Energy transition and regional economic growth: Spatial spillovers across the urban-rural divide

This study examines the role of energy consumption in regional economic growth across 1152 EU-27 NUTS-3 regions, distinguishing between renewable and fossil-based energy sources and explicitly accounting for spatial heterogeneity along the urban-rural continuum. We employ a flexible translog production function within a spatial econometric framework to capture nonlinearities, factor complementarities, and spatial interdependencies in energy-growth relationships. Bayesian model comparison decisively favours a Spatial Durbin Error Model with exponential distance-decay spatial weights, indicating that spatial dependence attenuates smoothly with geographic distance. The results reveal pronounced nonlinear and source-specific energy effects. Renewable energy exhibits a convex relationship with output, negative at low deployment but positive beyond threshold levels, highlighting the importance of scale effects. Spatial spillovers from neighbouring regions' renewable deployment show diminishing returns, suggesting potential competition for suitable sites or grid capacity constraints. Conversely, fossil energy displays a concave profile with declining marginal contributions at higher intensity. Substantial territorial heterogeneity emerges along the urban-rural hierarchy: renewable energy contributes positively to output exclusively in rural regions, while fossil energy effects are strongest in intermediate and rural regions. Moreover, renewable and fossil energy display partial complementarity rather than strict substitution, suggesting that gradual hybrid transition pathways may be economically efficient during the energy transition. These findings carry important policy implications. Renewable investments appear most productive in rural regions, supporting both decarbonisation and regional development, while urban regions can pursue ambitious emissions reductions with limited growth trade-offs. Intermediate and rural regions, however, require targeted transition support to manage continued fossil dependence.