Impacts of Renewable Energy on Output Elasticities and Implications for Factor Shares in European Countries

Abstract

The objective of this paper is to examine, for a panel of seven countries from the European Union, spanning the period 1986-2015, whether the use of renewable energy impacts their output elasticities of capital and labor and, thereby, influences the factor shares. By applying a set of models from threshold analysis, the analysis detects-for the first time-the presence of thresholds in the use of renewable energy with nontrivial consequences; notably, once the thresholds are crossed, the output elasticity of capital declines, while the output elasticity of labor rises. These changes in the elasticities indicate substantial changes in factor shares triggered by the identified threshold level of renewable energy consumption. This paper also finds changes in output elasticities of factors of production for other threshold variables including energy production from oil and gas or coal. These findings portray a complex and non-linear relationship between energy sources (e.g., renewables and non-renewables) vis-à-vis the economic growth level (e.g., GDP), with far-reaching consequences for factor shares from using renewables vis-à-vis non-renewables. Accordingly, it can be assumed that the changes in factor shares can, in turn, shape the incentives for the adoption of renewables within the selected European nations. Hence, future economic policies should emphasize the augmentation of renewable energy in the national energy system in order to sustain the rate of economic growth.