Decoupling of Economy from Fossil Fuels

Jae Hyun Kim
December 17, 2017

Submitted as coursework for PH240, Stanford University, Fall 2017


Fig. 1: US GDP Growth and CO2 emission growth in 1990-2014. (Source: Jae Hyun Kim. Data from the IEA. [7])

Since 1900, fossil fuels have made up at least 80% of the U.S. energy consumption. (Data source: U.S. Energy Information Administration) Until recently, economic growth largely coincided with the increased usage of fossil fuels. However, recently the correlation between GDP growth and the fossil fuel usage has started to disappear. Nations are going through much steeper GDP growth compared to their fossil fuel usage growth. Another notable observation is the disappearing correlation between fossil fuel price and renewable energy stock price. Renewable energy has been conventionally considered a competitor or substitute for fossil fuels. Consequently, renewable energy stock price has been highly correlated to natural gas price. However, such correlation has decreased to nil recently, demonstrating that renewable energy industry has become its own sector separated from traditional energy market. Finally, positive bi-directional correlation between renewable energy consumption and GDP growth is observed in most countries, indicating the potential of renewable energy to take place of fossil fuels.

Decoupling of Economic Growth From Fossil Fuels

In 2016, for the first time since the industrial revolution the world produced less greenhouse emissions than the year before without it being caused by an economic crisis. [1] In particular, greenhouse gas (GHG) emissions from the U.S. plateaued while the economic growth was substantial. Asafu-Adjaye et al. demonstrate that while correlation between energy use and GDP per capita remains strong, relationship between GDP growth and fossil fuel consumption growth rate has been weakening, even reversing for some of the developed countries. [2] Fig. 1 shows the U.S. GDP growth vs. CO2 emission growth during 1990-2015. We can observe that the GDP growth curve starts to deviate from CO2 consumption growth from year 2010.

Decoupling of Renewable Energy Sector From Fossil Fuels

The renewable energy sector has historically been significantly affected by the fossil fuel price, especially oil. The rally and subsequent fall of oil price between 2007-2010 was accompanied by renewable energy sector closely following it. However, in recent years, the correlation has dropped significantly. [3] In fact renewable energy sector has been uncorrelated, or even negatively correlated with oil price in the recent years. Several explanations have been proposed for such phenomenon. The first is that oil and renewable energy are not substitutes. Oil is used mainly for transport, while renewable energy is turning out to be mainly used to generate electricity. The second explanation is that renewable energy sector is becoming closer to the technology sector than energy sector. [4] These perspectives as well as the data strengthen the claim that renewable energy is becoming its own sector independent of the traditional energy market.

Will Renewable Energy Lead Economic Growth?

While recent expansion of renewable energy and economic growth has coincided, there has been debates on whether renewable energy is the cause or effect of the economic growth. Al-mulali et al. demonstrate that there is a bi-directional relationship between renewable energy consumption and GDP growth in 79% of the countries, suggesting the positive feedback between the two. [5] Apergis and Denuletiu further shows the bi-directional causality. [6] While fossil fuel is slowly losing its dominance on the economy, it is likely that renewable energy will fill its place in the feedback loop of energy and economy.

© Jae Hyun Kim. The author warrants that the work is the author's own and that Stanford University provided no input other than typesetting and referencing guidelines. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.


[1] World Energy Outlook: Special Report on Energy and Climate Change," International Energy Agency, 2015.

[2] J. Asafu-Adjaye, D. Byrne, and M. Alvarez, "Economic Growth, Fossil Fuel and Non-Fossil Consumption: A Pooled Mean Group Analysis Using Proxies For Capital," Energy Econ. 60, 345 (2016).

[3] J. E. David, "Solar's Spike Tied to Oil Prices? Don't Bet on It," CNBC, 30 Mar 14.

[4] L. Shaffer, "Will Oil's Drop Hurt Renewable Energy?" CNBC, 4 Dec 14.

[5] U. Al-Mulali et al., "Examining the Bi-Directional Long Run Relationship Between Renewable Energy Consumption and GDP Growth," Renew. Sustain. Energy Rev. 22, 209 (2013).

[6] N. Apergis and D. C. Danuletiu, Renewable Energy and Economic Growth: Evidence From the Sign of Panel Long-Run Causality," Int. J. Energy Econ. Policy 4, 578 (2014).

[7] CO2 Emissions from Fuel Combustion 2017 (OECD Press, 2017).