The Impact of Renewable Energy Diversity on Inflation: A Case Study Based on China

Abstract

The rise in energy prices due to global uncertainties and risks is accelerating the transition to renewable energy in countries. It is expected that embracing energy diversity instead of dependence on a single energy source, such as oil, will curb energy-related increases in inflation. In this study, the impact of the transition to renewable energy on inflation is investigated using the energy diversification index. For this purpose, the Chinese economy is analyzed with the Augmented ARDL method. According to the long-term results of the analysis covering the 1991–2023 period, the effect of energy diversity on inflation is negative. The study also examined the effect of composing an energy portfolio consisting of various renewable energy sources rather than a single renewable energy source on inflation. According to the results obtained, renewable energy diversity has a negative effect on inflation, too. As a result, inflation is expected to decrease as renewable energy diversification and overall energy diversification increase. In sum, inflation can be expected to fall when authorities increase both renewable energy diversity and overall energy diversity instead of solely depending on oil or any renewable energy source.