Published in Economics and Finance in Indonesia 59 (1): 1-18, 2011

The final published version is available from LPEM-FEUI (www.lpem.org)

Causality relationship between renewable and non-renewable

energy consumption and GDP in Indonesia*

Jauhary Arifin and Normansyah Syahruddin

Abstract

Recent contributions show that the world is facing serious problems with energy
depletion as a result of the unbalanced availability between finite energy resources and
population growth as well as industrial growth. The available amount of finite-based energy
resources was predicted to last between 30-150 years (World Resource Institute 2007).
Responding to that threat, an ever-expanding research has been conducted on energy
consumption and renewable energy resources, leading to a large literature on this research
area.
Research on the causal relationship between energy consumption and GDP has been
a well established topic in the energy economics literature, yet the topic still remains
debatable (Dhungel 2008). In the case of Indonesian economy, some studies have shown
different results on the casual relationships between energy consumption and GDP and are
mainly focusing on non-renewable energy. This paper tests the causality relationship between
renewable and non-renewable energy consumption and GDP in Indonesia by applying the
Toda-Yamamoto procedure as well as the Engle-Granger procedure. Two proxies of
renewable energy consumption are used in this study. Granger causality is found to run only
from renewable electricity consumption per capita to GDP per capita. The last part of this
paper discusses the policy implications from our findings.

Keywords: Renewable Energy, Non-Renewable Energy, Real GDP, Granger Causality,

Indonesia

JEL classification: C32, Q43.

*
We thank Oetomo Tri Winarno from Institut Teknologi Bandung for lending us his electricity data
compiled from the Statistics Book of Electricity and Energy of the Directorate General of Electricity
and Energy Utilization. We also appreciate helpful comments from the editors of this journal. Arifin
acknowledges financial support from the University of Verona, Italy (PhD scholarship, CooperINT
2008, and funding from Scuola di dottorato di Economia). Syahruddin acknowledges financial support
from the University of Bergamo, Italy (PhD scholarship). Any opinions, findings, or conclusions
expressed in this paper are those of the authors and do not necessarily reflect the views of any
institutions including the Ministry of Agriculture, Republic of Indonesia.

Department of Economics, University of Verona, Italy; The Faculty of Economics, University of

Lugano, Switzerland. Corresponding author. Email: jauhary.arifin@univr.it; jauhary@gmail.com

Department of Economics and Technology Management, University of Bergamo, Italy; Ministry of

Agriculture, Republic of Indonesia. Email: norman.syahruddin@unibg.it

1
1. INTRODUCTION
Recent contributions have shown that the world is facing serious problems with energy
depletion as a result of the unbalanced availability between finite energy resources and
population growth as well as industrial development. The available amount of finite-based
energy resources was predicted to last between 30-150 years (World Resource Institute 2007).
This situation also hindered the economic development in most developing countries in the
world. Not only the availability became the immediate concern, but also the environmental
degradation whereas oil and coal exploitation eventually led to forest destruction, biodiversity
extinction and natural disasters (i.e. the Lapindo mud disaster in East Java). This type of
energy use was also vulnerable to disruptions caused by major events in the world, such as
war, monopolistic behaviors (e.g. by OPEC) and often very much depending on the political
stability of the producing countries (Huntington 2009)1.

Responding to these complexities, many countries have started to utilize energy which
is produced from renewable resources. Different types of renewable energy sources, such as
solar, wind, water, geothermal, and biomass have been used, mostly by developed countries,
to meet the demand of energy, whereas non-renewable energy availability are expected to be
scarce by 2050. This will later contribute to the achievement of the Millennium Development
Goals (MDGs), stating that energy availability and energy access play a vital role in poverty
eradication, providing aid to universal primary education, promoting gender equality, and
improving health as well as reducing child mortality (United Nation 2005).

With the growing interest in using renewable energy, it is natural to ask a fundamental
question, namely whether this development causes economic growth, is caused by economic
growth, whether both of the two are true, or none of them is true? Responding to this question
leads us to a well-established topic in energy economics which focuses on the investigation of
the causal relationship between energy consumption and economic growth, although the topic
still remains debatable (Dhungel 2008). In this paper, we aim to investigate the causal
relationship between renewable and non-renewable energy consumption and economic
growth in Indonesia.

1
Further, Huntington (2009) states that a principal difference over the last 10 years has been the spread of risks
of oil supply interruption beyond the Persian Gulf region. A later study covering a wider area, including Russia,
the states surrounding the Caspian Sea,, Nigeria, Angola, Venezuela, and Mexico, concluded that each of these
countries could potentially experience political problems that would make its oil supplies vulnerable.

2
 This paper consists of six sections. In the introduction we discuss the background of
our proposed research. In the next two sections, we describe some results from similar studies
and provide an overview of energy utilization in Indonesia. The fourth section explains the
data and methodology used in this study, and the fifth section discusses our empirical
findings. Lastly, we derive conclusions and possible policy implications from our research.

2. A BRIEF LITERATURE SURVEY

Numerous researches have studied the causal relationship between energy consumption and
economic growth (i.e. Ghosh 2002; Hondroyiannis et. al. 2002; Lee 2005; Francis et. al.
2007; Mozumder and Marathe 2007). The topic has also been recently surveyed by Ozturk
(2010) and Payne (2010). Although the topic seems to be the trend in the literature, Payne
(2010) points out that there is still no consensus concerning the causal relationship between
energy consumption and GDP for a particular country. In the same paper, he summarizes four
testable hypotheses of the causal relationship between energy consumption and economic
growth that are generally used by researchers working on the topic. First, the growth
hypothesis which proposes that energy consumption causes economic growth both directly
and as a complement to other inputs in the production process. The conservation hypothesis
suggests that energy conservation policies may not adversely affect real GDP growth. The
neutrality hypothesis asserts that energy consumption does not have a significant causality
on economic growth. The last hypothesis is the feedback hypothesis that implies
interdependence between energy consumption and economic growth.

Earlier studies on the causality relationship between total energy consumption and its
contribution to economic growth in Indonesia have provided us with different results. Using
GDP growth, commercial energy use per capita, and energy prices as the variables, Asafu-
Adjaye (2000) shows that, in the short run, there is a uni-directional Granger causality
running from energy consumption to income. The same view is also shared by Squalli (2007)
who found a causality relationship running from electricity consumption to GDP in Indonesia.
These findings corroborate the view that, for Indonesia, there is a short-run neutrality between
energy consumption and income, similar to Fatai et. al. (2004), while Soytas and Sari (2003)
pointed out that there is no cointegration between energy and income. In a further study, Sari
and Soytas (2007) found that energy is an important input factor of production (in terms of
explaining the forecast error variance of income growth) compared to labour and capital.
Another result was provided by Masih and Masih (1996) which stated that causality runs from

3
income to energy consumption. This later result is also supported by Yoo (2006) who found a
uni-directional causality running from economic growth to electricity consumption.

Despite the contributions to the topic, previous studies only focused on the non-
renewable energy consumption causality towards national income or GDP. In a different
study, Sadorsky (2009) presented the causality between renewable energy consumption and
income in several emerging markets, including Indonesia. The result shows that in the short
run, renewable energy consumption does not impact the current change in real income
whereas in long run real per capita income does influence real per capita renewable energy
consumption through the error correction term. This implies that the authorities have to be
careful in constructing and implementing policies in renewable energy and do not only focus
on short run gains but also on the long run perspective.

Our work differs from previous studies in some respects: 1) we provide a perspective
based on two types of energy sources in Indonesia, namely renewable and non-renewable
energy sources; 2) we use two proxies of renewable energy consumption with a longer data
coverage. Renewable energy sources refer to non-depletable energy sources, while non-
renewable energy sources refer to depletable energy sources (Medlock III 2009). Gas, oil and
coal are included in non-renewable energy sources, while biomass, wind, geothermal, solar,
hydro and tidal waves are considered as renewable energy sources.

3. A BRIEF OVERVIEW OF INDONESIAN ENERGY UTILIZATION

Indonesia was well known as an oil exporter in the 1980s until the late 1990s. Eventually, the
oil reserves were not sufficient for meeting all demands of all the stakeholders. The
production of oil was recorded at the highest point during 1980-1981, reaching 1.7 million
barrels per day, while the production of natural gas reached its peak during 1995-1996 with a
production of 3159.6 billion cubic feet.

Figure 1. Production and Consumption of Oil and Gas in Indonesia

4
 Source: Energy Information Agency (2011)

Figure 1 shows that the production of oil in Indonesia has shown a declining trend,
while consumption grew steadily over time. This development has transformed Indonesia
from an oil exporter to a net oil importer. The figure also shows how oil became an
irreplaceable commodity in various industrial sectors which needs serious attention from the
government as the stock of oil is expected to plummet in the not too distance future. A
different picture is provided by natural gas, where consumption is still far below the
production level, thus enabling Indonesia to become a net exporter of natural gas.

Figure 2. Share of energy utilization in Indonesia

Comb. Renew. & waste Hydro

26.7% 0.5%
Gas
Geothermal/solar/wind 16.1%
7.2%

Coal/peat
18.7%

Oil
30.9%

Source: International Energy Agency (2008)

To date, Indonesias energy utilization is still highly dependent on non-renewable energy

resources, while the renewable energy resources account for less than 40% of the total energy
consumption (Figure 2). The largest portion of the renewable energy belongs to the
combination of renewable energy and waste with 26.7% followed by geothermal, solar, and
wind energies with a 7.2% share. Hence, the utilization of renewable energy is still limited
while the raw materials are abundant. This situation should be changed before the resources

5
of non-renewable energy become extinct. Exploitation of renewable energy can lead to a
better industrial performance (i.e. the inexhaustable raw materials will stimulate the
performance of energy industries and eventually becomes the answer to the energy shortage2),
social performance (i.e. utilization of renewable energy will absorb a considerable amount of
different renewable energy sources and will absorb considerable amount of workforce3) and
even environmental performance as renewable energy can reduce the amount of CO2 released
to the atmosphere.

4. DATA AND METHODOLOGY

In this work, we consider the approach by Bowden and Payne (2010) and Vaona (2010) that
measure the causality between the GDP and energy consumption disaggregated by the type of
energy. By this approach, we want to understand the phenomenon of the growth of GDP and
energy consumption in a holistic view which is not limited to a certain type of energy.

4.1. Data Description

We explore four variables in this study: the real GDP measured in 2000 price, non-renewable
energy consumption, and two proxies of renewable energy consumption. The sample covers
the period 1971-2008. The choice of the starting year was constrained by the availability of
the data. The proxies for renewable energy consumption are non-fossil fuel energy
consumption and electricity production generated from renewable energy power plants. GDP
growth, fossil and non-fossil fuel energy consumption data were obtained from the World
Development Indicators (WDI) of the World Bank. The non-fossil fuel energy consumption
data was calculated by taking the difference between the total energy use and total fossil fuel
energy consumption. The data on total electricity production from renewable energy power
plants was calculated by taking the sum of the total electricity generated from hydro,
geothermal, and wind power plants and collected from various publications of the Handbook
of Energy & Economic Statistics of Indonesia of the Ministry of Energy and Mineral
Resources and the Statistics Book of Electricity and Energy of the Directorate General of
Electricity and Energy Utilization. All data were then divided with the total number of

2
See Matos and Hall (2007) and Nardin and Catanzaro (2007).
3
A research by Thornley et al (2008) shows that the level of employment in the energy plant, that used biomass
as the input of energy, is higher compare to the other power plant that used conventional non-renewable energy.
This study also explained that higher level of employment is not only in the energy plant, but also along the
supply chain of the biomass and equipment section of the supply chain.

6
populations to represent the per capita terms and transformed to natural logarithms. Table 1
presents some summary statistics of the data in the original unit of measurement.

Table 1. Summary statistics of the variables (per capita, 1971-2008)

GDP NRE RE_total RE_electr.
Mean 619.07 315.0 251.1 39.1
Minimum 246.54 74.0 214.0 6.0
Median 594.66 299.2 248.4 38.0
Maximum 1,087.57 580.5 300.2 87.5
Std. Dev. 251.08 163.1 34.1 28.8
CAGR 4.2% 5.7% 0.7% 7.4%
Number of obs. 38 38 38 38
Notes: GDP is in US$, measured in 2000 price. NRE is the non-renewable energy
consumption, measured in kg of oil equivalent. RE_total is the non-fossil fuel energy
consumption, measured in kg of oil equivalent. RE_electr. is the electricity production
generated from renewable energy power plants, measured in kilowatt hour.

4.2. Methodology
The Granger (1969) test has been traditionally used in the literature to investigate the
causality relationship between two variables. This test states that if the values of a variable xt
significantly contribute to predict the values of another variable yt, then xt is said to Granger
cause xt and vice versa. When performing the Granger causality test from xt to yt, the test is
performed under the null hypothesis that xt does not Granger cause yt versus the alternative
hypothesis that xt Granger causes yt. Moreover, the causality relationship is said to be bi-
directional if xt causes yt and yt causes xt, uni-directional if one of the direction is true, and
neutral if none of them are true.

In the development of the testing methodology, Engle and Granger (1987) proposed a
strategy that involves pre-testing the order of integration of both variables and the
cointegration between them. Unfortunately, this strategy may suffer from pretest biases and
therefore the results would be unreliable (Zapata and Rambaldi 1997). To overcome these
issues, Toda and Yamamoto (1995) proposed a new procedure based on lag-augmented vector
autoregressive (VAR) model with an integrated process.

The main objective of this study is to investigate the Granger causality relationship
between renewable and non-renewable energy consumption per capita and GDP per capita.
Like in Tsani (2010) and Vaona (2010), in this study, we use a bivariate VAR model and
apply the Granger causality test based on the Toda-Yamamoto procedure. As a check, we also

7
run the Granger causality test between the variables by employing the Engle-Granger
procedure of Engle and Granger (1987).

Toda-Yamamoto procedure
Toda and Yamamoto (1995) has proposed a procedure to perform a Granger causality test
between two variables without performing a preliminary cointegration test, as opposed to the
Engle-Granger procedure. This way, the Toda-Yamamoto has advantages that it can avoid
some possible pretest biases which may occur when using the standard procedure (Toda and
Yamamoto 1995) and shows an excellent performance in terms of size stability (Yamada and
Toda 1998).

To explain the Toda-Yamamoto procedure, let us first consider a bivariate VAR

model of two variables Xt and Yt,
m n m n
Y t = 1 + 1, i Y t i + 1, i Y t i + 1, i X t i + 1, i X t i + 1, t (1)
i =1 j = m +1 i =1 j = m +1

m n m n
X t = 2 + 2 ,i X t i + 2, j X t j + 2,i Yt i + Y
2, j t j + 2 ,t (2)
i =1 j = m +1 i =1 j = m +1

where , , and are parameters to be estimated, and are the residual terms. The variable
with subscript t denotes the value of the variables at time t. The number of lags m and n are to
be determined by following the subsequent analysis. Later in this paper, the variable Yt is the
log of GDP and the variable Xt is the log of each three types of energy consumption. Hence,
we will have to analyze three bivariate VAR models and six directions of the Granger
causality.

The procedure for Granger causality test of the Toda-Yamamoto is described as

follows. We first check the order of integration of each variable. The order of integration of a
time series can be analyzed by performing an Augmented Dickey-Fuller (ADF) test (Dickey
and Fuller 1979, 1981) at the level, first differenced, or second order differenced data. If a
series is non-stationary and must be differenced d times before it becomes stationary, then the
series is said to be integrated of order d, or denoted by I(d). For now, let us assume that the
highest order of integration between the two variables is dmax.

The next step of the procedure is to choose the optimal number of lags m of equation
(1) and (2) based on the Schwarz Information Criteria. In this step, we do not consider the
parameters with the subscript j on the equation 1 and 2. At this stage, we also check for the

8
autocorrelation of the residuals using the Portmanteau test. If autocorrelation is suspected, we
increase the number of lags until autocorrelation is not present in the residuals.

We then estimate the VAR model of equation (1) and (2) using the number of lags n
equals to m+dmax. The modified Wald test is then performed to test the joint significance of
the first m estimated coefficients of 1 in equation (1) and the first m estimated coefficients of
2 in equation (2). If the first m lags of X variables in equation (1) (Y variables in equation (2))
are jointly equal to zero, then we can conclude that X does not Granger cause Y (Y does not
Granger cause X).

Cointegration and Granger causality

Engle and Granger (1987) has proposed a procedure to test the Granger causality by
incorporating the concept of cointegration. The concept of cointegration can be related to the
concept of long-run equilibrium, where two variables are said to be cointegrated if they share
a common trend. The test of cointegration relationship between two or more variables can be
performed by testing the order of integration of each variables and then finding a
cointegrating vector that stationarizes the linear combination betwen the variables.

The implication of cointegration on testing the Granger causality has been pointed out
by Granger (1986) who argued that if two variables, Xt and Yt, are I(1) and cointegrated, then
there must be Granger causality in at least one direction either uni-directional or bi-
directional. To establish the direction of the Granger causality when the series are
cointegrated, we can use the vector error-correction model.

But if the variables of Xt and Yt are I(1) but not cointegrated, as is the case in this
paper, Toda and Phillips (1993) argued that the Granger causality using the VAR model of the
first-differenced data is likely to have higher power in finite samples. The VAR model of the
first-differenced data can be written as the following:
p p
Yt = 1 + 1,i Yt i + 1,i X t i + 1,t (3)
i =1 i =1
p p
X t = 2 + 2,i X t i + 2,i Yt i + 2,t (4)
i =1 i =1

9
where , , and are the parameters to be estimated, is the residual term, and denotes the
first differenced of the variable. The number of lags p is chosen using the Schwarz
Information Criteria.

To test the Granger causality, we need to estimate the equation (3) and (4) and use the
Wald test to test the joint significance of the p estimated coefficients of 1 in equation (3) and
the p estimated coefficients of 2 in equation (4). If the p lags of X variables in equation (3)
(Y variables in equation (4)) are jointly equal to zero, then we can conclude that X does not
Granger cause Y (Y does not Granger cause X).

5. EMPIRICAL RESULTS
In order to investigate the Granger causality relationship using the Toda-Yamamoto
procedure, we first identified the order of integration of each variable by applying the ADF
test both at the level and first-differenced data. The results of the ADF unit root tests are
presented in Table 2. The results exhibit that all variables at level data are non-stationary at
the 95% levels of significance. The results of the ADF test on the first differenced data show
that all variables are significantly stationary. Hence, we concluded that all variables are
integrated of order one, I(1). Based on these results, we are able to determine the highest
order of integration is equal to one (dmax = 1), for all pairs between GDP and the three types of
energy consumption.

Table 2. Results of ADF tests of the variables

ADF
Intercept Trend + Intercept
ln(GDP) Level -1.39 (2) -1.94 (1)
first difference -3.73 (1) ** -3.88 (1) **

ln(NRE) Level -2.72 (1) * -1.49 (1)

first difference -4.53 (0) *** -5.38 (0) ***

ln(RE_total) Level -0.21 (1) -2.34 (1)

first difference -5.75 (0) *** -5.77 (0) ***

ln(RE_electr.) Level -0.88 (1) -1.68 (1)

first difference -5.57 (0) *** -5.53 (0) ***
Notes: ***, **, * denote the levels of significance at 1%, 5%, and 10% respectively.
The number in parentheses denotes the number of lag for the ADF test.

10
 We then checked the optimal number of lags m of equation (1) and (2) for each pair
between energy consumption and GDP using the Schwarz Information Criteria. The optimal
number of lags is three for the VAR model between ln(NRE) and ln(GDP), one between
ln(RE_total) and ln(GDP), and two between ln(RE_electr) and ln(GDP). We then augmented
the optimal number of lags by one, as the highest order of integration of the variables is one,
and estimated the VAR model of equation (1) and (2). The modified Wald test is then
performed on the first m estimated coefficients ignoring the last dmax lagged coefficients.

The results of the Granger causality test following the Toda-Yamamoto procedure are
reported in Table 3. The first and second column are the variables of energy consumption
distinguished by the type of energy (E) and the corresponding VAR models used. The third
and fourth column respectively report the modified Wald test with null hypothesis of GDP
does not Granger cause E and E does not Granger cause GDP.

From the results in Table 3, a significant evidence of Granger causality is found to run
only from renewable electricity consumption to GDP. The null hypothesis of renewable
electricity consumption does not Granger cause GDP is rejected at the one percent level of
significance. Or, in another word, we significantly accept the hypothesis that renewable
electricity consumption Granger causes GDP. The causality test statistics of the opposite
direction (GDP to renewable electricity consumption) shows insignificant value even at the 10
percent levels of significance. Hence, we cannot reject the null hypothesis of GDP does not
Granger cause the renewable electricity consumption, or, in another word, GDP does not
Granger cause renewable electricity consumption.

Table 3. Granger causality test (Toda-Yamamoto Procedure)

Type of Energy (E) Model Specification GDP causes E E causes GDP Conclusion
ln(NRE) VAR (4) 0.52 1.04 Neutral
ln(RE_total) VAR (2) 2.19 0.75 Neutral
ln(RE_electr.) VAR (3) 1.21 12.00 *** RE_electr. GDP
Notes: ***, **, * denote the levels of significance at 1%, 5%, and 10% respectively.

The test statistic of Granger causality on other pairs (GDP to non-renewable energy
consumption, non-renewable energy consumption to GDP, GDP to non-fossil fuel energy
consumption, non-fossil fuel energy consumption to GDP) are all insignificant even at the 10
percent levels of significance. Hence, we do not find significant evidence of Granger causality

11
between non-renewable energy consumption and GDP and between non-fossil fuel energy
consumption and GDP.

As a complement, we performed the Granger causality test based on the Engle-

Granger procedure. As previous analysis found that all variables are I(1), we could proceed to
test the cointegration relationship between each energy consumption variables and the GDP at
the level data using the Johansens (Johansen 1988, Johansen and Juselius 1990) cointegration
test. The results of the Johansen test based on Trace statistic and Maximum Eigenvalue
statistics are presented in Table 4 with the five percent critical value reported at the bottom of
the table. As can be seen in Table 4, all test statistic of none cointegrating equation of all
variables are less than the corresponding critical value. Hence, we do not find significant
evidence of cointegration relationship between the GDP and any of the three types of energy
consumption.

Table 4. Results of Johansen test for cointegration relationships between GDP and each variable
(intercept, no trend)

Variable Hypothesized No. of CE(s) Trace Max. Eigen.

ln(NRE) None 14.22 10.86

At most 1 3.36 3.36

ln(RE_total) None 10.70 9.69

At most 1 1.01 1.01

ln(RE_electr.) None 14.69 12.84

At most 1 1.86 1.86

Notes: CE(s) is the abbreviation for cointegrating equation(s), Max. Eigen. denotes maximum
eigenvalue statistic and Trace is trace statistic of the Johansen cointegration test.
The 5% critical value of the trace statistic of none and at most 1 cointegrating equation are 15.41 and
3.76 respectively. The 5% critical value of the maximum eigenvalue statistic of none and at most 1
cointegrating equation are 14.07 and 3.76 respectively. The results indicate no cointegration at the 5%
levels of significance.

As cointegration is not found between the GDP and any of the three types of energy
consumption, we proceed to perform the Granger causality test based on the first differenced
data of equation (3) and (4). The optimal number of lags p is chosen using the Schwarz
Information Criteria. The optimal number of lags is: one for the VAR model between
ln(NRE) and ln(GDP), one between ln(RE_total) and ln(GDP), and two between
ln(RE_electr) and ln(GDP). We then tested the Granger causality using the Wald test and

12
 present the results in Table 5. The results of Granger causality test based on Engle-Granger
procedure are consistent to our previous results using the Toda-Yamamoto procedure.

The significant evidence of Granger causality is found to run only from renewable
electricity consumption to GDP. The null hypothesis of renewable electricity consumption
does not Granger cause GDP is rejected at the one percent level of significance. Or, in
another word, we significantly accept the hypothesis that the renewable electricity
consumption Granger causes the GDP, which confirms our previous result using the Toda-
Yamamoto procedure. This result gives evidence that the renewable electricity consumption
supports the growth hypothesis and suggests that the consumption of renewable electricity
affects economic growth directly or indirectly complementing labor and capital in the
production process in the Indonesian economy. Although the study of causality relationship
between renewable electricity consumption and GDP in Indonesian economy is relatively new
in the literature, our result is consistent with a closely similar study by Squalli (2007) but
contrary to Yoo (2006).

Table 5. Granger causality test (Engle-Granger Procedure)

Type of Energy (E) Model Specification GDP cause E E cause GDP Conclusion
ln(NRE) VAR (1) 0.16 0.31 Neutral
ln(RE_total) VAR (1) 0.79 0.23 Neutral
ln(RE_electr.) VAR (2) 0.23 5.36 *** RE_electr. GDP
Notes: ***, **, * denote the levels of significance at 1%, 5%, and 10%.

Moreover, the results of the Granger causality test between non-renewable energy
consumption and GDP and between non-fossil fuel energy consumption and GDP presented
in Table 5, which are also consistent with the previous results using the Toda-Yamamoto
procedure, give evidence that these types of energy consumption support the neutrality
hypothesis. This suggests that the consumption of non-renewable energy and non-fossil fuel
energy does not significantly cause the economic growth in Indonesia, which is consistent
with a related study of Soytas and Sari (2003).

6. CONCLUSIONS AND POLICY IMPLICATIONS

In this paper, we examine the causality between renewable and non-renewable energy
consumption per capita and GDP per capita in Indonesia. We consider two proxies of
renewable energy consumption: total renewable energy consumption and total electricity

13
generated from renewable power plants. The Toda-Yamamoto procedure and Engle-Granger
methodology are used to test the Granger causality relationship.

Using these procedures, we found that the renewable electricity consumption is the
only variable that significantly supports the growth hypothesis in Indonesian economy. On
the other hand, we did not find any significant causality relationship between the consumption
of non-renewable energy and the GDP growth. This indicates that the higher consumption of
renewable energy will increase the level of GDP and reduce the dependency on non-
renewable energy sources. A wider implication on this research is related to the
environmental impact in the context of reducing deforestation as well as lowering CO2
emissions. This can be extended to the REDD+ programme in Indonesia by returning the
function of the forest as the vital instrument in stabilizing the climate change (United Nations,
2011). This finding is related to the conclusion provide by Hermawan and Hadi (2006) stating
that renewable energy sources in Indonesia are plentiful but remains underdeveloped. This
can stimulated by the production of renewable energy along with its supporting
implementation and legal framework.

It would also be interesting to analyze the Granger causality based on disaggregated

energy consumption based on various industrial sectors and their contribution towards GDP
growth. This will yield a more specific results on the sectors prioritization in energy
allocation and can be integrated into the national blue print that have been outlined by the
Ministry of Energy and Mineral Resources.

14
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