The Link Between Good Governance, Economic Development and Renewable Energy Investment : Evidence From Upper Middle-Income Countries

Renewable energy can play a vital role in sustainable energy future and to address the climate change. Investment in renewable energy in the upper middle-income countries (UMIC), a major contributor to global carbon dioxide (CO2) emissions, can be an important part of recovery from climate change damage. Existing literature suggests that governance (institutional quality) is an important determinant of renewable energy investment (RE investment). The governance condition in the UMIC remained almost unchanged for a longer period of time while income level increased and a substantial amount of investment took place in renewable energy sector in these countries in the recent past. This paper investigated the role of governance in RE investment in the UMIC and examined if influence of governance on RE investment depends on income level of a country. For this purpose, pooled OLS, panel corrected standard errors, and panel fixed effects models were used to analyse the data of 35 UMIC from 1996-2017. The results clearly suggest that good governance raises RE investment in the UMIC. In particular, control of corruption, government effectiveness, regulatory quality, and rule of law are statistically significant aspects of good governance that boost RE investment. However, this effect is conditional on the level of economic development (income level) of a country. The marginal effect of governance on RE investment is larger in lower income countries, and vice versa. Among the controls, trade openness in the UMIC is predicted to have adverse impact on RE investment