The introduction of alternative energy can have an impact on a country’s economic growth. This conclusion, which is barely considered in times of rising energy prices and a vivid race to introduce new forms of energy, results from a recent consultation of key economic literature and empirical analysis with special attention to the case of Malta.
With an increased focus on introducing renewable sources of energy in the EU and record-high prices of oil, the pressure to think about ways of implementing alternative energy has also increased in Malta. The energy consumption in Malta has almost doubled since 2001 despite the increasing world energy prices, leaving potential risks on the environment. Nevertheless, the market for renewable energy sources in Malta is still at an early stage according to a report by the European Commission in January 2007. One reason for this may be the high initial investments required to start using new forms of energy in a country and the difficulty of predicting the exact economic benefits of such a change. Often neglected in this analysis is the fact that the introduction of energy policies can affect the country’s economic growth in the long run.
Alternative energy can influence growth through three channels: by supplying energy at new price rates and hence affecting demand, by creating and diminishing jobs on the labour market and by opening doors for international cooperation.
Based on the much cited research by Goeran Wall in 1995 and a contemporary cross-sectional analysis of 124 countries, households are found to be willing to switch between energy sources even though energy demand as such appears inelastic. Additionally, a study by Allianz in 2007 concluded that the global energy mix does not sufficiently satisfy the total energy demand and that alternative energy only accounts for less than one percent of the world’s energy. Hence it becomes apparent that the introduction of renewable energy sources would not substitute for current energy consumption. The cross country study shows that sufficiently low prices of alternative energy would not deteriorate energy demand and could potentially stimulate economic growth.
Starting up a renewable energy sector in a country also influences the labour market. A drastic example for this is described in a paper by Addison and Portugal in 1987 showing that the closure of a conventional power plant results in a drastic increase in unemployment.
On the contrary, the German Environment Ministry forecasts 300,000 newly generated jobs in the renewable energy sector by 2020. Therefore, if alternative energy generates more labour opportunities than are lost through the replacement of conventional sources, this may enhance the economy.
One last growth-enhancing factor of a more sustainable energy policy is that it opens possibilities for international cooperation. The best example for this is the Kyoto Protocol, through which countries take up the challenge of environmental sustainability in strong collaborations, which has led to an enormous technological advance and efficiency gains in the renewable sector.
If Malta strengthens its position in the international race for alternative energy, it can also benefit from the economies of scale generated in international cooperation.
If these three growth-determining elements are considered in Malta, an increased focus on the sector of renewable energy may become beneficial for Malta’s economy despite the high initial investments required. An additional input with respect to this is given in a paper by Mott MacDonald from 2005, which describes renewable energy in Malta as part of a strategy to abide EU law and illustrates economic cost optimisation scenarios for a Malta specific appropriate mix of renewable generation types such as wind and solar energy. A clever introduction of alternative energy in Malta will not only save the environment, but may potentially help to enhance Malta’s economic growth.
Sarah Bonnici is Economics Graduate University of Malta