Modeling the effects of renewable energy on sustainable development: evidence from simultaneous equations models

This study aims to examine the three-way linkages between renewable energy consumption, carbon dioxide emissions, and human development index for a set of 14 Mediterranean countries over the period spanning from 1990 to 2016. We used the simultaneous equations approach to estimate these linkages. This system of equations is estimated by the three-stage least squares (3SLS) and seemingly unrelated regression (SUR) methods. These techniques allow it possible to assess all the parameters of the models at the same time and to solve the endogeneity issue. We have shown that renewable energy makes a substantial contribution to improving economic conditions and sustainable development levels. Our results confirmed that renewable energy consumption generates a negative effect on CO2 emissions, thus confirming the idea that employing new sources of cleaner energy is the best way to tackle this issue. We also found that the nonlinear relationship between pollution level and economic development, defined by the inverted U-shaped quadratic form, is confirmed in SUR estimation, but it is not validated in 3SLS estimation. In this context, some countries such as the Mediterranean countries are taking the initiative to restructure their energy consumption profile by investing heavily in the renewable energy industry. Therefore, the transition from the fossil fuels use to renewable energy is not a choice, but an urgent issue to achieve climate stability and, in turn, the goals of sustainable development.