Impact of Financial Development Shocks on Renewable Energy Consumption in Saudi Arabia

Abstract

The demand for renewable energy is increasing globally due to concerns about climate change, pollution, and the finite nature of fossil-fuel resources, and renewable energy has been recognized as a significant factor in realizing sustainable development. The government of Saudi Arabia adopted the reduction in fossil-fuel subsidies policy as a financial motivation for supporting both the production and consumption of fossil fuels. Therefore, this study aims to investigate the influence and shocks of Saudi financial development indicators on renewable energy consumption (REC) and to examine the track of causality between financial development indicators and REC. The study covers the annual data period of 1990–2021 and applies the Basic Vector Autoregressive model (VAR), the Granger causality test, forecast-error variance decomposition (FEVD), and the impulse response function (IRF). In the short run, the VAR results indicate a positive and significant impact of stock price volatility and private credit on REC. The results of causality between REC and financial development indicators were conflicting. The Granger causality test shows significant causality running from stock price volatility and private credit to REC. The FEVD results reveal that REC variation is explained by its innovative shocks and has a positive response to shocks in financial development. The IRF results show that REC has a positive response to shock on private credit, liquid liabilities, and stock price volatility. Authorities can encourage investment in renewable energy consumption by providing financial incentives; also, governments can foster national and international partnerships between investors, policymakers, and industry stakeholders. Employing different determinants of financial development indicators and incorporating population factors in the REC function will be highly recommended for forming the renewable energy demand in Saudi Arabia. Conducting a micro-level analysis of specific sectors within renewable energy, such as solar, wind, and others, can provide actionable insights for policymakers.