Renewable Energy Consumption and Financial Development in the EU Context

This paper investigates the relationship between Renewable Energy (RE) consumption and financial development in the European Union (EU), using a broad set of financial indicators, including measures from the International Monetary Fund (IMF), country-specific RE prices, and the OECD Market-Based Environmental Policy Stringency (EPS) index. Employing a System GMM estimator over the period 2005–2019 for a panel of 14 EU advanced economies, the empirical findings show a statistically significant positive relationship between financial development and RE consumption, emphasizing the importance of well-developed financial systems in supporting renewable energy demand. The estimated coefficient on lagged RE consumption is close to 0.97, implying a high degree of persistence and a slow adjustment of RE demand toward its long-run equilibrium. In line with conventional inverse demand dynamics and the regulatory push toward sustainability, lower RE prices and higher environmental policy stringency are associated with higher RE consumption: in the short-run, a 1% reduction in the levelized cost of electricity (LCOE) for renewables increases RE consumption by about 0.02%. Long-run elasticities calculated from the dynamic specification indicate that a 1% increase in broad IMF financial development indicators can raise RE consumption by roughly 3–7%, depending on the specific dimension considered. These elasticities are useful inputs for the calibration of theoretical macroeconomic models that incorporate RE and financial development, and they suggest that EU green-finance policies should prioritize the depth, access, and efficiency of both financial institutions and markets to sustain the transition toward renewable energy.