The Effect of Financial Development and Foreign Direct Investments on the Consumption of Renewable Energy in Iran

Document Type : Research Paper

Authors

1 Faculty of Economics, University of Tehran, Iran

2 Master's Degree, Business Management (Financial Orientation), Alborz University

3 Department of Economics, Faculty of Economic and Political Sciences, Shahid Beheshti University

Abstract

Abstract
The growing trend of energy consumption, reduction of fossil fuel resources and global warming are the main and important reasons for the tendency of countries to use new and renewable energies as an suitable alternative to fossil fuels. In addition to having a special capacity for economic growth, renewable energy has improved energy security through diversification of the country's energy portfolio and can play important role in protecting the environment by reducing air pollution. Financial development and consumption of renewable energy as a solution to reduce dependence on fossil fuels and preserve the environment has received much attention at the global and regional level. In addition, direct investment in the renewable energy sector can provide many opportunities for economic growth and Reduce the dangerous impacts associated with electricity generation from fossil fuels. This study examines the impact of financial development and foreign direct investment on renewable energy consumption using the ARDL model during the period of 1357 to 1399. The results indicate that the effect of both factors of financial and foreign direct investment on renewable energy consumption is positive and significant in both the short term and the long term.
Introduction
The limitations in energy resources and the depletion of its reserves have made energy consumption management one of the fundamental issues in the global economy. In oil-producing countries, high energy consumption is one of the major concerns of policymakers. The oil shocks of 1973 and 1979, caused by rising energy prices and declining global supply, are an example of the profound effects of energy on the economy. Due to the limitations in energy factors and their vital role in the
 
production chain, the study of the factors affecting energy demand has become one of the main priorities in economic and policy research. The purpose of this study is to investigate the effect of financial development and foreign direct investment on renewable energy consumption in Iran using time series data and autoregressive econometric model with distribution lag. The present study provides valuable results and recommendations to help Iranian policymakers achieve sustainable and green economic growth by diversifying the energy mix and by increasing investment in the use of clean energy resources.
Methods and Material
The purpose of this study is to investigate the effect of economic growth, foreign direct investment and financial sector development on renewable energy consumption in Iran. Regarding the method of selecting the Financial Development Index (FD), it should be said that the ratio of credits granted to the private sector by banks to GDP is one of the indicators of financial development in the banking sector. The share of private sector debt to the banking system relative to GDP can largely reflect the efficiency of the banking system. The more credits received by the private sector relative to the GDP, the more active the role of the private sector through the use of banking facilities is revealed, and in general, it can be concluded that the efficiency of the banking sector in financial development has been successful. The basis of using this index is that the more the financial system directs the share of private sector credit, the more successful it will be in its functions such as evaluating managers, selecting investment plans, addressing risk management, and providing financial services.
Results and Discussion
This study seeks to investigate the impact of financial development, economic growth, and foreign direct investment on renewable energy consumption during the period 1978 to 2020. The results show that financial development in the estimated model has a positive and significant effect on renewable energy consumption in Iran in the short and long run, with the difference that in the short run, it increases the consumption of renewable energy by 0.18 percent without interruption, on the other hand, the elasticity of this factor in the long run is positive and equal to 0.09 percent, which means that due to an increase of one percent in development, Financial consumption of renewable energy will increase by 0.09% in the long run, as a result of which financial development directly affects renewable energy consumption in the short and long term. As a result, this hypothesis is confirmed.
According to the estimated results, due to an increase of one percent in foreign direct investment, renewable energy consumption will increase by 0.23 percent in the short term. In the long run, the elasticity of renewable energy consumption compared to the foreign investment variable at the error level of 5% is statistically significant, positive, and equal to 0.15. As a result, by increasing foreign investment, renewable energy consumption can be increased.
According to the results of this study, the increase in economic growth has led to an increase in the consumption of renewable energy in Iran, so that in the short run, with an increase of one percent in economic growth, the consumption of renewable energy increases by 0.02 percent without interruption and by 0.45 percent with two intervals. The elasticity of this factor in the long run is also positive and equal to 0.27 percent, which means that due to an increase of one percent in economic growth in the long run, the consumption of renewable energy will increase by 0.27 percent.
Conclusion
In the end, it is recommended that increasing the share of renewable energy in the total energy produced in the country should be placed on the horizon of politicians, because despite the high initial cost of renewable energy production, which is achieved in the GDP as a result of the use of energy, it can compensate for the initial costs and bring about sustainable and secure economic growth, because the stable and sustainable nature of renewable energy is able to make a difference. From economic fluctuations, it is possible to use energy for economic growth and development, which in addition to increasing energy security by increasing diversity in the country's energy basket, will lead to people's health due to compatibility with the environment.

Keywords

References

 
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Journal of Environmental and Natural Resource Economics
Volume 4, Issue 9 - Serial Number 2
October 2025
Pages 113-143

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History

  • Receive Date: 03 October 2024
  • Revise Date: 18 January 2025
  • Accept Date: 26 January 2025

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