Macroeconomic Pathways to Renewable Energy Expansion: Implications for Investment and Climate Policy

Abstract

The rising global demand for sustainable energy, driven by volatile fossil fuel prices and resource depletion, underscores the urgent need to understand the drivers of renewable energy adoption. This study empirically examines the macroeconomic determinants influencing renewable energy consumption in Somalia. Using national data from 1990 to 2022, the analysis employs the Autoregressive Distributed Lag (ARDL) and Dynamic Least Squares (DLS) approaches to estimate both short-run and long-run elasticities of key economic variables. The findings reveal that GDP has a positive but statistically insignificant effect on renewable energy use, with a 1% increase in GDP leading to a 0.021% rise in consumption over the long term. In contrast, foreign direct investment (FDI) and domestic investment exhibit negative effects, reducing renewable energy use by 0.002% and 0.046%, respectively. Trade openness is also negatively associated with renewable energy consumption (coefficient: -0.009), suggesting that greater trade liberalization may hinder renewable energy adoption. Conversely, population growth positively influences renewable energy use, while carbon emissions show a negative relationship, emphasizing the importance of tailored energy strategies aligned with national economic conditions. Based on these findings, the study recommends that the Somali government establish a comprehensive renewable energy policy framework, revise trade policies to support clean energy goals, incentivize green FDI, and strengthen regulatory institutions to foster sustainable energy investment.