Economic uncertainty and renewable energy investment

The energy transition is a crucial component of the transformation to a green economy, but financing this transition is a challenge for developing nations. Although renewable energy investments now exceed those in fossil fuels, these flows are highly uneven, leaving many developing countries at a disadvantage. Research on the reasons for this disparity remains limited. This paper investigates the impact of economic uncertainty on renewable energy investments using data from 93 countries that span 2000–2020, covering developed, emerging, and developing economies. The analysis reveals a consistently negative and statistically significant effect of economic uncertainty on renewable energy investments. This finding is robust across alternative measurements, model specifications, and estimation methods. Notably, this negative impact does not vary significantly across economies characterized by factors such as income, absorption capacity, and governance effectiveness. However, the effect is more pronounced during periods of low economic growth, limited financial absorption capacity, unfavorable financing conditions, and poor institutional quality, which exacerbate uncertainty and weaken responses to policy stimuli. The findings are underpinned by the interplay of Real Options Theory, Marginal Returns to Capital, and Financial Frictions, which collectively amplify or mitigate the effects of uncertainty on investments.