**1. Introduction**

The energy needs of mankind in the 19th century were essentially satisfied by the use of renewable sources, such as biomass mainly by burning wood, and animal power. Some transformation of agricultural goods was done through the exploitation of natural resources such as wind and water, using wind mills and water wheels. The 20th century was the century of high economic growth. It was a century where the use of internal combustion engines was widespread and with them the massive use of fossil fuels. The 21st century is now looking for alternative sources of energy.

Nowadays, there is a backdrop of the forecast of depleting fossil fuels in the near future, particularly oil, and climate changes, associated with large emissions of carbon dioxide. In this century, there is a great focus on renewable energy sources, with the strong support of public policies. In addition to the use of hydropower, which already has mature technology, there is a continuous process of developing technologies for harnessing the wind and photovoltaic resources. The attribution of the title of energy of the future to renewable sources is dependent on two factors. First, the achievement of their own economic sustainability will depend on the evolution of technology itself. Second, it will depend on the long-term advances in atomic energy to accomplish the nuclear fusion process on Earth. One of the fundamental questions that arises is to assess whether this progressive change in the energy paradigm will affect the process of economic growth. The analysis of the relationship between energy consumption and economic growth is far from new in literature. Narayan & Smyth (2008) summarise the principal achievements, the absence of consensus and the diversity of methodologies. The study of the impact of using renewables on economic growth is, however, scarce (e.g. Apergis & Payne, 2010 & Menegaki, 2011). Furthermore, the literature has not focused on the energy mix, that is, on the impact of the simultaneous use of different energy sources on economic growth. Will the impact of energy on economic growth be identical, regardless of whether this energy comes from fossil fuels or renewable sources? The literature is not unanimous regarding the relationship between income and environmental concerns. Some authors, such as Vachon & Menz, 2006 and Huang *et al*., 2007, argued a positive effect of wealth on renewables. On the one hand, higher income

 1Research supported by: NECE, I&D unity funded by the FCT - Portuguese Foundation for the Development of Science and Technology, Ministry of Science, Technology and Higher Education.

could cushion the effect of the greater fees and costs resulting from the encouragement of Renewable Energy (hereafter RE). On the other hand, higher income levels can also represent a further financial capacity for accommodating the huge investments needed to develop the technology of energy production from renewable sources. Recently, Marques *et al*. (2011) pointed out that the effect of Gross Domestic Product (GDP) on renewables is far from uniform. In fact, this effect depends on the phase of deployment of renewables. With the exception of countries that use renewable sources on a small scale, the authors show that in general the effect of GDP on RE is negative.

Higher income levels of countries have historically been associated with the use of technology based on fossil fuels. Currently, the production structures are grounded firmly in the use of internal combustion engines, in gas turbines and more recently in fuel cells, although the latter with still little relative weight. The technology associated with these fuel cells is still evolving. Right now, this technology is very expensive and partly controversial, because hydrogen is not a primary energy source. The process for obtaining it can lead to the release of harmful gases into the atmosphere. In addition, unequivocal confirmation is still lacking as to their efficiency when compared to that of conventional combustion engines. The conversion and replacement of all these technologies with other technologies based mainly on electricity, such as electric motors, is a long and extremely costly path. More often than not, this shift to alternative technologies is not desired or it is hindered by entrenched interests, which are mostly associated with lobbying exercised for players acting in traditional sources of energy.

There are specific features identified in renewable energies. The first refers to the mechanism of price formation. Given that the contracts of exploitation of renewable sources are generally long-term, usually with prices that are defined or indexed to inflation, the volatility of those energy prices that economic agents face is well controlled, when compared with the prices of fossil sources. This mechanism may thus contribute to increased stability of the economic environment in which agents conduct their forecasts and make their investment decisions. In this way, economic growth could be stimulated. Economic growth can also be promoted by the development of a cluster associated with renewables, since production is done locally. The use of local resources is just another feature of renewables.

The third feature concerns the incentives for the development of renewables. Countries have adopted an extensive battery of measures, such as feed-in-tariffs, grants or preferential loans, to encourage the development of these sources. Walking the path of renewable technology development requires sustaining high investment costs. In one way or another, the costs of implementing these policies are passed on to the economic agents. Since resources are scarce, if the inputs become more expensive, the focus on renewables may create inefficiencies in the economy. Inefficiency can also result from the fact that greater use of RE can cause already installed production capacity to be left behind, including capacity associated with internal combustion engines. Actually, these characteristics sum up the hot debate about the benefits / need for development of renewables. Therefore, to shed some light on this debate, we consider it indispensable to test empirically the effect that different energy sources have had on economic growth.

Since the beginning of the discussion about climate change, especially since the United Nations Framework Convention on Climate Change in 1990, and the Kyoto Protocol (1997), Europe has been firmly committed to this goal. That is why, within a context of energy policy and in order to promote the use of renewables, Europe has produced strong

could cushion the effect of the greater fees and costs resulting from the encouragement of Renewable Energy (hereafter RE). On the other hand, higher income levels can also represent a further financial capacity for accommodating the huge investments needed to develop the technology of energy production from renewable sources. Recently, Marques *et al*. (2011) pointed out that the effect of Gross Domestic Product (GDP) on renewables is far from uniform. In fact, this effect depends on the phase of deployment of renewables. With the exception of countries that use renewable sources on a small scale, the authors show that

Higher income levels of countries have historically been associated with the use of technology based on fossil fuels. Currently, the production structures are grounded firmly in the use of internal combustion engines, in gas turbines and more recently in fuel cells, although the latter with still little relative weight. The technology associated with these fuel cells is still evolving. Right now, this technology is very expensive and partly controversial, because hydrogen is not a primary energy source. The process for obtaining it can lead to the release of harmful gases into the atmosphere. In addition, unequivocal confirmation is still lacking as to their efficiency when compared to that of conventional combustion engines. The conversion and replacement of all these technologies with other technologies based mainly on electricity, such as electric motors, is a long and extremely costly path. More often than not, this shift to alternative technologies is not desired or it is hindered by entrenched interests, which are mostly associated with lobbying exercised for players acting

There are specific features identified in renewable energies. The first refers to the mechanism of price formation. Given that the contracts of exploitation of renewable sources are generally long-term, usually with prices that are defined or indexed to inflation, the volatility of those energy prices that economic agents face is well controlled, when compared with the prices of fossil sources. This mechanism may thus contribute to increased stability of the economic environment in which agents conduct their forecasts and make their investment decisions. In this way, economic growth could be stimulated. Economic growth can also be promoted by the development of a cluster associated with renewables, since production is done locally. The

The third feature concerns the incentives for the development of renewables. Countries have adopted an extensive battery of measures, such as feed-in-tariffs, grants or preferential loans, to encourage the development of these sources. Walking the path of renewable technology development requires sustaining high investment costs. In one way or another, the costs of implementing these policies are passed on to the economic agents. Since resources are scarce, if the inputs become more expensive, the focus on renewables may create inefficiencies in the economy. Inefficiency can also result from the fact that greater use of RE can cause already installed production capacity to be left behind, including capacity associated with internal combustion engines. Actually, these characteristics sum up the hot debate about the benefits / need for development of renewables. Therefore, to shed some light on this debate, we consider it indispensable to test empirically the effect that different

Since the beginning of the discussion about climate change, especially since the United Nations Framework Convention on Climate Change in 1990, and the Kyoto Protocol (1997), Europe has been firmly committed to this goal. That is why, within a context of energy policy and in order to promote the use of renewables, Europe has produced strong

in general the effect of GDP on RE is negative.

in traditional sources of energy.

use of local resources is just another feature of renewables.

energy sources have had on economic growth.

compulsory recommendations for its Member States. In the context of the definition of climate and energy targets, to be reached in 2020, the European Union (EU) established the 20-20-20 strategy. This strategy pursues the following objectives: i) reduce greenhouse gas emissions to at least 20% below 1990 levels; ii) produce 20% of energy consumption from renewable sources; and iii) encourage energy efficiency, reducing primary energy use by 20%. Plans are still being drawn up to make the target reduction of greenhouse gas emissions even more ambitious. Regarding the analysis of the relationship between sustainable development and economic growth, it is therefore important to study the EU region. In parallel with the clear commitment to extend the use of renewables, Europe has undergone growth difficulties. The European Council in Lisbon in the year 2000, and the Spring European Council in Brussels in 2005 defined, as their main goals, sustainable economic growth and job creation.
