Nexus between renewable-disaggregated non-renewable energy consumption and economic growth in GCC countries: a Cobb-Douglas production function analysis – Nature

Report on the Nexus Between Energy Consumption and Economic Growth in Gulf Cooperation Council (GCC) Nations in the Context of the Sustainable Development Goals (SDGs)

Executive Summary

This report analyzes the disaggregated impacts of renewable and non-renewable energy consumption on economic growth (Gross Domestic Product – GDP) within the Gulf Cooperation Council (GCC) countries from 1995 to 2020. The primary objective is to provide a framework for aligning the region’s energy transition with the United Nations Sustainable Development Goals (SDGs), particularly SDG 7 (Affordable and Clean Energy), SDG 8 (Decent Work and Economic Growth), and SDG 13 (Climate Action). Using a Cobb-Douglas production function and advanced econometric models, the analysis reveals that while non-renewable energy, specifically natural gas, has historically driven long-term GDP growth, it exhibits diminishing returns. Conversely, renewable energy demonstrates a significant positive correlation with GDP, highlighting its potential to support sustainable economic growth in line with the 2030 Agenda. The findings underscore the urgent need for energy diversification and provide evidence-based policy recommendations for increasing investment in renewable energy, enhancing energy efficiency, and developing human capital to support a sustainable economic future.

1. Introduction: Aligning GCC Economic Growth with Sustainable Development Goals

Energy is a critical input for economic activity, creating a strong nexus between consumption patterns and the achievement of SDG 8 (Decent Work and Economic Growth). For the GCC nations, this relationship is complicated by a historical dependence on fossil fuels, which poses a significant challenge to meeting commitments under SDG 7 (Affordable and Clean Energy) and SDG 13 (Climate Action). The escalating energy demand, driven by rapid industrialization and urbanization, has intensified environmental degradation, hindering progress toward broader sustainability. This report addresses a critical gap in the literature by examining the distinct roles of renewable and non-renewable energy sources (coal, oil, natural gas) in driving economic growth within the unique context of the GCC. The analysis aims to inform policies that can successfully navigate the energy transition, balancing economic prosperity with environmental responsibility.

2. Methodological Framework for Sustainable Analysis

The analysis is grounded in a Cobb-Douglas production function, which incorporates both renewable and disaggregated non-renewable energy as factors of production alongside capital and labor. The study utilizes panel data for five GCC nations from 1995 to 2020. To ensure the reliability of the findings for policy-making, the report employs advanced econometric techniques that account for the region’s specific economic characteristics.

• Feasible Generalized Least Squares (FGLS): This primary model was used to address issues of autocorrelation, heteroskedasticity, and cross-sectional dependence common in regional panel data.
• Panel-Corrected Standard Errors (PCSE): This method was used as a robustness check to validate the FGLS results, ensuring the standard errors are reliable.
• Causality Tests: A Dumitrescu & Hurlin Granger causality test was conducted to determine the directional relationship between different energy types and economic growth, providing insight into four key hypotheses: growth, conservation, feedback, and neutrality.

3. Analysis of Findings: Energy Consumption and its Impact on SDGs

The empirical results offer a nuanced perspective on the energy-growth nexus in the GCC and its implications for the SDGs.

3.1. Impact of Non-Renewable Energy on SDG 8

The consumption of non-renewable energy sources demonstrates a strong, positive impact on economic growth, directly contributing to the objectives of SDG 8. However, the effects are not uniform across all fuel types.

• Natural Gas: A 1% increase in natural gas consumption is associated with a 0.4013% increase in GDP, making it the most significant non-renewable driver of economic growth.
• Oil: A 1% increase in oil consumption corresponds to a 0.3398% rise in GDP, confirming its continued importance to the region’s economies.
• Coal: Coal consumption shows a statistically insignificant negative correlation with GDP, indicating it does not contribute to economic growth in the GCC.

While these findings confirm the role of hydrocarbons in achieving economic growth, their environmental externalities conflict with SDG 13 (Climate Action) and SDG 12 (Responsible Consumption and Production).

3.2. The Role of Renewable Energy in Advancing SDG 7 and SDG 13

Renewable energy consumption exhibits a significant positive correlation with economic growth, presenting a clear pathway for the GCC to achieve multiple SDGs simultaneously. The analysis found that a 1% increase in renewable energy consumption is associated with a 0.7589% increase in GDP. This finding is critical, as it refutes the notion that a transition to clean energy must come at the expense of economic progress. Investing in renewables allows GCC nations to:

1. Advance SDG 7 by increasing the share of renewable energy in the national energy mix.
2. Promote SDG 8 by fostering new green industries and creating jobs.
3. Contribute to SDG 13 by reducing greenhouse gas emissions and mitigating climate change.
4. Support SDG 9 (Industry, Innovation, and Infrastructure) by driving investment in modern and sustainable energy infrastructure.

3.3. Causality Analysis and Implications for Sustainable Policy

The causality tests provide further guidance for targeted policymaking:

• Growth Hypothesis (Oil): A unidirectional causality from oil consumption to GDP was found. This implies that oil remains a driver of economic growth, but policies aimed at reducing its consumption could negatively impact short-term economic performance if not managed carefully.
• Conservation Hypothesis (Coal and Natural Gas): A unidirectional causality runs from GDP to both coal and natural gas consumption. This suggests that economic growth drives the demand for these fuels. Therefore, energy conservation policies targeting these sources are unlikely to harm economic growth.
• Neutrality Hypothesis (Renewables): No causal relationship was found between renewable energy consumption and GDP. This is a highly significant finding, as it indicates that the GCC can implement aggressive policies to promote renewable energy (to meet SDG 7 and SDG 13) without risking adverse effects on economic growth (SDG 8).

4. Policy Recommendations for Achieving the 2030 Agenda

Based on the findings, this report proposes the following policy recommendations for GCC decision-makers to foster a sustainable and prosperous future:

1. Prioritize and Accelerate Investment in Renewable Energy: In line with SDG 7 and SDG 9, governments should create robust policy and financial incentives to scale up investments in solar and wind power, leveraging the region’s significant natural advantages.
2. Enhance Energy Efficiency and Promote Responsible Consumption: To support SDG 12, policymakers should implement measures to improve energy productivity across all economic sectors. This will optimize the economic benefits derived from non-renewable sources while reducing overall consumption and environmental impact.
3. Align Human Capital Development with a Green Economy: To ensure a just transition and support SDG 8, investments in education and vocational training are needed to equip the workforce with the skills required for the renewable energy sector and other green industries.
4. Advance Economic Diversification: To build long-term economic resilience, GCC nations must intensify efforts to diversify their economies away from a heavy reliance on hydrocarbon exports, fostering growth in non-energy sectors.

5. Conclusion: A Pathway to Sustainable Prosperity for GCC Nations

This report confirms that the traditional economic model of the GCC, heavily reliant on non-renewable energy, is insufficient for achieving the integrated goals of the 2030 Agenda for Sustainable Development. The findings demonstrate that a strategic transition toward renewable energy is not only environmentally necessary but also economically beneficial. By prioritizing investments in clean energy, enhancing energy efficiency, and diversifying their economies, the GCC nations can forge a path that ensures long-term economic prosperity, energy security, and environmental sustainability, thereby making a significant contribution to achieving SDG 7, SDG 8, SDG 12, and SDG 13.

Analysis of Sustainable Development Goals in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

The article addresses several Sustainable Development Goals (SDGs) by examining the complex relationship between energy consumption, economic growth, and sustainability in the Gulf Cooperation Council (GCC) countries. The primary SDGs connected to the article’s themes are:

1. SDG 7: Affordable and Clean Energy
   • The entire study is centered on energy, distinguishing between “renewable and non-renewable energy sources (coal, oil, natural gas).” It directly investigates the role of different energy types in economic growth and recommends “increasing investments in renewable energy,” which is the core of SDG 7.
2. SDG 8: Decent Work and Economic Growth
   • The article’s main objective is to analyze the impact of energy sources on “GDP in GCC nations” and to balance this with the “need for sustainable economic growth.” This aligns with SDG 8’s goal of promoting sustained, inclusive, and sustainable economic growth.
3. SDG 9: Industry, Innovation, and Infrastructure
   • The article discusses the importance of energy for the “industrial sector” and recommends policies that promote “energy efficiency” and “green technology.” This relates to SDG 9’s aim of building resilient infrastructure, promoting sustainable industrialization, and fostering innovation, particularly through upgrading to cleaner technologies.
4. SDG 12: Responsible Consumption and Production
   • By analyzing the “diminishing returns” of non-renewable energy and advocating for “energy efficiency,” the article touches upon the principles of sustainable consumption and production. It highlights the need to manage the use of natural resources like fossil fuels more efficiently, which is a key aspect of SDG 12.
5. SDG 13: Climate Action
   • The introduction explicitly states that the “utilization of energy, especially fossil fuels, carries significant adverse consequences, including the emission of pollutants.” The recommendation to transition towards renewable energy is a direct strategy to mitigate climate change, connecting the article’s discussion to the urgent action required under SDG 13.

2. What specific targets under those SDGs can be identified based on the article’s content?

Based on the article’s analysis and recommendations, several specific SDG targets can be identified:

• Target 7.2: Increase substantially the share of renewable energy in the global energy mix.
  • The study directly addresses this target by analyzing the “disaggregated impacts of renewable and non-renewable energy sources” and concluding that “renewable energy shows a significant positive correlation with GDP.” The recommendation to “increase investments in renewable energy” is a clear call to action aligned with this target.
• Target 7.3: Double the global rate of improvement in energy efficiency.
  • The article explicitly recommends “improving energy efficiency” as a key policy for GCC countries. It cites other research showing how “investments and policies can improve energy efficiency” and how reforms have “significantly reduced energy intensity in firms.”
• Target 8.1: Sustain per capita economic growth.
  • The core of the study is an investigation into the drivers of “long-term GDP growth” in GCC nations. By using GDP as the primary dependent variable, the article is fundamentally concerned with understanding and sustaining economic growth, which is the essence of this target.
• Target 8.2: Achieve higher levels of economic productivity through diversification and technological upgrading.
  • The article’s findings “emphasize the need for energy diversification” away from a heavy reliance on non-renewable sources. This recommendation directly supports the goal of economic diversification to achieve sustainable productivity.
• Target 8.4: Improve global resource efficiency in consumption and production and decouple economic growth from environmental degradation.
  • The central challenge discussed in the article is “balancing their reliance on non-renewable energy with the need for sustainable economic growth.” By exploring how renewable energy can support growth while mitigating the “adverse consequences” of fossil fuels (like emissions), the study directly engages with the concept of decoupling economic growth from environmental harm.
• Target 9.4: Upgrade infrastructure and retrofit industries to make them sustainable, with increased resource-use efficiency and greater adoption of clean technologies.
  • The recommendation to invest in renewable energy implies the need for new infrastructure. Furthermore, the call to improve “energy efficiency” and adopt “cleaner alternatives” in sectors like manufacturing aligns with the goal of making industries more sustainable and efficient.
• Target 13.2: Integrate climate change measures into national policies, strategies and planning.
  • The article provides a “region-specific framework for policymakers navigating the energy transition.” Its recommendations for diversifying the energy mix and investing in renewables are concrete policy suggestions that integrate climate change considerations into national economic planning for hydrocarbon-dependent economies.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

The article mentions or implies several specific indicators that are used to measure progress toward the identified SDG targets:

• Indicator 7.2.1: Renewable energy share in the total final energy consumption.
  • This is explicitly used as a key independent variable in the study’s econometric model. The article defines “RE” as the “consumption of Renewable energy (% of total final energy consumption),” which directly corresponds to this official SDG indicator.
• Indicator 7.3.1: Energy intensity measured in terms of primary energy and GDP.
  • The article implies this indicator by discussing energy efficiency. It mentions a study where “China’s VAT reform significantly reduced energy intensity in firms,” showing that energy intensity is a key metric for measuring progress in energy efficiency.
• Indicator 8.1.1: Annual growth rate of real GDP per capita.
  • The study’s primary dependent variable is “economic growth represented in GDP (constant 2015 US$).” The analysis of how different energy sources impact GDP growth directly uses this indicator to measure economic performance.
• Indicator 12.2.2: Domestic material consumption (DMC), DMC per capita, and DMC per GDP.
  • The article’s use of “coal (CC), oil (OC), natural gas (NGC) consumptions measured in (Exajoules)” as variables represents a direct measurement of the domestic consumption of specific natural resources (fossil fuels), which is a component of this indicator.

4. Table of SDGs, Targets, and Indicators

Source: nature.com