Does improvement in capital intensity facilitate the transition to renewable energies? Evidence from Tunisia

Abstract

The objective of this study is to investigate the potential role of capital deepening in promoting the transition to renewable energy in Tunisia. To this end, the long and short run effects of capital deepening on the renewable energy transition were explored using the vector error correction model (VECM) and the Johansen cointegration technique, along with a linear and nonlinear causality test in the context of Tunisia for the period 1990 to 2018. In particular, we found that capital deepening contributes positively to the transition to clean energy resources. In fact, the results of the linear and nonlinear causality tests confirm a unidirectional causal relationship between capital intensity and the transition to renewable energy. This explains that the increase in capital intensity ratio conducts technical change towards renewable energy, which constitutes a capital-intensive technology. Moreover, these results enable us to draw a conclusion about the energy policies in Tunisia and the developing countries in general. In fact, the renewable energy substitution depends on capital intensity, through the development of specific energy policies, such as renewable energy policies. Gradual substitution of fossil fuel subsidies with renewable energy subsidies is essential to faster the transition to renewable energy and promote capital-intensive production methods.