Cities, factories, and energy: How urbanization and industrialization shape renewable and fossil fuel use. Evidence from a developing economy

Abstract

As cities expand and industries grow, energy demand surges, but what fuels this transformation? Do urbanization and industrialization in developing economies accelerate a shift toward renewables, or do they deepen reliance on fossil fuels? This study examines the impacts of urbanization and industrialization on fossil fuel consumption, as well as on the consumption of renewable energy. The Autoregressive Distributed Lag (ARDL) and Canonical Cointegrating Regression (CCR) estimation procedures were used. The study found an inverted U-shape relationship between urbanization and renewable energy consumption, while an increasing monotone relationship was found for urbanization and fossil fuel consumption. The Lind and Mehlum test provided sufficient conditions for the existence of an inverted U shape between urbanization and renewable energy consumption, and the turning point was obtained for policy purposes. Another key finding from the study revealed that in Ghana, the use of fossil fuels is a key driver of industrialization, rather than renewable energy sources. Additionally, the results of the generalized forecast error variance decomposition (GFEVD) provided interesting insights. The policy implications of these findings have been thoroughly discussed.