European Countries on a green path. Connections between environmental quality, renewable energy and economic growth

The paper investigates the environment-energy-growth relationship by exploring a panel data on 30 European economies for the period 1995-2015. We start by exploring traditional relation between environmental pollution expressed in green houses gases emissions as a whole (Kyoto Basket) as well as their three main components, carbon dioxide (CO2), dioxide of methane (CH4) and nitrous oxide (N2O), and per capita income extending the model by considering the role of renewable energy sources (RES). Our results, based on both fixed effects and instrumental variable methodology, demonstrate that traditional U-shape environment-growth relationship that holds for European countries is strongly influenced by the presence of RES through the shift of the turning point to higher per capita income levels. Moreover, the estimates show that with the increase of per capita consumption based on RES, environmental pollution tends to decrease in different measures, in according to the specific pollutant. As argued in the economic literature, the increase in consumption from renewable sources may generate a substitution effect, which mostly influences nuclear energy rather than fossil fuels, leading to increasing the income level of the turning point. Our results show that this increase could be due to the endogenous nature of income and to omitted variables distortion, thus revealing the true turning point. This would suggest that the process of energy transition, through the diffusion of low-emission energy sources, should accelerate to produce significant impact on pollution reduction.