Nonlinear relationship between sectoral renewable energy consumption and economic growth: Evidence from the U.S.

The nature of the relationship between energy consumption and economic growth plays a crucial role due to its implication for the design of energy policies. Starting with the seminal study by Kraft and Kraft (1978), the direction of causality between energy consumption and economic growth has been a well-researched topic in energy economics (for an extensive literature review, see Ozturk, 2010). Although a number of empirical studies have investigated the causal relationship between energy consumption and economic growth, no consensus regarding the existence and direction of the causality has yet been reached. However, these studies adopted linear models as the common estimation methodology. Therefore, the mixed and inconsistent empirical results regarding the existence and direction of the causality may be attributed to the linear assumption between energy consumption and economic growth. However, the studies by Lee and Chang (2007), Chiou-Wei et al. (2008), Arac and Hasanov (2014), among others, strongly argued that energy consumption and economic growth variables are inevitably non-linearly correlated due to economic crises and structural regime changes such as changes in the energy policies. Since those events may lead to structural changes in the pattern of energy consumption, incorporating these structural changes prevent any definitive results (Arac and Hasanov, 2014).

The main objective of our study is to empirically investigate the causal relationship between renewable energy consumption by sector and economic growth in the United States, employing non-linear cointegration and causality tests in a time series setting, and using publicly available annual data from 1973 to 2016 from the U.S. Energy Information Administration. This study uses the data from three sectors with respect to renewable energy consumption: industrial sector, residential sector and commercial sector. We hope to be able to determine the existence of and the direction of causality in the relationship between energy consumption and economic growth.