Economic growth, renewable energy and financial development in the CPTPP countries

Abstract

The trade agreement is generally considered an effective mechanism to encourage trading activities. However, trade activities may lead to environmental degradation because more trade is generally associated with more energy consumption. In addition, financial development with an increased flow of capital among members is required to fund trading activities. Renewable energy can be a moderating factor to balance the effects of trade activities and financial development on the economy and the environment. This paper focuses on the inter-relationship between growth-energy-finance nexus for the CPTPP members in the 1971-2020 period. While the energy-growth-environment nexus has been extensively investigated, the energy-growth-finance relationship has been largely ignored in existing literature, particularly for the CPTPP countries. Our findings can be summarized as follows. First, we find that renewable energy consumption does reduce CO2 emission while financial development does not necessarily increase environmental degradation. Second, financial development is found to cause renewable energy usage bilaterally. Finally, when different proxies are used for financial development, a bilateral causality relationship between renewable energy usage, financial development and economic growth is confirmed. These important findings imply that the governments of the CPTPP countries should encourage renewable energy usage to achieve the dual objectives from the CPTPP trade agreement: (i) to increase trade activities; and (ii) to support further financial development within the region. These two objectives together support economic growth.