Impact of Renewable Energy from a Macroeconomic Perspective - Case Study Example

Impact of Renewable Energy from a Macroeconomic Perspective

Introduction

Renewable energy that is geothermal, solar, the wind, biomass and hydroelectric power provide substantial benefits for both the economy and the environment. All these sources of energy have different benefits cost thus implying that policymakers ought to analyse the opportunity cost of implementing each technique before its deployment. In the twenty-first century, the world is facing the challenge of managing the transformation from a predominantly carbon intensive economy to one that is premised on sustainable energy sources (Quaschning, 2005). The reality of global climate change as a result of increased carbon emissions to the atmosphere makes it imperative for countries across the world to cut their consumption of carbon based fuels by implementing sustainable energy sources. The transition to sustainable energy is crucial to meeting development and climate objectives even as policymakers consider options at their disposal understand the socio-economic benefits of this change of practical importance. The essay will analyse the impact of renewable energy from a macroeconomic perspective by assessing quantitative data from across world economies (Del Río and Burguillo, 2009).

It is prudent that acceleration in the deployment of renewable energy contributes to economic growth, enhanced human welfare, the creation of employment opportunities as well as contributes to a safe climate future. Advances in sustainable energy technologies have strengthened the business case for renewables and opened new possibilities for nations across the world to transform their energy systems. The paper will outline the benefits of scaling up renewable energy that include increased competitiveness in the global market, increased capacity to meet energy needs of the growing population, improve the well-being of the people as well as increasing the productivity of natural resources.

Energy Fuels and Global Economic Actions

As the world's population expands, the overall power consumption increases a factor that is associated with improved living standards of people across economies. Ideally, according to Chien and Hu (2007), the demand for energy is expected to increase by 21% by the year 2030. Consequently, the increasing concerns over climate change are prompting governments across the world to seek alternative ways of supplementing their energy requirements by employing technologies that minimise greenhouse gas emissions as well as the overall environmental impact of these techniques. It is prudent that the energy sector significantly influences the sustainability and vibrancy of the entire economy right from job creation, resource efficiency as well as environmental conservation (Teske et al., 2012). Ideally, all sectors of the economy depend on energy for their productivity. However, the degrees to which different areas are dependent on energy reserves are not constant. Major shifts in the power have vibrant ripple effects throughout the economy since fluctuation in the cost of energy will alter the cost of production a factor that will influence the final price of commodities thus changing the cost of living (Outlook, 2010).

Energy is crucial since it has a first-hand effect on the economies since all macroeconomic activities tend to be influenced by fluctuations and spillovers in the energy sector. For instance, in 2011, Japan was hit by a strong earthquake that disrupted its nuclear power plants that the country depended on for its energy needs. The event disrupted the automobile industry since the production volumes dropped by three-fold after that occurrence adversely affecting the Japanese economy (Moreno and Lopez, 2008). Similarly, the recent global oil price volatility that has affected oil prices has adversely impacted the economies of oil producing countries especially Saudi Arabia, Iran, Kuwait just to name but a few since their economies are predominantly depend on oil. Relatively, even as global economies struggle to maintain their momentum on adopting renewable energy technologies, the focus remains on the benefits that come with these techniques that include economic growth and job creation. Ideally, the benefits of renewable energy are crucial in policy formulation since it triggers the balance for low carbon investments. In that regard, businesses and governments will opt for renewable energy sources to supplement their needs as well as enhance their competitiveness in the market (Bernanke, Antonovics, and Frank, 2015).

Renewable Energy and Global GDP

GDP is the most prevalent indicator of economic growth that is utilised to analyse the development and growth go global economies. Findings from IREMA indicate that deployment of renewable energy is set to increase the global GDP by between 0.6% and 1.2% by the year 2030. According to Remap case, when renewable energy share is doubled to 36% of the global energy share the GDP is set to increase by 0.6% which translates to approximately $706 billion a figure that represents the cumulative GDP of Malaysia and Colombia combined (Connolly et al., ). However, it is worth noting that the degree of the impact of renewable energy on the gross domestic product varies from one nation to the next depending on their dependency on fossil fuel. A majority of the positive impacts of renewable energy on GDP are as a result of increased investment in the energy sector which in turn stimulates other areas of the economy (Apergis and Payne, 2010). Some countries encounter a decline in their GDP with the deployment of renewable energy technologies due to dynamics in conventional energy prices. Oil producing and exporting countries such as Nigeria, Russia, Saudi Arabia and Venezuela are set to experience a reduction in their gross domestic product with the implementation of renewable energy technologies in the long run (Lund, 2009). Evidently, a majority of OPEC are dependent on oil for the stimulation of their economies in that light, oil and gas are crucial commodities since they account for a significant portion of their GDP (Chien and Hu, 2008). Thus, owing to the significance of fossil fuels to the GDP of these countries, a reduction in the trade volumes of these commodities will adversely affect their respective economies.

Significant gas and oil exporting nations rely on the energy sector more than their coal counterparts. A case in point, the gas and oil sector represents 25% of Venezuela and Saudi Arabia’s GDP while it accounts to roughly 15% of Russia and Nigeria’s gross domestic product. Conversely, coal accounts for only 8% of the Australian GDP with only 4.7% of the South Africa’s gross domestic product (Econometrics, 2012). In that light, it is evident that oil and gas exporting countries tend to be more reliant on their energy sector for economic stimulation as compared to coal producing countries. The high reliance of oil producing and exporting countries on revenues from this area makes them vulnerable to the fluctuations in oil prices a factor that creates economic fragility. According to International Monetary Fund, the gross domestic product of Saudi Arabia is expected to slow to 2.7% in 2016. That occurrence is as a result of a shift to renewable energy by most countries thus reducing oil trade volumes hence negatively impacting the revenues from petroleum products. Ideally, oil producing and exporting countries embraces renewable energy as an opportunity to diversify their economies. It is prudent that a significant portion of major economies depends on oil as the primary supplement of their GDP. Thus, deployment of renewable energy will diversify the economy since other sectors will come into play hence cushioning the economy against shocks resulting from fluctuation in prices of oil in the global market (Haas et al., 2011).

Similarly, renewable energy requires massive investments for them to be deployed effectively. These kinds of investment influence the growth of gross domestic product as it is triggered by capital intensive nature of the technologies that are employed to actualise the operations of renewable energy solutions. For instance, a typical geothermal power plant that can supply a modest volume of energy may require a capital investment that runs to millions of dollars. With such investments, the GDP of that particular country will grow since based on Keynesian stimulus an increase in investment triggers a positive index in the gross domestic product (Lipp, 2007). Additionally, other sectors of the economy are set to benefit from the same especially the manufacturers and contractors of these infrastructures will reap big from the deployment of renewable energy projects. In that light, more people will get job opportunities to work either during the construction period of the project as well as when it is complete to provide maintenance services. That notwithstanding, renewable energy projects will create demand for certain products and services a factor that will further stimulate the economy by increasing the volume of trade thus enhancing the gross domestic product (Edler, 2012).

Renewable Energy Increases Welfare

In the current economic scenario, social benefits are measured regarding education, health, income generation, human well-being as well as employment. Sustainability is yet another dimension that can be utilised to measure the benefits of renewable energy on the economy in the long run. Resource sustainability is crucial since other measures of welfare include GDP do not capture all the elements that fall under social welfare, for instance, additional health cost as a result of natural resource depletion (Frondel et al., 2010). From an economic perspective, consumption and investment in production capital are some of the factors that influence the welfare of people in an economy. As the level of consumption increases firms will exert more pressure on the existing resources thus resulting in the depletion. However, with the advent of renewable energy, companies will opt for sustainable energy sources that are cost effective as well as have minimal impact on the environment (Jones and Klenow, 2010).

Socially, the impact of energy on the health and education is yet another issue of contention. With renewable energy, the impact on the environment is reduced thus the cost associated with medical attention will significantly reduce since renewable energy solutions are sustainable and thus with little effects on the natural environment (Chancel, Thiry and Demailly, 2014).

Consequently, environmental effects are often not factored in a majority of global economic effects thus they play a significant role in improving the overall welfare of human beings. Renewable energy technologies are best suited to expand the energy reserves to meet the increasing demand in the modern economic scenario. Approximately, 65% of the additional energy volumes that is required to bridge the universal electricity demand is set to come from sources that are out of the grid (Dincer, 2000). Therefore, for the living standards of people in the villages to be improved renewable energy technologies have to be implemented to reduce poverty at the same time enhance economic development in marginalised areas. Ideally, the cost of acquiring electricity is relatively expensive to some people given the recurrent expenditure that is involved in maintaining that source of energy. As a result, government coming up with other cheaper sources of power, for instance, solar to reach out to the needy in society with the aim of alleviating poverty levels and improving the welfare of the people in general (Bergmann, Hanley, and Wright, 2006).

Renewable Energy and Job Creation

Employment opportunities are vital in achieving social and economic development. In that case, they are necessary for the household since they influence their purchasing power since individuals with jobs will have more disposable income and thus they will spend more on goods and services thus stimulating the economy as opposed to jobless people. Apart from income generation and improving individual well-being, jobs are crucial since they enhance economic productivity growth, poverty reduction as well as social cohesion (Kissel and Krauter, 2006). Renewable energy technologies are a source of massive employment opportunities since the systems that will lead to the implementation of these techniques will require a substantial labour force to be actualised. However, it is worth noting that even as renewable energy provides employment opportunities, a significant number of jobs will be lost as a result of the transition from fossil fuels to green energy (European Wind Energy Association, 2012).

At the moment, the global employment gap stands at sixty million as a result of the 2008 financial crunch, but the figure rises to roughly three hundred million when new entrants to the labour market are factored. Ideally, the employment gap has a ripple effect on the economy since the lack of job opportunities will affect the relationship between wages, aggregate demand as well as household consumption (Blazejczak et al., 2014). Internationally, the energy sector plays a significant role in generating employment opportunities both directly and indirectly. For instance, the coal, oil and natural gas industries collectively employed close to 8 million individuals as of 2014 (International Labour Office, 2015). Growth in renewable energy is set to increase the number of jobs opportunities given the capital intensive projects that will be undertaken to ensure deployment of green energy systems. However, it is important to appreciate the fact that the effect of renewables on job opportunities is unique to the nature of individual economies and their reliance on fossil fuels. For instance, in a country like Saudi Arabia, the oil sector accounts for nearly 60% of its GDP (Lehr, Lutz, and Edler, 2012).

Thus, a shift to renewable energy will imply that the country will experience a drastic drop in the volume of its trade since oil exports will reduce thus resulting in oil firms laying off some of their employees to remain sustainable in the market. Similarly, numerous businesses are secondary dependents to the oil sector, and thus, the ripple effects will reach them thus causing more job losses due to a decrease in trade volume.

Impact on Global Trade

With the deployment of renewable energy sources, international trade is set to increase to about $50 trillion by the year 2030 due to growing demand for the infrastructure and equipment necessary for the development of green energy systems. Reduction in the request of fossil fuels will have mixed effects to both importers and exporters. For instance, exporting countries will experience a drastic reduction in their volume of international trade in the amount of outflows will reduce thus diminishing their purchasing power in the global market a factor that will adversely affect their GDP (Ragwitz et al., 2009). Similarly, importing countries will reduce their reliance on fossil fuels since they will reduce the volume of inflows and as a result, their gross domestic product will increase (Johnstone, Haščič, and Popp, 2010). However, given the fact that these countries will have more disposable income they are likely to spend on other goods and services a factor that will counterbalance their trade volumes.

The adoption of renewable energy solutions will come along with an adoption of capital-intensive investment in the form of infrastructure and accompany machinery to actualise the implementation of green energy (Goossens and Mäkipää, 2007).In that light, demand for this infrastructure will come up thus benefiting some sectors of the economy for instance manufacturers as well as engineers that specialise in those technologies. Additionally, the stimulation of GDP as a result of renewable energy investment will lead to an increase in the demand for other goods and services since the inflows will surpass the outflows and thus, economies will be having more disposable income to spend on alternative products.