**5. Energy consumption, dependency and volatility**

To conclude that the higher the level of energy dependency, the lower the economic growth, is more intuitive than checking that the consumption of energy has the same negative impact on economic growth. However, looking carefully at these two relationships, both effects are understandable and expected. Regarding energy consumption, it is confirmed that the negative effect outweighs the positive one. As discussed above, this may be the result of two phenomena. On the one hand, this suggests that the additional consumption of energy stems from activities other than production, such as leisure activities. On the other hand, this additional consumption could be causing an overload in the external deficit of energy, for most EU Members.

The hypothesis that the dependency on energy imports is limiting economic growth is confirmed. Additional energy dependency means that the country becomes more subject to external constraints and to the rules, terms and prices set by other countries and external markets. Meanwhile, greater volume of energy imports is matched by financial outflows.

Globally, results reveal great consistency and they are not dependent on the assumptions we made about variances across panels and serial correlations. There are no signal changes and, in general, the explanatory variables prove to be consistently statistically significant

The impact of both energy consumption *per capita* and import dependency on energy on economic growth is negative and statistically significant. The effect of the volatility on economic growth is negative and statistically highly significant. This result supports the assumption that higher volatility contributes to reducing economic growth. Results also provide strong evidence that the impact of energy on economic growth is dissimilar, varying according to the source of energy. While oil and nuclear reveal a positive and statistically highly significant effect on economic growth, it seems that renewables are hampering economic growth. This negative and statistically significant relationship is consistent throughout the several models. The effect of the fossil source natural gas on economic growth is positive and statistically significant, albeit at a lower level of significance (5% and 10%). This probably comes from the fact that this source is playing a recent role as a transition source from heavily polluting sources towards cleaner ones. The effect of coal on economic growth is not always statistically significant and, when

We deepen the adequacy of use of the variables *LCRESct-1* and VOLGDPPCct since their use is not widespread in the literature. Additionally, we test the simultaneous use of *SCOALEGct, SOILEGct, SGASEGct,* and *SNUCLEGct*. For that purpose, we provide two exclusion tests: i) Joint Significant Test - JST; and ii) Linear Restriction Test -LRT. The variables *LCRESct-1* and VOLGDPPCct, together, must be retained as explanatory variables. Nevertheless, the sum of the estimated coefficients could not be statistically significant in explaining economic growth. From the LRT we reject the null hypothesis and then the sum of their coefficients is different from zero. The same conclusion is reached when we test the adequacy of the simultaneous control for the variables *SCOALEGct, SOILEGct, SGASEGct,*  and *SNUCLEGct*. These variables must belong to the models. Together with the appropriateness of the use of PCSE, these tests corroborate the relevance of the explanatory variables, other than energy consumption per capita and import dependency on energy,

To conclude that the higher the level of energy dependency, the lower the economic growth, is more intuitive than checking that the consumption of energy has the same negative impact on economic growth. However, looking carefully at these two relationships, both effects are understandable and expected. Regarding energy consumption, it is confirmed that the negative effect outweighs the positive one. As discussed above, this may be the result of two phenomena. On the one hand, this suggests that the additional consumption of energy stems from activities other than production, such as leisure activities. On the other hand, this additional consumption could be causing an overload in the external deficit of

The hypothesis that the dependency on energy imports is limiting economic growth is confirmed. Additional energy dependency means that the country becomes more subject to external constraints and to the rules, terms and prices set by other countries and external markets. Meanwhile, greater volume of energy imports is matched by financial outflows.

throughout the models.

significant, it is negative.

since these are well described in the literature.

energy, for most EU Members.

**5. Energy consumption, dependency and volatility** 

With respect to prices and diversification of primary energy sources, if larger energy dependency confers an advantage to the country, then it is likely that this dependency could have positive effects on economic growth. The reality is somewhat different, however. On the one hand, it appears that, in general, countries are price-takers in the international energy markets and, as such, they cannot influence prices. On the other hand, diversification of energy sources can lead to the need for diversified investments, which are expensive and are not sized to take advantage of economies of scale.

One of the common-sense ways to offset this negative effect will be the replacement of imports. To do so, countries can locally produce some of their energy needs, through the use of indigenous renewable resources. However, till now, the use of these resources to convert into electricity does not seem to produce the desired effects. On the contrary, it seems to limit the economic growth capacity of countries, in contrast to what happens with fossil energy sources.

Regarding the negative effect of volatility on economic growth, this result is in line with the hypothesis that the characteristic of irreversibility that is inherent in physical capital makes investment particularly susceptible to diverse kinds of risk (Bernanke, 1983; and Pindyck, 1991). Indeed, growth volatility produces risks regarding potential demand that hamper investment, generating a negative relationship between economic growth and its volatility. Other possible explanations are based on the learning-by-doing process, which contributes to human capital accumulation and improved productivity, which was assumed to be negatively influenced by volatility (e.g. Martin and Rogers, 2000).
