Redefining economic trajectories: examining the U-shaped dynamics between renewable energy and economic leading indicators

Abstract

The shift from fossil fuels to renewable energy presents both opportunities and challenges for economic stability. This study investigates the relationship between renewable energy consumption and economic performance in Indonesia, using data from 1994 to 2022. Specifi-cally, it explores a potential U-shaped dynamic between renewable energy and economic composite leading indicators (ECLI). The Autoregressive Distributed Lag (ARDL) model is employed as the primary method of analysis, with additional robustness checks using Robust Least Squares, Fully Modified OLS, Dynamic OLS, and Granger causality tests. Results reveal a U-shaped relationship: in the short term, increased renewable energy use is associated with declines in economic indicators, but beyond a certain threshold, its impact turns positive in the long term. These findings contribute to the literature by providing novel evidence of the nonlinear effects of renewable energy on economic growth in a developing economy. Pol-icymakers are encouraged to implement phased strategies, invest in innovation, and provide targeted incentives to maximize the economic and environmental benefits of renewable energy adoption.