Transition to a green economy, oil prices and the current account

Abstract

In this paper we propose and develop the hypothesis that a transition to a green economy influences the consumption-smoothing component of the current account. This is important because green economy has the potential to improve current accounts. Using a sample of 23 countries, we discover that when renewable energy consumption as a share of total final energy consumption is below the threshold value of 23.561 %, there is a negative impact of oil prices on the current account. However, the negative impact diminishes when renewable consumption exceeds this threshold. Interestingly, splitting the sample into current account surplus and deficit countries reveals that a transition to a greener economy mitigates the negative impacts of an oil price rise more so for deficit countries than surplus countries.