Renewable Energy Thresholds and Oil Price Effects on Decarbonization: Comparative Evidence From China and the United States

Abstract

The United States and China are the two world’s largest renewable energy consumers that spearhead global energy transition efforts. Nonetheless, the motivation of energy transition is affected by oil prices since oil is a key economic catalyst. This paper performs the Fourier Autoregressive Distributed Lag (FARDL) and Fourier multi-threshold nonlinear ARDL (FMTNARDL) models to assess the relationship between carbon dioxide (CO2) emissions, oil prices, and renewable energy disaggregated by source (hydro, solar, wind, and others) in the United States and China, from 1980 to 2022. This research aims, first, to examine the threshold effects of renewable energy consumption on CO2 emissions. Second, to investigate the intertwined effects of renewable energy consumption and oil prices on CO2 emissions. The findings are as follows: Firstly, solar and others energy demonstrate threshold effects on CO2 emissions in the United States, while in China, threshold effects are evident for hydro and wind. Secondly, the moderating effects of oil prices only exist for the case of China. This study suggests to sustain renewable energy investments and maintain high consumption levels to preserve the decarbonization effect of renewable energy. To avoid diminishing returns, the United States and China should promote innovations in solar, hydro, and wind technologies. Additionally, the United States should increase the incentive for renewable energy substitution by implementing renewable energy-targeted tax incentives and carbon tax, whereas China should increase biofuel consumption in the oil-reliant industries, particularly petrochemical and transport industries.