.

1.3 Data source and type

The annual time series data covering the period from 1981-2014 for modern renewable energy consumption, biomass energy consumption, non-renewable energy consumption, GDP and emission for Ethiopia is collected from World Development Indicators (World Bank data base). emission (measured in metric tons per capita) is the dependent variable and modern renewable energy consumption per capita (MREC), biomass energy consumption per capita (BEC), non-renewable energy consumption per capita (NREC) and GDP per capita are independent variables.

Auto Regressive Distributed Lag (ARDL) methodological framework is used to check the effect of these alternative sources of energy to the country’s emission of .

1.4 Significance of the study

Generally, since the country is at a good economic progress and increasing energy consumption, it is appropriate to have this study which examines the implications of renewable energy sources. Particularly renewable energy sources are gaining more attention in the country’s energy and general growth and development policies and strategies and a lot is being invested on it. This fact and absence of previous studies in the country that treats energy sources in disaggregated form motivated the present study which can have high implication to policy.

1.5 Objective of the study

The present study will generally examine the energy – emission relationship in Ethiopia with a particular emphasis on different energy sources.

Specifically the study seeks to check

i- The effect of consumption of modern renewable energy on the emission of
ii- The effect of consumption of biomass renewable energy on the emission of
iii- The effect of consumption of non- renewable energy on the emission of .
iv- The effect of growth in GDP per capita on emission of in Ethiopia.

1.6 Organization of the paper

The remaining part of the study is organized as follows. Chapter two contains the existing theoretical and empirical reviews on the study area. Chapter three deals with the country’s profile with regard to energy consumption and development, emission of greenhouse gas and institutional and policy efforts in the country towards renewable energy alternatives. Chapter four entirely explains the methodology used to achieve the objective of the study. Chapter five is devoted to the result of the descriptive and econometric study and discussions on the obtained results. The last chapter is all about conclusion and recommendation.

Chapter Two

Review of Theoretical and Empirical Literature

2.1 Review of Theoretical Literature

2.1.1 Introduction

Economic activity, which is part of the natural environment, interacts with the environment in complex and dynamic ways. The environment provides different services to the economic system. These include material and energy resources as inputs, spiritual and educational values, life support services and waste assimilative capacity. The air we breathe, the water we drink, the beauty and diversity we observe, rainfall and soil that affect the productivity of the production process are the critical contribution of the environment to the economic system. In turn the environmental impacts of economic activity can be seen in terms of extraction from or insertion in to the environment. That is economic activity affects the natural environment by the emission of anthropogenic pollutants that degrade the nature and change the global climate (Perman et al., 2003; Grossman and Krueger, 1995).

The size and structure of the economic activity is fundamentally shaped by the environment and the environment in turn is affected by the use of resource and generation of pollution and wastes from the economic system. This emission of wastes and pollutants and degraded environment affect the general system of the environment which manifests the change in the form of changing climate- which is mostly mentioned as the problem of global climate change.

Climate change is now recognized as one of the major threats to human existence. People are experiencing the significant impacts of climate change which is manifesting itself in terms of more extreme weather events, destructive storms, melting glaciers and rising sea level. It is affecting every country and disrupting national economies, affecting lives , costing people and communities dearly today and even more tomorrow (EEA, 2009; UNSDG, 2016). The accumulation of greenhouse gas in the atmosphere in the past century is already influencing today’s climate and the trend is likely to become more profound with time (ADB, 2012).

Though natural process itself can lead to the change in the climate system, anthropogenic forces associated with human economic activities is the main driving force behind climate change. Extraction of resource for production, clearing of forests and other resources for energy use and other land use purposes etc. leads to the increase in the accumulation of greenhouse gas.

This accumulation of greenhouse gas in the atmosphere is the main driving force behind the change in the world climate and the main contributors to this accumulation is emission from the developed and emerging large economies. The six largest contributors to the emission of - which is the major greenhouse gas in the atmosphere, in 2013, (according to the report by the European commission) are China, USA and European Union, India, Russian Federation, and Japan. On the other hand, the poor with lower adaptive capacity is the most vulnerable to the adverse impacts associated with changing climate. This is because climate change is a global challenge that doesn’t respect boundaries. Emissions anywhere affect people everywhere.

The impact of climate change is becoming a ‘’clear and present danger ‘’ now than ever since it is costing millions of lives. As a result the international community’s attention to the cause, effect, and solution to the issue of climate change gets momentum over the last few decades. Given this, the dilemma between economic growth, societal improvement, and environmental protection and the achievement of sustainable development become the center of attention (Yanqing, 2012).

Consequently, sustainable development which represents a paradigm linking economy, society and the environment and aimed at economic and social development integrating with environmental protection become on the center of the discussion (IPCC, 2014; ADB, 2012). Sustainable development is a development that meets the needs of the present generation without compromising the ability of the future generation to meet their own needs. However, it is a general concept and doesn’t provide on how to achieve this.

As a result in order to provide a concrete policy frameworks to the broad concept of sustainable development and on how economic development and environmental sustainability can reinforce to each other and create a win-win synergy to achieve the three pillars of sustainable development (economy, society and environment), green growth emerged as an alternative path to the conventional growth path (ADB, 2012).

Green growth as defined by the World Bank 2012 is a growth that is efficient in the use of natural resources, clean in that it minimizes pollution and environmental impacts and resilient in that it accounts for natural hazards. It is an economic progress that fosters environmentally sustainable, low carbon and socially inclusive development (UN, 2010 cited in ADB 2012).

Both green growth and sustainable development are meant to give insights and future policy directions to the two basic challenges of the present world particularly economic world which are societal equity and environmental sustainability. That is any growth process should be inclusive and the benefits of the growth should trickle down to every part of the people to be sustainable. Otherwise the process will end up in to societal and political crisis. On the other hand that growth process must not pose problems to the natural environment which is giving back what it receives in the form of hazards and extreme events and in the long run may threaten the very existence of the human being.

Thus the persistence of environmental degradation and continued inequality in Africa necessitates green growth as path way to achieve sustainable development and create green economy –an economy that result in improved human wellbeing and societal equity while significantly reduce environmental risks and ecological scarcities (UNEP, 2011 cited in ADB, 2012).

Given this different countries started to look for alternative growth path that can be able to mitigate and adapt to climate change and create green economy than following the conventional path.

2.1.2 Energy, Growth and Environment

Energy is a crucial determinant of economic development and general civilization of human being. It is considered as one crucial factor of production or input to all of the goods and services we have today. Since all production involves the transformation of inputs in to products for consumption and all such transformation requires energy, many regarded it as the life blood of modern economy (Kulionis, 2013). It plays an important role in the economic development of a country through enhancing the productivity of other factors of production.

There is a strong connection between the energy sector and the national economy. The development and status of the sector is very much related and dependent on the country’s level of socio-economic development. On one hand energy demand, supply and pricing have impact on the socioeconomic development, living standard and overall quality of life of the people (EEA, 2009). Fast, stable, uninterrupted, sustainable and reasonably priced energy supply is vital for economic growth and for maintaining and improving the living standard of all people. Inefficient, and wasteful utilization and underdevelopment of the sector stagnates social and economic development (Hailu, 2010; Kulionis, 2013).

On the other hand higher level of economic development could induce more energy consumption. The nature and status of the economy and changes in the structure, the prevailing macro -economic conditions determine energy demand and supply (EEA, 2009).

The direction of the causal relationship between energy and economic growth though not conclusive is categorized in to four types hypothesis of which has important policy implications.

1- Neutrality hypothesis- there is no causality between energy consumption and economic growth. Given the insignificant share of the sector in total GDP, this hypothesis asserts that increase or decrease in energy consumption have no significant impact on the economic growth. In this case energy conservation policies have no significant impact on the overall economic activity.
2- Conservation hypothesis- there is a unidirectional causality running from GDP to energy. This is the case when a greater economic activity stimulates the use and further production of energy.
3- Growth hypothesis – unidirectional causality running from energy to economic growth. That is energy contributes towards economic growth both directly in the production process and/or indirectly as a complement to labor and capital. The implication is that policies aimed at energy conservation may potentially have a detrimental impact on economic growth.
4- Feedback hypothesis- bi directional causality implying interdependent relationship between GDP and energy consumption where each component may act as a complement to each other. That is, increase in energy consumption results in increase in GDP or vice versa and the other way round, increase or decrease in GDP may result in increase or decrease in energy consumption or vice versa (Kulionis,2013; Magazzinno,2014). The empirical studies, studying this causality doesn’t reach consensus yet.

Though energy production and consumption is a crucial determinant of the growth and development of any modern economy, the sector is highly criticized from the environmental grounds. Energy affects environmental quality through deforestation associated with unsustainable biomass energy dependence, emission from burning fossil fuel (petroleum and coal) which are considered as the major source of emission of greenhouse gas to the atmosphere.

As clearly understood, high energy consumption is one of the lines demarcating developed nations from developing countries. It is unquestionable that heavy energy consumption is a must for a fast economic growth. However, fast and rapid economic growth can have negative environmental implications since the current production process relies on inputs that are environment damaging (particularly energy sources).

Studies examining the relationship between economic growth and various indicators of the environment test the validity of the so called Environmental Kuznets Curve (EKC) hypothesis. The EKC concept first emerged in 1992 with a path breaking works of Grossman and Krueger whose studies suggests that the environment impact indicator as an inverted U shaped function of economic growth.

EKC is a hypothesized relationship between various indicators of the environmental degradation and income per capita. In early stages of economic growth, environmental degradation and pollution increases but beyond some level of growth the trend will reverse so that at high income levels economic growth leads to environmental improvement (Stern, 2003). As economic activity expands, emission of pollutants tend to increase since some pollutants are natural bi products of economic activities and the current way of producing and consuming are not environmental friendly (Krueger and Grossman,1991). Energy and power production and consumption, trade, transport, construction, industrial production etc. all which are the backbones of any economy produces large amount of wastes and pollution that can degrade the environment.

This proportional increase in the pollution and other environmental wastes from the pure growth in the scale of the economy and due the in ability of the economy to change in the structure and technology is referred as scale effect (Stern, 2003).

But once the economy reaches certain level of income various factors influence production and consumption behavior and lead to reduction of pollutants and improvement in the environment. First as the scale expands there will exist changes in production system such as changes in input and output mix of production which involves the substitution of less environmentally damaging inputs for more damaging inputs. Second, improvements in the technology involve changes in production efficiency and hence reduce emission. Third, as the society becomes richer it began to care for the environment and hence pressurize both the private and public sectors to consider environmental issues beyond its own protection. Finally, due to the public’s demand and other reasons government will formulate environment protective laws and policies and employ appropriate institutions that can establish the conditions for environmental improvement (Stern, 2003; Grossman and Krueger, 1991).

Accordingly, this time related effects of production system, societal awareness and institutional and legal factors are expected to bring improvement in the developed economy’s environment.

However, the EKC hypothesis, though seems robust is criticized from may grounds particularly its theoretical inadequacy. First the assumption of exogenously given income seems unrealistic. The damaged environment can have a feedback impact on economic activity in different ways and hence can affect the income level. Second aggregate pollution might not be declining in developed countries as it is being observed that as some wastes like sulfur and nitrous oxide decline, others like CO2 and solid wastes increase (Stern, 2003).

Third, the strong environmental regulation in the developed counties may lead to the migration of industries with higher pollution to developing countries and hence the decline in developed countries pollution and the increase in the developing countries. Forth the environmental improvement expected from developed nations might also be possible in developing ones and good environment might be possible before the assumed higher income level. This is because there is an informal regulation in developing countries, availability of better information now than ever, trade liberalization which can bring more efficient and environmental friendly production etc. (Stern,2003).

2.1.3 Renewable energy, Economic Growth and the environment

Economic progress inevitably hurts the environment given the current way of producing and consuming goods and services. The damaged environment in turn is affecting economic, social and other aspects of human being. It even endangered the very existence of human creature. On the other hand economic growth and development are not options but a must survival issues particularly for developing countries. Thus alternative growth and development paths must be followed for this dilemma between economy and environment. Therefore an economic progress must be clean in the environmental grounds, in order to benefit the intended population particularly in the long run.

Given the fact that the energy sector is one major sector contributing to the accumulation of greenhouse gas in the atmosphere which is responsible for the global climate change, transforming the sector to alternative sources which are clean and environmental friendly is a burning issue.

De-growth, energy efficiency and energy transformation are the three basic options for policy with respect to emission from the energy sources as presented by the African development report (2012). The first option is unthinkable since growth should be a must non- stoppable process given the fact that the world population is growing rapidly. The other two options are the way forward which requires the development of better technology in the sector. Energy efficiency (increasing output per unit of energy input) is one important process for creating low carbon pathways. It includes improving the efficiency of end use technologies and processes and the system in which they are used in all spheres from household to the industries (ADB, 2012).

International environmental institutions like Intergovernmental Panel for climate change (IPCC) and different governments propose the need to shift to alternative environmental friendly energy sources. In this respect renewable energy can potentially play a crucial role to increase energy supplies and reduce emission.

Finiteness for exporting countries, risk of heavily depending on imports for importing countries and associated health and environmental impacts for the entire world of fossil fuel (coal and oil) energy sources called for the development of alternative renewable energy sources.(Kulionis, 2013). Renewable energy represents the broad category of energy flows occurring in the natural environment that can be captured for use up to their rate of replenishment. They include hydropower, wind and solar energy, tidal and wave energy, ocean and geothermal energy, and biomass energy. Modern renewable energy alternatives, such as hydropower, geothermal, wind and solar are cleaner in their very nature and hence their effects on the environment particularly to the emission of is benign. There are still critics in these sources, especially on hydropower from the ecological perspective that it can harm ecosystem during its production.

But the case with the traditional biomass energy is an exception. It can only be considered as renewable and environmental friendly, if only if it is produced in sustainable manner. That is from environmental point of view it can only be acceptable if it gets produced from animal and plant wastes. But if not and is produced by cutting living trees and not reforested then it will have more greenhouse gas emission and even bigger climate change impacts.

Consequently the nature and source of production of biomass energy determines its competitiveness from environmental aspect. If it is prepared in sustainable manner it will have important co benefits to the environment in particular. These include reduction of emission of carbon, methane and sulfur, reducing deforestation and desertification, reducing dependence on imported energy from abroad given its abundance.

In general renewable energy can provide important benefits as compared to fossil fuel energy sources. As presented in IPCCs special report on the renewables, renewable energy can offer a number of benefits (1) social and economic development, (2)energy access and security (3) climate change mitigation and reduction of environmental and health impacts.

1) Economic and social benefits

Development of renewable energy can enhance economic and social development indifferent ways. It can create ‘’green jobs’’ in the production level and but mainly in the service end of the supply chain including in distribution, sales, installation, maintenance etc. It can decouple the energy –growth relationship by serving as a sustainable input to production and consumption in the economy. Renewable energy, which is environmental friendly, can help social development through supporting human health and women in particular who are suffering high from the unhealthy energy sources. Since it is renewable and doesn’t reduce the future harvest, it sustains natural capital (ADB, 2012).

It can also improve the efficiency of the economy that is through a modern technological development and thereby reducing energy intensity (the amount of energy needed to produce one more unit of output) (ADB, 2012).

It is also imperative that fast and high economic development can enhance the investment and technological development in the energy sector and improve the efficiency of renewable energy technologies.

But the main challenge with the deployment of renewable energy can be the cost associated with production, installation and distribution which can hamper the other sectors growth process

2) Energy access and security

Access to modern energy system is a crucial component in transforming the economy and makes the poor to improve its living standard. Developed countries achieve their growth and development agenda by exploiting renewable and non - renewable energy.

In this regard renewable energy sources provide opportunities for low or non-electrified rural poor as alternative source of energy for different a purpose which includes cooking and lighting. As the supply and distribution of stable and sustainable energy facilitates growth, interrupted power supply may result in series economic, social and political problems (ADB, 2012).

In addition renewable energy can provide additional alternative to rely on multiple sources of energy than single fossil fuel sources there by reducing risks.

Local renewable energy development can reduce imports and save foreign exchange of a given country and facilitates growth activities in other sectors of the economy by redirecting the funds. Beyond the funds importing (particularly extracting and transporting) of fossil fuel is susceptible to different risks and hence the local development of RE sources can overcome this risk (ADB, 2012).

3) Climate change mitigation and health benefits

Renewable energy can provide important advantages in particular in the reduction of greenhouse gas which is causing the global problem of climate change. This is because greenhouse gas from renewable energy technologies is in general, lower than those associated with fossil fuel energy.

Non-combustion based renewable energy power generations significantly reduce air pollution and lower associated health impacts. This mitigation potential of dangerous anthropogenic pollutants is the main driving force behind the global support of renewable energy.

Lowering the amount of this dangerous gases which have health impact such as particulate matter, nitrous oxide, sulfur di oxide, CO2 etc. means improving the health of the people and especially the rural women and therefore enhance the productive potential of the economy (ADB, 2012).

2.2 Empirical review

2.2.1 International studies

Following the path breaking works of Grossman and Krueger (1991) who tried to examine the impact of NAFTA on the environment, there emerged extensive studies examining the relationship between economic progress and environmental degradation. These different countries studies which employ different methodology and varying number and type of variables and hence obtain different results can be categorized in to three lines.

The first line of studies that tries to examine the growth-environment interaction there by checking the validity of the EKC hypothesis represents the economic activity by GDP per capita and environment by emission of different pollutants, deforestation etc. Some of these studies simply aim to check the EKC hypothesis, by seeing the relationship between environment impact indicator and the GDP per capita, while others examine the relationship and causality of different variables that can represent the economic activity such GDP per capita, , trade openness, FDI etc. and the environment impact variable. The popular studies by Grossman and Krueger (1991), Shafik and Bandyopadhyay (1992) and Grossman and Krueger (1995) fall in this line.

Using different environmental indicators and controlling for various factors affecting environment, Grossman and Krueger tried to assess the relationship between North American Free Trade Agreement (NAFTA)- a trade agreement between USA ,Mexico and Canada on the environment (of Mexico particularly). They found out that general economic growth in Mexico is expected to alleviate pollution problems given that the country’s per capita GDP reached the level that further growth should generate increased political pressure for the environmental protection and a change in private consumption behavior. They also found that NAFTA will increase Mexican specialization in sectors that cause less harm to the environment and hence positive impact for the environment.

In 1992 Shafik and Bandyopadhyay explored the relationship between economic growth and environmental quality on 149 countries. Their panel regression results suggest that some environmental indicators improve with rising income, others worsen and then improve and others worsen steadily which the authors see this relationship as reflecting social choices about environmental quality at different income levels.

Using multiple countries panel data Grossman and Krueger examine the relationship between per capita income and various environmental indicators in 1995. They included urban air pollution, focal contamination of river basins, contamination of river basins by heavy metals and the state of oxygen regime in river basins as environmental impact indicators. Conforming the above two studies they found no evidence of steadily environmental quality deterioration with rising income. Rather, for most indicators, they found that economic growth brings an initial phase of deterioration followed by a subsequent phase of improvement.

The second lines of studies are those that try to examine the dynamic link between energy use, economic growth and environmental pollution together in a multivariate framework. Considering the fact that the energy sector is the main contributing sector for the emission of greenhouse gas in the atmosphere, studies on this line examine the environmental impacts of the sector and the general economic activity. There are multiple studies on this line too, though the results are still inconclusive and call for further study on the topic.

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