Impact of Carbon Pricing on Renewable Energy: A Comparative Study of Developing and Developed Countries

Abstract

The global energy transition is crucial in tackling climate change and achieving sustainable development, with renewable energy playing a central role in replacing fossil fuels. Therefore, many countries have implemented carbon pricing policies to internalise environmental externalities. While most of the existing literature focuses on the impact of such policies on carbon dioxide emissions, their influence on renewable energy capacity remains underexplored. We examine the impact of carbon pricing policies ‒ emissions trading schemes and carbon taxes ‒ on renewable energy capacity across 18 developing and 21 developed countries from 2006-2022. Given that the standard difference-in-differences approach may violate the parallel trends assumption due to cross-country heterogeneity, we employ a combination of propensity score matching and staggered DiD to mitigate selection bias and improve causal inference. We find that carbon pricing policies significantly increase renewable energy capacity in developing countries, both in the short run and long run. However, implementation of these policies appears to reduce renewable energy capacity in developed countries, possibly due to policy design, market maturity, or regulatory overlap. The findings highlight the importance of strengthening carbon pricing in developing countries, while developed economies may require more targeted reforms or complementary policies to enhance renewable energy development.