The impact of renewable and non-renewable energy consumption on aggregate output in Pakistan: robust evidence from the RALS cointegration test

Over the past three decades, Pakistan’s energy consumption has surged due to industrialization, population growth, and development activities. To meet the escalating energy demands, the country has primarily relied on thermal power projects, which are financially burdensome and environmentally detrimental, compared to hydropower projects. This reliance exposes Pakistan to global oil price shocks and environmental degradation. To address this dilemma, this empirical research investigates the impact of both non-energy factors (labour and capital) and energy-specific factors (renewable and non-renewable) on Pakistan’s aggregate output, using annual time-series data from 1980 to 2021. The analysis employs the newly established Residual Augmented Least Square (RALS) cointegration test and the Autoregressive Distributed Lag (ARDL) methodology to estimate the long-term cointegrating relationship among the examined variables. The empirical findings demonstrate that both non-energy and energy-specific factors positively and significantly influence Pakistan’s long-term aggregate output. However, petroleum consumption exerts a positive but insignificant influence on Pakistan’s long-term aggregate output. The study recommends diversifying the energy supply mix to include more hydroelectricity, non-hydroelectric renewables (mainly solar and wind), and natural gas. Specifically, transitioning from imported, expensive, and more greenhouse gas (GHG)-generating petroleum products to domestically produced natural gas could potentially reduce Pakistan’s trade deficit and its vulnerability to global oil price shocks. Besides the economic benefits, shifting from non-renewable energy sources (specifically oil) to renewable energy would enhance Pakistan’s image and increase its geopolitical influence over neighboring countries. Additionally, the study emphasizes the need to encourage private sector participation in renewable energy projects and suggests implementing effective carbon tax policies to mitigate CO2 emissions and foster economic growth.