Does renewable energy substitute LNG international trade in the energy transition?

Abstract

Renewable energy is a vital tool for the energy transition and sustainable development goals. The global economy, however, remains heavily reliant on fossil fuels despite efforts to reduce global greenhouse gas emissions. Demand for natural gas is rising as a bridge for moving towards a low-carbon economy, but whether natural gas and renewable energy represent substitutes in the global energy mix remains underexplored. We tackle this concern by examining the impact of renewable policies on international trade in liquified natural gas (LNG) among 1359 trading partners during the period 1988–2017. We measure renewable energy policies based on the ratio of renewable energy to total energy usage in importing trading partners, which also corresponds to a proxy for energy transition policies. The analysis is conducted using a global panel dataset in a trade gravity framework by applying various econometric methods and model specifications to measure LNG trade as a dependent variable. The results show that the energy transition, measured by the share of renewable energy, has a negative impact on LNG trade. This suggests that investing in cleaner energy technologies can reduce LNG trade globally, as a channel towards reducing natural gas demand. The results are consistent with the narrative where natural gas and renewable energy represent partial substitutes at the global level. However, subgroup analysis suggests that less-developed economies and the shale revolution period seem to impede progress towards the energy transition.