Home > Proposals and Reports > The Macroeconomic Benefits of Renewable Energy Investments in Small Island States

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Jinxi Chen, Moon Oulatta, Chris Walker, and Brian Fowler| October 17th, 2017

 

INTRODUCTION

In 2012, the Barbados Declaration on Achieving Sustainable Energy for All in Small Island Developing States reaffirmed that

“… SIDS continue to face acute sustainable development challenges resulting from their unique and specific vulnerabilities and characteristics. SIDS remain highly vulnerable notably due to their small open economies, narrow resource base, disadvantages in economies of scale, remoteness, high export concentration, high dependency on imports with high vulnerability to energy and food price shocks and speculation, and relatively high levels of national debt. These combined vulnerabilities have been further exacerbated by the current global energy, food, financial and economic crises, the increased incidence of natural disasters, and environmental challenges.”  

While many of those challenges persist today, the consensus within the development community has long since targeted renewable energy as an investment category capable of delivering benefits to begin to address many of these interlinked challenges. These benefits will additionally help to modernise the energy sectors of these developing economies. Despite this consensus, renewable energy deployment remains low.

Section II of this report situates the state of energy modernisation of small island economies within three interlined contexts: climate change, comparative macroeconomic efficiency of energy sector compositions, and energy securities. It also examines the paradox that SIDS contribute very little to total global greenhouse gas emissions, yet their fossil fuel imports impede climate change adaption through economic effects (the high cost of importing diesel fuel weakens the islands’ economy), and examines how renewable energy can address many of the interlinked challenges that structurally weaken SIDS today.

Section III of this study develops a theoretical and empirical framework for estimating the macroeconomic impact of renewable energy development in small island economies. With it, this paper verifies expected gaps between the efficiency of renewable energy investments to improve macroeconomic performance over fossil fuel imports. This research therefore, underscores the viability of renewable energy investments in SIDS to act as a lever to improve economic output, as well as local environmental protection. As such, this study also implies the viability of dual purpose climate change mitigation and adaptation programming as modes of sustainable development in SIDS.

 

SECTION II

2.1 SIDS and Climate Change

SIDS altogether contribute to less than 1% of the worldwide GHG emissions (Figure 1.1). In contrast to this minor contribution to the global warming, SIDS share common characteristics such as limited size, proneness to natural disasters, and external shocks, which make them especially vulnerable to the effects of climate change (IPCC Fourth Assessment Report).

IPCC stated with very high confidence that sea-level rise driven by global warming is expected to exacerbate inundation, storm surge, erosion and other coastal hazards. In the Caribbean and Pacific Islands, more than 50% of the population live within 1.5 km of the shore. In addition, international airports, roads and capital cities in SIDS are sited along the coast or on coral islands. Therefore, sea-level rise and higher likelihood of natural disasters would threaten vital infrastructure, settlements and facilities that support the livelihood of island communities and states.

Under IPCC’s intermediate low-emissions scenario (RCP 4.5), surface temperature, on average, is projected to increase by 1.2-2.3°C across the Caribbean, Indian Ocean and Pacific Ocean small island regions by the end of the century, compared to 1986-2005. Sea level rise is projected to be 0.4 and 0.5 meters in the North Indian Ocean, and 0.5 and 0.6 meters in the Caribbean, Pacific and Indian Ocean [1].

Figure 2.1: Total GHG emissions including land use change and forestry by SIDS in 2013.

Data Source: World Resources Institute’s Climate Analysis Indicators Tool, Country Greenhouse Gas Emissions Data, available at: http://www.wri.org/resources/data-sets/cait-country-greenhouse-gas-emissions-data.

Climate change and its related hazards are undermining the essential natural resources on which SIDS economies depend. Global warming is likely to heavily impact coral reefs, fisheries and other marine-based resources, which make important contributions to Gross Domestic Product (GDP) in SIDS from both fisheries and tourism. SIDS have limited fresh water supply due to the topography and geology of islands, and limited capacity to store water resources. Seawater intrusion and soil salinization are risks associated with sea level rise, which are very likely to adversely impact coastal agricultural production.

Meanwhile, at the global scale, markets are failing to provide the level of incentives needed for climate stabilization through shifts to sustainable energy. International climate action has largely reflected the inertia.

Due to SIDS’ small size and insularity, climate change adaptation – which entails large infrastructural outlays – is vital to economic stability, but has high per-capita overhead costs. Island economies and their partners must, therefore, marshal significant resources (financial, technological, and human) as efficiently as possible.

2.2 Macroeconomics in SIDS

SIDS (AOSIS members and observers)[2] are mostly middle-income states based on GNI per capita (table 1). Italicized states are involved in Global Sustainable Energy Islands Initiative (GSEII).

Income Class Country
High Income ($12,476 or more) Antigua and Barbuda, Bahamas, Barbados, Guam,

Nauru, Puerto Rico, Seychelles, Singapore, St. Kitts and Nevis, Trinidad and Tobago, U.S. Virgin Islands

Upper-Middle-income ($4, 036 to $12,475) American Samoa, Belize, Cuba, Dominica, Dominican Republic, Fiji, Grenada, Guyana, Jamaica, Maldives*, Marshall Islands, Mauritius, Palau, St. Lucia, St. Vincent and the Grenadines, Suriname, Tuvalu*
Low-Middle-Income ($1,026 TO $4,035) Cape Verde, Federated States of Micronesia, Kiribati *, Papua New Guinea, Samoa*, São Tomé and Príncipe*, Solomon Islands*, Timor-Leste*, Tonga, Vanuatu*
Low-income ($1025 or less) Comoros*, Guinea-Bissau*, Haiti*
Data not found Cook Islands, Niue

Table 1: Classification of SIDS, GNI per capita 2017.[3]

In spite of the relatively high-income level on average compared to other developing countries, the debt problem is severe in many of the small island developing states. SIDS are, on average, more severely indebted than other developing countries. In 2014, SIDS’ debt to GDP ratios stood at, on average, 57% as compared to 44% in all other middle and low-income countries (Figure 2.2). There were a few small reductions in debt levels over recent years, but debt ratios began to climb again from 2011.

The severity of debt problems varies across different regions. In 2014, SIDS in the Caribbean were the most heavily indebted (at on average 73% of GDP) while SIDS in the Pacific had the lowest levels of debt (33%). Debt levels in the AIMS[4] SIDS stood at on average 65% of GDP in 2014.

In addition to severe debt issues, small domestic markets and a narrow natural resource base result in undiversified economies in SIDS. In general, SIDS have high dependence on a small range of export products and high import content of strategic imports such as food and fuels. Therefore, global trade and financial volatility and economic downturns can quickly and strongly affect SIDS.

Figure 2.2. Central Government Debt to GDP 2006-2014. Source: IMF World Economic Outlook 2015, cited in UNDP & UN-OHRLLS Discussion Paper “Financial for Development and Small Island Developing States: A Snapshot and Ways Forward”, June 2015, page 4. Available at:

https://unohrlls.org/custom-content/uploads/2015/07/SIDS-lowres.pdf

2.3 Energy Security in SIDS

Given their narrow fossil fuel resource bases, many SIDS are heavily reliant upon foreign supplies to meet their energy demand (Figure 2.3). In Singapore, approximately 98% of their energy use is reliant on energy imports. 85% of Jamaica and Dominican Republic’s energy demand is supplied by foreign energy inputs. Mauritius has experienced a graduate increase in energy imports from 75% in 2000 to 85% in 2014. There are also exceptions. In contrast to these net energy importers, Suriname and Trinidad and Tobago are exporting energy to other countries and regions.

Figure 2.3. Energy imports (% of energy use) in SIDS with available data.

Data Source: World Bank Data Bank World Development Indicators, available at: http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators.

Although there is no obvious trend in the proportion of energy imports in the total energy use in SIDS, the continuous increase in energy demand has driven the value of fuel imports up. The total value of fuel imports in 16 selected SIDS has increased significantly from 2001 to 2012 by approximately 600% (Figure 2.4). However, since 2012, the value of fuel imports started to decrease. Total fuel imports decreased by 42.6% in 2015 compared to the 2014 level. All the 16 states have experienced a decline in fuel imports since 2012, among which Singapore has almost halved its import from 11.4 billion US dollars in 2014 to 6.53 billion US dollars in 2015.

Figure 2.4. Fuel imports in 15 SIDS with available data (current US$).

Data source: World Bank Data Bank World Development Indicators, fuel imports = fuel imports (% of merchandise imports) x merchandise imports (US$).

 

Figure 2.5. Total fuel imports in 15 SIDS from 2001-2015 (million US dollars) .

Data source: World Bank Data Bank World Development Indicators, fuel imports = fuel imports (% of merchandise imports) x merchandise imports (US$).

Since Singapore is an outlier in terms of fuel imports (Figure 2.3), we remove it from the 16 states and found that the total fuel imports by the rest 15 states increased by approximately 300% from 2001 to 2013 and started to decline since then (Figure 2.6). The total value of fuel imports by the 15 SIDS in 2015 decreased by 41.4% compared to the 2014 level.

Figure 2.6. Fuel imports in 14 SIDS (without Singapore) with available data.

Data source: World Bank Data Bank World Development Indicators, fuel imports = fuel imports (% of merchandise imports) x merchandise imports (US$).

Figure 2.7. Total fuel imports in 14 SIDS (without Singapore) from 2001-2015.

Data source: World Bank Data Bank World Development Indicators, fuel imports = fuel imports (% of merchandise imports) x merchandise imports (US$).

Heavy reliance on fuel imports exacerbated SIDS’s trading deficits and debt problems. Beginning in 2004, they surpassed the total value of all exports in the region. By 2012, fuel imports in the Caribbean were worth 550% of the total value of regional exports. There is little doubt that fossil fuel import dependence is contributing to debt in SIDS, particularly in the Caribbean region. Under the most generous schemes in the world (such as PetroCaribe), Caribbean SIDS hold outstanding loans to oil exporters that approach or surpass 10% of their GDP (IMF 2014). The International Monetary Fund’s (IMF) 2014 Spillover Report detailed the risks of dependence of some Caribbean SIDS to such generous loan terms. If those agreements degrade (for instance, if Venezuela faces binding external liquidity constraints), some SIDS with difficult balance of payments scenarios and low access to international markets may be forced to approach the IMF for concessional loans.

As such, fuel imports to island economies contribute to energy insecurity by exposing SIDS to high and variable energy costs, or through dependence on potentially unsustainable loan agreements. The lack of affordable or predictable energy costs impedes policy-planning processes and can threaten islands’ solvency. As an iterated challenge, only the displacement of fuel imports through renewable energy investments portends a sustainable solution. Additionally, SIDS with less-than-complete access to electricity has opportunities to leapfrog fuel import dependence and the related sets of macroeconomic hazards.

2.4 The Case for Renewable Energy in SIDS

There are three primary courses of action to effectively reduce foreign oil dependence in SIDS.

  1. Decreasing demand for transportation fuels
  2. Increasing energy efficiency
  3. Building renewable energy capacity to scale

The vast majority of fossil fuel imported to these regions is in the form of petroleum; categories of natural gas and coal make up the remainder of imports. The largest fraction of petroleum imported to SIDS is used for transportation. Changes in the transportation sector such as improving vehicle fuel economy and emissions standards, or investing in public transportation are ways to decrease the demand for transportation fuels. The second largest share of petroleum imports is used for energy production. Increasing energy efficiency is an inexpensive way to reduce energy demand relative to generation capacity, however, only locally-sourced energy could correct the inefficiency of importing commodities with high and variable prices.

Diversifying the energy sectors of SIDS would not only lead to reduced dependence on foreign oil and fuels, and increased availability of foreign currency reserves, but it is also predicted to result in benefits associated with infrastructure, environment, health, and other sectors. These benefits also include improved electricity access and reliability and increased regional collaboration through energy trading.

Many SIDS have small economies and low levels of exports. These and other economic conditions make it difficult for them to invest in major infrastructure. However, there is increasing global attention drawn to climate change, which encourages foreign investment from governments, private companies and multinational organizations.

SIDS’ location often provides immense potential for renewable energy production such as solar and wind power. Antigua and Barbuda, The Bahamas, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines are all projected to have 10-100MW potential capacity for solar power generation as well as significant energy production from at least one other renewable energy source such as wind and geothermal, as well as untapped ocean mechanical and thermal energy resource potentials. The International Renewable Energy Agency (IRENA) has made similar predictions for states in the Atlantic, Indian Ocean and South China Sea region (AIMS) and Pacific Ocean Region in their Renewable Energy Country Profiles.

Prior to the U.N. Framework Convention on Climate Change (UNFCCC) Conference of the Parties (COP21) in Paris in December 2015, countries submitted an outline of post-2020 climate actions they intended to take under the new international agreement to be achieved during the conference, which is known as Nationally Determined Contributions (INDCs). 23 of the SIDS specified their intentions to develop renewable energy in order to contribute to the global effort of keeping temperature rise below 2°C. In addition, fiscal incentives and public financing exist in some SIDS to encourage the development renewable energy. A list of countries with existing policies and actions to encourage renewable energy development can be found in Appendix 1. Figure 2.8 shows the total electricity generation from renewables in all SIDS from 2000 to 2009. Solar and wind deployment in SIDS has significantly increased since 2010. The reduction of hydropower caused the reduction in total renewable power generation.

Figure 2.8. Total electricity generation from renewables in all SIDS.[5]

Nevertheless, the deployment of renewable energy in small island economies remains low compared to the total energy use in the countries. Values for renewable energy generation ranged from 0% in over a dozen island economies to 74% in Belize. Renewable energy generated on average, only 13% of electricity in a given island economy.[6] Despite this, renewable energy generation targets are strengthening. This may reflect policymakers’ growing confidence in the feasibility or viability of new renewable energy deployments.

Although there is potential for renewable energy development in SIDS, they face a myriad of interlocking sets of challenges in bringing these projects to fruition.

  1. Overcoming political and regulatory challenges
  2. Securing sustainable energy investment
  3. Developing the technological capacity for operation and maintenance

The International Renewable Energy Agency’s (IRENA) August 2014 report, Renewable Islands: Settings for Success, argued that combinations of political prioritization, open markets, technical planning, and capacity building have catalyzed renewable energy investment inflows in Cabo Verde, Cyprus, Fiji, and Samoa – and suggests a model that SIDS can use to proactively reorder public policy to attract sustainable energy investment partnerships.

The report also emphasised that renewable energy projects were undertaken in part to curtail high retail electricity rates. Fuel imports in 2012 ranged from the equivalent of US$ 600 to US$ 3500 for person living in small island economies. As the upper range of retail electricity prices in SIDS exceeds 40 U.S. cents per kilowatt-hour, and as many renewable energy technologies become increasingly affordable (see Appendices A7-A9), renewable energy deployment will become an increasingly attractive option for replacing energy infrastructures in SIDS.

While tangible difficulties that impede renewable energy deployment in SIDS – front-end investment expenses, though shrinking, are chief among them – the fiscal challenges SIDS face in procuring fossil fuels are iterated indefinitely. In comparison, the challenges related to attracting investment for sustainable energy projects are each one-off challenges.

 

SECTION III

3.1 Research Objective

The research objective of this study is to investigate the macroeconomic impacts of renewable energy development in SIDS, particularly by looking at its effects on GDP. This analysis will be used as evidence of the direct macroeconomic benefits of renewable energy in order to incentivize SIDS’ leaders and their international partners to invest in renewable energy development. Two of the biggest financial limitations of SIDS renewable energy investments include their limited ability to finance projects and the long pay-off time for renewable energy projects. The results of this study will hopefully be a tool used to mitigate both of these issues by providing evidence for the macroeconomic benefits of renewable energy investment.

3.2 Methodology

Chien and Hu (2008) analysed the effects of renewable energy development on GDP for 116 economies in 2003 through Structural Equation Modelling (SEM).[7] This analysis follows a similar empirical approach to analyse the effect of renewable energy on macroeconomic efficiency.

Structural equation modelling (SEM) is a multivariate statistical analysis technique and a combination of factor analysis and multiple regression analysis. The technique is used to analyse structural relationships between measured variables and latent constructs, and is selected when multiple and interrelated dependence is studied in a single analysis.[8]

By using structural equation modelling, GDP of SIDS is decomposed into multiple influencing factors including trade balance, capital formation, household consumption, energy imports and renewables. GDP is the latent construct, while all the others are measured variables. Figure 3.1 illustrates the previous theoretical assumption of relationships between measured variables and GDP, as well as relationship among measured variables. By theory, renewable energy increases the macroeconomic efficiency by the following processes: (1). The investment and business expansion, as well as new employment opportunities brought by renewable energy industries result in economic growth. (2) The substitution of imported energy (mainly fossil fuels) leads to less import, hence decreases debt and increases trade balance. (3) Combing (1) and (2), renewable energy has a positive effect on GDP.

Figure 3.1. SEM initial model, modified from Chien and Hu (2008).[9]

The model can be expressed by the following equations:

 

(1) GDP = a1I + a2TB + a3C + a4EI + a5RN + E1

(2) I = b1RN + b2C + E2

(3) TB = c1EI + c2RN + E3

(4) EI = d1RN + E4

(5) C = f1EI + f2TB + E5

 

Where,

I denotes capital formation;

TB denotes trade balance;

C denotes household consumption;

EI denotes energy imports;

RN denotes renewables;

E1, E2, E3, E4, E5 are the residuals of each equation.

 

In equation (1), GDP is influenced by capital formation, trade balance, and household consumption. Renewable energy and energy imports are included because they may have indirect impacts as explained in the last paragraph. In equation (2), capital formation is influenced by renewable energy because theoretically, development in renewables will lead to business expansion, which causes capital accumulation. Household consumption is related to income, the part of income not used for consumption will be used in savings, hence being translated into capital formation.

Equation (3) shows that trade balance is influenced by energy imports and renewables. Trade balance is the result of exports minus imports. Therefore, in theory, energy imports have a negative impacts on trade balance while renewable energy has a positive impact on trade balance by reducing energy imports as shown in equation (4).

Equation (5) can be explained by international trade theories. The domestic price of goods increases as the same kinds of goods are exported while the domestic price of goods decreases as same kind of goods is imported. Therefore, trade balance can influence household consumption indirectly through influencing domestic prices. Energy imports also influence domestic energy prices and the domestic consumption of energy. As a result, consumption of energy-related products is also affected.

The purpose of the analysis is to test whether the influences of renewables on GDP are valid.

3.3 Data

Most up-to-date renewable energy data and macroeconomic data were collected for 39 SIDS. Table 2 lists the 39 SIDs categorized by the region they are located within.

3.3.1 Renewable Energy Development Data

The total electricity generated from renewable energy sources is used as an indicator for renewable energy development. The data can be found on IRENA website under REsource-Avoided Emissions Calculator[10]. The IRENA REsource has data of electricity generated from different renewable energy technologies (GWh) for all 42 SIDS from 2000 to 2014. For this analysis, electricity generated from different renewable sources is added up for 2014 particularly. Renewable technologies include solar photovoltaic, wind, biomass, geothermal and hydropower.

Other renewable energy development data exists while with various limitations. For example, World Bank has renewable energy consumption (% of total energy consumption) data, while combining both the renewable energy consumption (% of total energy consumption) and total energy consumption datasets, only 9 of the SIDS have available information. IRENA REsource has data for finance flows in renewable energy but only includes foreign investment without considering investment projects initiated by domestic businesses or governments. Therefore, the electricity generation from renewables is used for this analysis.

3.3.2 Energy Imports Data

Information about energy imports by SIDS is obtained from the CIA World Factbook. CIA World Factbook provides most up-to date information about each country’s imports of crude oil (bbl/day), refined petroleum products (bbl/day), natural gas (cubic metre). These figures are then converted to toe per year and added up for each country to be used as the total energy imports. Although some states may import other types of fuels, the listed three fuels represent the majority of energy imports in the SIDS.

3.3.3 Economic Data

Economic data including capital formation in current dollars, household consumption in current dollars, trade balance in current dollars and GDP in current dollars was collected from the World Bank World Development Indicator database. Most states have the most up-to-date data in 2015, while a few of them only have 2014 data available.

3.3.4 Countries

39 SIDS with available data in all the aforementioned variables are analyzed (Table 2). The states are categorized into three groups based on their geographic regions: the Caribbean, the Pacific, and Africa, Indian Ocean, Mediterranean and South China Sea.

Singapore posed a substantive concern, however, as it is a much larger economy than other SIDS. Nevertheless, because of Singapore’s classification as a small island developing state and its heavy reliance on energy imports, which indicates the importance of renewable energy development in the country, Singapore was retained in the sample.

Table 2. List of SIDS studied.

3.4 Results and analysis

As explained in 3.2, figure 3.1 shows the initial SEM model used in the analysis of 39 SIDS. Natural logarithm is taken for all the variables. Table 3 shows the estimated path coefficients for the initial SEM model.

Figure 3.1. Initial SEM model

 

(1) GDP = a1I + a2TB + a3C + a4EI + a5RN + E1

(2) I = b1RN + b2C + E2

(3) TB = c1EI + c2RN + E3

(4) EI = d1RN + E4

(5) C = f1EI + f2TB + E5

 

Table 3. Estimated path coefficients for the initial SEM model.

Variables GDP Energy imports Capital formation Trade balance Household consumption Renewables
GDP 0.0531 0.315*** 0.0923** 0.663*** 0.0271*
Energy imports 0.445***
Capital formation 0.878*** 0.0949*
Trade balance 0.218** -0.129*
Household consumption 0.872*** -0.233***

 

Note: Sample size = 39

Numbers in the table are coefficients representing impacts of variables in the first row on variables in the first column.

*** Represents significance at the 1% level.

** Represents significance at the 5% level.

* Represents significance at the 10% level.

 

After the initial analysis, the only path that was not significant at 10% was the path from energy imports to GDP. Therefore, the path was removed from equation (1). Figure 3.2 shows the revised SEM model.

Figure 3.2 Revised SEM model.

 

Equation (1) was modified to: (1) GDP = a1I + a2TB + a3C + + a4RN + E1. All the other equations keep the same. Table 4 shows the estimated coefficients for each path in the revised SEM model.

 

Table 4. Estimated path coefficients for the revised SEM model.

Variables GDP Energy imports Capital formation Trade balance Household consumption Renewables
GDP 0.346*** 0.105*** 0.694*** 0.0247*
Energy imports 0.444***
Capital formation 0.877*** 0.096*
Trade balance 0.219** -0.127*

 

Household consumption 0.871*** -0.230***

Note: Sample size = 39

Numbers in the table are coefficients representing impacts of variables in the first row on variables in the first column.

*** Represents significance at the 1% level.

** Represents significance at the 5% level.

* Represents significance at the 10% level.

 

The results show that the model and the assumption of signs on each path are verified apart from the path from renewables to energy imports and from energy imports and renewables to trade balance.

The result shows that renewable energy has a statistically significant impact on GDP at a 10% confidence level.  A 1% increase in electricity generation from renewables can lead to 0.025% of increase in GDP, i.e., for per 1% increase in electricity generated from renewables, the total GDP of the 39 countries will increase by more than 18 million current dollars.

According to the results, renewable energy investment has a significant positive impact on energy imports. A 1% increase in renewables can lead to 0.44% increase in energy imports. This may be explained by greater energy demand, not only used more renewables, but also requires more energy imports. As renewables influence trade balance indirectly through its effect on energy imports, renewable energy might also explain the negative impacts of renewables on trade balance.

In generable, renewable energy can only account for a small changes in GDP since there are so many contributing factors.

3.5 Limitations

Usually, SEM requires a larger sample size with over 100 samples and 10 indicators. However, as even the total number of SIDS is below the preferred sample size and data is not available at all the SIDS, only 39 states were used in this analysis, which might affect the accuracy of the estimation.

In addition, using electricity generated from renewables as an indicator for the renewable energy development may cause bias in the analysis. Although the majority of renewables are used for electricity, it can also be used to meet energy demands in transportation, heating, and other commercial and industrial sectors.

Furthermore, for a few countries, energy imports in 2014 was used instead of 2015. This inconsistency in years might cause some inaccuracy in the analysis.

 

CONCLUSIONS

As sea levels rise and weather patterns change, many states are forced to adapt to ensure survival. Additionally, decreasing oil prices make the picture more complicated as SIDS tend to import more fossil fuels instead of developing renewable energy. This will lead to even heavier long-term reliance on energy imports that exacerbate the impacts of climate change. Therefore, demonstrating the importance of renewable energy becomes essential for SIDS to analyse the cost and benefit of changing current energy profiles.

Renewable energy is a viable, though vastly under-utilized, option for SIDS to increase both foreign currency reserves available for investment and to diversify their energy sectors.  Renewable energy’s potential to reduce the demand of imported fuel liberates foreign currency reserves to be used for investment in climate adaptation projects such as the construction of seawalls and improvement of roads. Diversifying the energy sectors of SIDS using renewable energy investment would lead to reduced international dependence by mitigating participation in programs such as the PetroCaribe between Venezuela and the Caribbean, and other similar arrangements. It would also likely result in an increased electrification of SIDS.

Renewable energy investment in SIDS is not without its challenges. At the 2005 UN Conference on Small Islands in Mauritius, the majority of states cited project financing as the largest hurdle in pursuing renewable energy projects. Other challenges include energy policy and markets that do not allow for independent energy production. Evidence of the benefits of renewable energy investment, however, can be used to attract external investors and to incentivize policy changes that facilitate renewable energy production. The macroeconomic study described in this paper shows that the benefits of renewable energy investment include a positive correlation between renewable energy investment and GDP; a benefit that would benefit both foreign investors and SIDS.

Despite the challenges SIDS face, they are taking steps towards bringing renewable energy projects to fruition. At present, the majority of SIDS already has renewable energy targets set for the next several decades. For example, REN 21’s Renewable Global Status Report has reported Barbados as having a goal of 29% electricity generation from renewables by 2029 and Vanuatu as having a goal of 65% by 2020. Some states have even begun to incorporate renewable energy sources into their energy make up. As of 2012 the Dominican Republic produced 14% and Fiji produced 67% of its energy from renewables. At present, Sustainable Energy for All, a global energy initiative has an established a goal for all countries to double their current renewable energy production, ensure access to modern energy services, and improve the rate of energy efficiency by 2030. SIDS’ investments in renewable energy would put them on the path towards accomplishing these goals. Additionally, there has been increased focus on investment and development in SIDS with 2014 as the International Year of Small Island Developing States, marking a decade since the UN General Assembly established the Barbados Program Plan of Action. In this, the inaugural year of Decade of Sustainable Energy for all, the empowerment of SIDS to both improve macroeconomic performance and to protect themselves from a changing climate – and indeed, both goals reinforce one another – cannot be delayed another decade. The newest elaboration of challenges and efforts to bridge the divide between the status quo and a sustainable energy future – the “SIDS Accelerated Modalities of Action (S.A.M.O.A.) Pathway” – must, therefore, represent a jumping-off point from which stakeholders seize upon opportunities to create value in small island developing states.

Note that other variables such as gross capital formation and population were added to the equation to satisfy the literature on economic growth. These factors are also instrumental to macroeconomic performance.

A downloadable pdf of this report is available here.

References

[1] Climate and Development Knowledge Network (CDKN), (2014). The IPCC’s Fifth Assessment Report: What’s in it for Small Island Developing States?

[2] AOSIS represents the Alliance of Small Island States, which is a coalition of small islands and low-lying coastal countries that share similar development challenges and concerns about the environment. The website is available at: http://aosis.org/. List of members available at: http://aosis.org/about/members/

[3] Data Source: World Bank Country Classifications, available at: https://datahelpdesk.worldbank.org/knowledgebase/articles/906519-world-bank-country-and-lending-groups

[4] AIMS: Atlantic, Indian Ocean, Mediterranean, and South China Sea Region.

[5] Source: IRENA REsource-Avoided carbon emissions, available at: http://resourceirena.irena.org/gateway/dashboard/?topic=17&subTopic=55

[6] Estimating the Macroeconomic Benefits of Renewable Energy Investments in Small Island Developing States. Climate Institute. September 2014. http://climate.org/estimating-the-macroeconomic-benefits-of-renewable-energy-investments-in-small-island-developing-states/

[7] Chien T. and Hu J.L. (2008), “Renewable Energy: An Efficient Mechanism to improve GDP.” Available at: https://www.researchgate.net/publication/222594526_Renewable_energy_An_efficient_mechanism_to_improve_GDP

[8] Explanation of SEM can be found on “Statistics Solutions” website, available at: http://www.statisticssolutions.com/structural-equation-modeling/

[9] Chien T. and Hu J.L. (2008), “Renewable Energy: An Efficient Mechanism to improve GDP.” Available at: https://www.researchgate.net/publication/222594526_Renewable_energy_An_efficient_mechanism_to_improve_GDP

[10] Available at: http://resourceirena.irena.org/gateway/dashboard/?topic=17&subTopic=55