The Impact of Renewable and Non-Renewable Energy Consumption on Aggregate Output in Pakistan: Robust Evidence from the RALS Cointegration Test

Abstract

Pakistan’s energy consumption has significantly increased over the past three decades due to industrialization, population growth, and development activities. Pakistan has initiated short-term energy-oriented plans by establishing thermal power projects to meet the growing energy demands. However, these projects are more costly in terms of financial outlays and environmental harms than hydropower projects. Consequently, Pakistan is vulnerable to global oil price fluctuations and environmental damage. To address this dilemma, this empirical research examines the impact of non-energy factors (labour and capital) and energy-specific factors (renewable and non-renewable) on Pakistan’s aggregate output by considering annual data from 1980 to 2021. The analysis employs the newly established Residual Augmented Least Square (RALS) cointegration test and the Autoregressive Distributed Lag (ARDL) methodology to estimate the long-term cointegrating connection among the variables. The empirical findings demonstrate that non-energy and energy-specific factors positively and significantly impact Pakistan’s long-term aggregate output, except for petroleum consumption (insignificant). The study suggests a diversified energy-supply mix explicitly characterized by hydroelectricity, non-hydroelectric renewables (mainly solar and wind), and natural gas. Furthermore, the study suggests encouraging private sector participation in renewable energy initiatives and implementing effective carbon tax policies to mitigate CO2 emissions and improve economic growth. JEL Classification: D24, O47, Q42, Q43, Q48, Q54