Navigating the climate challenges in Africa: Exploring the synergy and threshold effects of renewable energy and foreign direct investment on climate risk

Abstract

Renewable energy is widely acknowledged as an essential response to climate change, which poses a severe threat to humanity and natural ecosystems. Drawing from the greenhouse theory of climate change and the pollution haven hypothesis, this study contributes to the literature by addressing three critical issues. First, we examine the effect of renewable energy on climate risk. Second, we explore the intervening role of foreign direct investment (FDI) on the renewable energy-climate risk nexus. Third, we determine the minimum threshold required for renewable energy to minimise climate risk. The analysis was based on 47 African countries and estimated using the generalised method of moments (GMM) and dynamic panel threshold regression techniques. The GMM technique is essential due to its ability to address endogeneity issues in the model. Also, the dynamic panel threshold technique is employed because it is built on the principles of GMM and provides an estimate of the threshold level and nonlinearities in the model. The empirical evidence presents a significant negative relationship, suggesting that renewable energy minimises the surge in climate risk in Africa. Second, the findings reveal that the weakening effect of renewable energy on climate risk is contingent on FDI. Third, the dynamic panel threshold results demonstrate that the minimum threshold required for renewable energy to reduce climate risk is 56%. Beyond this level, renewable energy presents a significant negative impact, implying that high renewable energy consumption lessens climate risk. Policy recommendations for boosting renewable energy consumption to alleviate climate risk have been provided.

Keywords

• C24
• C33
• O55
• Q42
• Q54