Policy insight from renewable energy, foreign direct investment (FDI), and urbanization towards climate goal: insight from Indonesia

Abstract

This study is premised on Indonesia's climate goal amidst good economic performance. To test the environmental implication of this macroeconomic performance of Indonesia, we adopt Indonesian quarterly data of 1990Q1-2018Q4 for empirical analysis. Relevant instruments in the economic performance of Indonesia such as urbanization, foreign direct investment (FDI), and renewable energy source are all adopted for accurate estimations and analysis of this topic. Different approaches (structural break test, autoregressive distributed lag (ARDL)-bounds testing and Granger causality) are all adopted in this study. Our analysis and policy recommendations are based on the short-run and long-run ARDL dynamics and Granger causality. Findings from ARDL confirmed negative relationship between carbon emission and renewable energy source, FDI, and urbanization. Also, a U-shape instead of inverted U-shaped EKC is found confirming the impeding implication of Indonesian economic growth to its environmental performance if not checkmate. From Granger causality analysis, all the variables are seen transmitting to urbanization in a one-way causal relationship. Also, FDI and renewable energy prove to be essential determinants of the country's environment development; hence, FDI is seen transmitting to both energy sources (fossil fuels and renewables) in a one-way causal relationship. Renewable energy is as well seen having two ways causal relationship with both carbon emission and fossil fuels. This result has equally exposed the significant position of the three instruments (urbanization, FDI, and renewable energy source) in Indonesian environment development.