The Impact of Renewable Energy Diversity on Inflation: A Case Study Based on China

Abstract

The rise in energy prices due to global uncertainties and risks is accelerating the transition to renewable energy in countries. It is expected that embracing energy diversity instead of dependence on a single energy source, such as oil, will curb energy-related increases in inflation. In this study, the impact of the transition to renewable energy on inflation is investigated using the energy diversification index. For this purpose, the Chinese economy is analyzed with the Augmented ARDL method. According to the long-term results of the analysis covering the 1991–2023 period, the effect of energy diversity on inflation is negative. The study also examined the effect of composing an energy portfolio consisting of various renewable energy sources rather than a single renewable energy source on inflation. According to the results obtained, renewable energy diversity has a negative effect on inflation, too. As a result, inflation is expected to decrease as renewable energy diversification and overall energy diversification increase. In sum, inflation can be expected to fall when authorities increase both renewable energy diversity and overall energy diversity instead of solely depending on oil or any renewable energy source.

1. Introduction

Inflation is one of the most important macroeconomic problems for all countries. An increase in inflation reduces the purchasing power of individuals and adversely affects their standard of living and wealth. Inflation is of great concern to firms and governments as it adversely affects many macroeconomic indicators, particularly business profits and economic growth. Therefore, countries aim to maintain a low and stable inflation rate. However, inflation can be affected by many factors [1,2]. One of them is fossil fuel prices. For example, as a result of the large jumps in oil prices in 1973 and 2021, inflation in oil-importing countries increased, and this increase became a major problem in these countries [3]. Since fossil fuels directly and indirectly accelerate inflation, renewable energy, which is a substitute for fossil fuels, is believed to reduce inflation [4,5].

As energy demand increases due to economic growth, population growth, and urbanisation, countries are facing problems such as supply shortages and sudden price increases in fossil fuels. While ‘per capita energy consumption’ is considered an important indicator for the economic development of countries, today, the economic, social, and environmental costs of energy are far more crucial indicators. Additionally, energy supply security has become the primary focus due to the need for access to energy. Increasing conflicts, uncertainties, and the depletion of energy sources can leave countries dependent on fossil fuels dealing with energy supply issues [3,6]. Reliance on a single energy source such as oil can cause disruptions in energy supply, which may have a detrimental effect on all sectors, particularly industry, infrastructure, transportation, and tourism [7]. Energy supply shocks can cause energy prices to jump sharply and increase volatility, putting ongoing pressure on inflation. The impact of rising oil prices on inflation has been clearly documented during the 1974 oil crisis, the 2003 Iraq War, the 2008 global crisis, and the 2021–2022 COVID-19 pandemic and Russia–Ukraine war periods. As a solution to this global energy problem, increasing the share of renewable energy in countries’ energy portfolios is proposed. For this reason, countries are prioritising the renewable energy sector in their energy strategies to achieve a sustainable energy system [1,2,3,4,5,6,7,8,9]. Ref. [7] investigated the drivers of energy diversity and observed that global supply chain pressure, investment, innovation, globalisation, and economic growth are decisive factors for developing Asian countries. Additionally, the harmful effects of fossil fuel consumption on the environment and human health are also a significant disadvantage. For this reason, the transition to renewable energy as an alternative to fossil fuels has accelerated [10,11].

As a result, dependence on oil leaves countries vulnerable to economic and environmental crises. For this reason, it is recommended that energy diversity be ensured, in other words, that a portfolio consisting of different energy sources be established. To this end, when formulating energy policies, countries should aim for a sustainable economy by ensuring that their energy mix is diverse [12,13]. Additionally, energy diversity increases the use of financial instruments such as green bonds and loans, thereby contributing to economic stability by facilitating the development of financial markets [14,15]. For example, Ref. [11] have examined the relationship between energy diversity and financial development and economic growth in developed economies such as OECD countries, and have verified a bidirectional causality between financial development and energy diversity. It is also mentioned that energy diversity supports economic sustainability through economic growth [10,16].

How the transition to renewable energy and energy diversity will affect inflation is one of the topics researchers are focusing on. This is because the cheapness of energy, which is an important input, and its lack of acceleration of inflation, are desired by economic actors (individuals, firms, and policymakers) for social, economic, and political success [6].

In this study, the effect of the transition to renewable energy and energy diversity on inflation is analyzed. However, unlike previous studies, the impact of renewable and non-renewable energy consumption on inflation has not been investigated here. Instead, the transition to renewable energy has been represented by the energy diversity index. In addition, the study focused on whether the development of various renewable energy sources, rather than a single renewable energy source such as solar or wind, has a decisive impact on inflation in the country.

In general, energy diversity refers to a country’s use of different energy sources such as fossil fuels, renewable energy sources, and nuclear energy. Thus, the country will not be dependent on only one energy source, such as oil, to meet its energy needs. Integrating solar, wind, and hydro sources into energy systems within the scope of energy diversity not only reduces carbon emissions but also strengthens the country’s energy independence [13,17,18].

The diversity of renewable energy sources is also important within the scope of the country’s energy policy. Renewable energy diversity can be defined as follows: not being dependent on just one renewable energy source and producing energy from various renewable energy sources. Relying on only one renewable energy source also poses a risk for the country. For example, as denoted by Refs. [11,12], energy production from renewable energy sources is dependent on weather conditions (e.g., solar and wind energy), which means that the country may still suffer from energy shortages. Changes in weather conditions will affect the amount of energy produced from renewable energy sources. Therefore, incentives for the renewable energy sector should cover diverse renewable energy sources within the energy mix.

The study investigated the impact of energy diversity on the Chinese economy. China ranks first in the world in renewable energy generation capacity. China has made significant investments in renewable energy, accounting for more than 40% of the annual additions to renewable energy capacity worldwide after 2013. In addition, China has already reached its 2030 target of 1200 GW of wind and solar capacity [19]. In 2023, China made more renewable energy investments than the rest of the world. While there was a 75% increase in solar energy capacity globally in 2023, 16% of this increase was realized by European countries and 25% by China. Wind energy capacity increased by 115 GW globally, and approximately 66% of this increase was realized by China, which is the sum of North America and Europe [20]. In 2023, the capacity increase in solar energy systems, wind energy systems, thermal power plants, and nuclear power plants was 55.2%, 20.7%, 4.1%, and 1.8%, respectively, in the Chinese economy [21]. In addition, China ranks first in coal consumption (56% of the world’s total coal consumption) and second in oil consumption. The increase in China’s nuclear energy capacity is approximately 66% since 2006 [20].

The study is intended to contribute to the literature for the following reasons: (1) Renewable energy and inflation are important current issues for all countries. For authorities aiming for a strong economy, a low and stable inflation rate should be ensured. The existence of a relationship between the two may be instructive for policymakers aiming at price stability and promoting the renewable energy sector. (2) The use of renewable energy to meet energy needs may have an impact on inflation [22]. Renewable energy is expected to have a reducing impact on inflation primarily by reducing import dependency on energy. However, as stated by Ref. [22], the effect of renewable energy on inflation may also be upward. On the other hand, there may also be an effect of inflation on renewable energy. For this purpose, the renewable energy-inflation relationship needs to be investigated deeply. There are a few studies, e.g., [4,23,24,25] that directly address the renewable energy-inflation issue. Moreover, the results obtained in these studies are inconsistent. Therefore, new studies are needed to reveal the effect of renewable energy consumption on inflation. (3) Unlike the existing studies, the effect of energy diversity on inflation has been investigated. In this context, the energy diversity index constructed by Ref. [26] is used in the analyses in this study for the first time to the best of our knowledge. Moreover, in addition to this index, an index considering only renewable energy diversity was calculated by the authors following the approach of Refs. [26,27]. In short, the impact of renewable energy diversity and aggregate energy diversity on inflation has been investigated for the first time by using these indices. It is known from the previous literature that energy diversification can lead to a slowdown in economic growth and an increase in inflation due to the costs associated with transitioning to new energy sources. However, in the long term, energy diversification generally promotes economic growth and stability by reducing reliance on a single and potentially volatile energy source (such as oil). For this reason, it is argued that energy diversity reduces inflation in the long term. In the existing literature, the relationship between energy diversity and inflation has been examined using renewable energy consumption indicators (e.g., [4,24]). However, in this study, we used an index to reflect energy diversity in order to examine the effect of energy diversity on inflation. Additionally, we investigated whether diversity in renewable energy sources has an effect on inflation. We adopted a similar index approach to represent renewable energy diversity. (4) In the study, the Augmented ARDL method is preferred, and recent data covering the period 1990–2023 are analyzed.

The study consists of six sections. The first section is the introduction. In the second section, the relationship between renewable energy consumption, energy diversity, and inflation is discussed, followed by a literature review in the third section. In the fourth section, the model and data are explained. The fifth section presents the empirical findings. Finally, the study ends with a conclusion section.

2. Renewable Energy Consumption, Energy Diversity, and Inflation

Developed and developing countries are implementing policies to increase economic growth and employment. The increase in production and economic activities increases energy usage [22,28,29]. Energy is a basic input used for production in sectors such as agriculture and industry. Basically, fossil fuels or renewable energy can be used as energy types. Energy needs are largely met from fossil fuels due to their accessibility and widespread use. Today, the use of fossil fuels is widespread, and energy shocks have become an important problem in terms of inflation and the economy since many countries are dependent on foreign energy. Fossil fuel prices are increasing rapidly due to the increasing cost of fossil fuel extraction and the decreasing amount of fossil fuels [4,30]. The increase in energy prices raises inflation due to production costs [1,4]. Therefore, the usage of fossil fuels should be reduced in order to achieve price stability. This will be possible by increasing renewable energy consumption, which is considered to be the best alternative to fossil fuels [3,31]. In addition to cost inflation, fossil fuel usage may also trigger inflation through global warming. As a result of climate change, events such as floods, droughts, and storms reduce the productivity and supply of products. The reduced supply of products may create inflationary pressure by not meeting national and international demand [2,5]. The use of fossil fuels poses a problem for sustainable growth as it increases CO₂ emissions. As a result, problems such as drought, diseases, soil and water pollution arise, and all economic activities are adversely affected [32]. In order to prevent global warming, countries are looking for environmentally friendly energy to be used instead of fossil fuels, and renewable energy is considered the best option. The scarcity of fossil fuels also brings renewable energy to the forefront [29,33,34,35]. Renewable energy also benefits the national economy by increasing economic growth and employment [32,36].

The high capital costs, long construction periods, and economic uncertainties associated with nuclear energy investments put nuclear energy at a disadvantage compared to renewable energy. Cost deviations of up to 100% tend to occur in nuclear energy construction. It has also been observed that the building of renewable energy projects generally exceeds the expected time frame. Radioactive risk and unexpected failures also increase doubts about the sustainability of nuclear energy, making renewable energy cheaper and more attractive compared to nuclear energy [37,38].

While renewable energy consumption is considered a good option for reducing inflation, the impact of renewable energy consumption on inflation can be positive or negative. The high cost of initial investments for renewable energy production and the need for advanced technology cause prices to rise [5,22,28]. As the renewable energy sector develops, renewable energy production may become cheaper in a fossil-fuel-importing country. The fact that renewable energy becomes cheaper in the long run is explained by the fact that it is easier to develop after the existing infrastructure for the renewable energy sector is built. Existing technologies can be developed at low costs and can have significant efficiency and energy-saving advantages. The growth of the renewable energy sector will also facilitate the production, storage, and trade of renewable energy. Thus, renewable energy can become cheaper than fossil fuels, gain the power to become the dominant energy in the market, and have a disinflationary effect [4,22]. In many countries, the government supports R&D projects and offers tax advantages and incentives for the development of the renewable energy sector. The growth of the sector increases competition. In summary, the cost of renewable energy production can be reduced through economies of scale and the development of new technologies [32]. The fact that renewable energy is unlimited despite the diminishing reserves of fossil fuels in the world also provides a long-term cost advantage for renewable energy sources [23]. However, it is known that there may be seasonal decreases in renewable energy production (e.g., solar and wind). In such cases, the energy storage phase may affect the cost of renewable energy in order to meet energy demand and ensure a continuous energy supply [1,39].

It is also possible that there is an effect of inflation on renewable energy sources. Since the increase in inflation will increase fossil energy prices, enterprises may turn to renewable energy, which is less costly in production. In this case, it can be said that inflation leads to a crowding-out effect for fossil fuels [32]. Inflation can also affect renewable energy production by causing uncertainty in the economy. In times of uncertainty, renewable energy investments may become riskier, and production may decline. High inflation and uncertainty can negatively affect renewable energy production by making access to finance difficult [40,41,42]. On the other hand, the fact that renewable energy is an emerging and rapidly growing sector also indicates that it offers high profitability opportunities for the future. Entrepreneurs may increase their investments in order to benefit from the opportunities offered by renewable sources despite the risks [30,41]. Refs. [30,40] pointed out that inflation triggers the interest rate. This is because price stability can ensure the realization of a low and stable interest rate. A low interest rate can make it easier to obtain funds to finance renewable energy investments.

Diversification of energy includes fossil fuels (oil, natural gas, and coal) and nuclear energy, which are non-renewable energy sources, and renewable energy sources (solar, wind, hydroelectric, geothermal, and biomass). The aim is to reduce a country’s dependence on a particular source for energy consumption [17]. Energy diversity is also expressed as reducing dependence on fossil fuels by increasing the share of renewable energy sources [18]. Increasing energy diversity will help to protect developed and developing countries, which are particularly dependent on foreign energy, from fluctuations in energy prices [26]. Thus, energy diversity can be expected to reduce inflation by reducing costs. Renewable energy diversity refers to the production of renewable energy from different renewable energy sources. Obtaining renewable energy from different renewable energy sources rather than from a single source will enable the development of the sector. Since the establishment phase of the renewable energy sector is costly, the increase in the diversity of renewable energy may increase inflation more in the beginning. However, in the following period, the increase in the amount of energy obtained can reduce inflation by reducing energy prices.

3. Literature Review

There are a limited number of studies that directly address the renewable energy-inflation relationship. The first study on the effect of renewable energy consumption on inflation belongs to [24]. Ref. [24] analyzed the Mexican economy and conducted an analysis covering the 1990–2019 time period. The authors constructed three models in which inflation, exchange rate, and renewable energy consumption are dependent variables separately. The authors concluded that renewable consumption affects inflation in the long run. In the short run, inflation and renewable consumption positively affect each other. Ref. [25] analyzed the renewable energy-inflation issue for the Iranian economy. Using the ARDL method for the period 1979–2018, the authors reported that renewable energy types have a negative impact on inflation in the short and long term. Ref. [23] examined G7 countries and calculated renewable energy demand and production using the principal component method. Applying techniques such as quantile regression and dynamic GMM (Generalized Method of Moments), Ref. [23] determined that energy demand accelerated energy supply and, in turn prices during the 1997–2021 period. In short, Ref. [23] concluded that renewable energy consumption and production increased inflation. Ref. [4] examined the relationship between renewable energy resources and inflation for the year 2022. According to the results of the study, as renewable energy consumption increases, core inflation decreases in EU countries. Ref. [22] determined that fossil fuel prices have a negative effect on renewable energy consumption in Asia Pacific countries, while no effect was found from renewable energy consumption on inflation. According to this result, it is stated that the hypothesis that ‘inflation will decrease as renewable energy consumption increases’ is not valid. Analyzing the Brazilian economy, Ref. [43] observed that inflation has a positive influence on renewable energy consumption. On the other hand, renewable energy does not have a statistically significant effect on inflation in both the long and short term.

Among the studies focusing on the effect of inflation on renewable consumption, Ref. [1] examined the effect of the increase in inflation on renewable energy for the Indonesian economy for the period 1997–2020. According to the Granger causality test, there is unidirectional causality running from inflation to renewable energy consumption. In another study, Ref. [34] analyzed West African countries for the period 1990–2021 with various methods. As a result of the analysis, they observed that while inflation has a negative effect on renewable energy consumption in the long run, it has a positive effect in the short run. Ref. [35] investigated the determinants of renewable consumption. The authors analyzed the Eurozone with the FMOLS (Fully Modified Ordinary Least Squares) method and found that renewable energy use slows down inflation. Ref. [44] analyzed the economies of Turkey, Russia, India, Indonesia, Mexico, Brazil, and China using panel fixed and random effects models for the period 1990–2019. Ref. [44] found evidence that oil prices and inflation have a negative impact on renewable energy consumption. Financial development and economic growth are factors that promote renewable energy. In another study, Ref. [45] examined the relationship between renewable energy consumption, inflation, trade, and economic growth for Middle East and North Africa countries. According to the findings obtained from the panel FMOLS (Fully Modified OLS) estimation, renewable energy consumption has a negative impact on economic growth. According to the causality analysis, there is a causality relationship running from inflation to renewable energy and from renewable energy to economic growth. Similarly, Ref. [46] concluded that there is a one-way causality running from inflation to renewable energy for the Pakistani economy. On the other hand, Ref. [2] examined the effect of alternative energy sources on environmental quality, considering inflation. The analysis, which was conducted in Germany and covered the period from 1971 to 2016, observed that inflation and alternative energy sources had a negative effect on the ecological footprint (i.e., they improved environmental quality).

There are many studies on the influence of oil prices on inflation. In these studies, different countries have been sampled, and they have mostly revealed that oil prices cause inflation. For example, Ref. [47] found a positive relationship between oil price and inflation. In his study, the author analyzed the US economy covering the period 1871–2018. Ref. [48], who reviewed the literature on the subject, concluded that oil prices increase inflation in developed and developing countries. Ref. [49] investigated whether oil price shocks have asymmetric effects on macroeconomic variables for the Indian economy. Wald test results indicate that variables such as inflation, exchange rate, industrial output, and stock returns show asymmetric and nonlinear responses to oil shocks. Similarly, Ref. [50] found that inflation responds asymmetrically to oil price shocks in ASEAN5+3 countries during the COVID-19 period. Focusing on the Ghanaian economy, Ref. [51] analyzed the period 2000Q1 to 2021Q1 and investigated the impact of oil price shocks on aggregated and disaggregated inflation. According to the results of the analysis, the impact of oil prices on Transport CPI is larger than its impact on other sectors. Ref. [52] found that local oil prices have greater effects on inflation than international oil prices for the Côte d’Ivoire economy. Ref. [53] observed that the effect of global energy price changes on inflation in the Turkish economy is significant for the period January 2003 to February 2022. Ref. [54] found that inflation in the UK economy reacts asymmetrically to oil price shocks, while it reacts symmetrically to gas price shocks. In addition, it is observed that the effect of gas prices on inflation is stronger than the effect of oil prices. Finding an asymmetric relationship between oil prices and inflation in the Nigerian economy, Ref. [55] observed that increases in oil prices lead to a decline in inflation.

Among the studies focusing on the relationship between oil prices and inflation for the Chinese economy, Ref. [56] investigated the asymmetric impacts of oil prices on inflation for BRICS countries. According to the findings, there are asymmetries between oil price and inflation in China in the short run, and the inflationary effect is observed more dramatically when the oil price falls. Ref. [57] analyzed the effects of oil price shocks on inflation in China over the period January 1999 to December 2016. The findings are that oil prices have a time-varying effect on inflation. In another study, Ref. [58] observed that oil price has direct and indirect effects on price levels in China. Ref. [59] determined that approximately 5–25% of the overall price changes in China are caused by actual coal price shocks.

There are very few studies employing the energy diversity index of [26]. These studies mostly analyze the issue of energy diversity and economic growth. Among these, Ref. [26] investigated the relationship between the energy diversity index and economic growth and observed that it has a positive effect in the long run in developed countries. However, it was found that energy diversity has a contractionary effect on economic growth in low-income countries. Ref. [60] determined that the index has a positive effect on economic growth in Nordic nations. Ref. [17] concluded that while the higher quantile of the energy diversification accelerates economic growth in BRICS countries, it harms growth in the previous quantiles. Another study by [61] concluded that energy diversity promotes economic development for the countries of the Asia Pacific Economic Cooperation. On the other hand, Ref. [14] focused on the impact of financial development on energy diversity in Australia. The study, which also included factors such as capital, export diversity, and economic growth as explanatory variables, determined that the impact of financial development on energy diversity was U-shaped. Ref. [27] conducted a study examining the impact of fossil fuel diversity and renewable energy diversity on employment. In this study, the approach of Ref. [26] was used to calculate the aforementioned energy diversities. Focusing on BRIC-T countries, the study employed the AMG (Augmented Mean Group) method and found evidence that employment increases as fossil and renewable energy diversity increases.

4. Materials and Methods

This study investigates the relationship between the transition to renewable energy and inflation. Although oil is the dominant energy worldwide, the fact that a few countries with oil reserves have monopoly power and geopolitical risks can result in economic problems that affect many countries. Therefore, switching to renewable energy and energy diversity can contribute to stabilizing overall price levels [7,11,25,62]. However, such an expectation is valid for the long term. This is because the establishment costs of renewable energy and nuclear energy are quite high in the short term [5,22,28,37,38]. Increases and fluctuations in energy costs directly affect production costs, particularly in energy-intensive sectors, spurring price increases inevitable [11,12]. In the long term, factors such as economies of scale and increased efficiency contribute to a decrease in costs [4,22,32]. For example, Ref. [63] found that while electricity production from renewable energy initially increased exponentially, costs decreased exponentially, but in the long term, production increased linearly.

In summary, the following hypotheses can be proposed:

Hypothesis 1 (H1).

Energy diversity may cause a temporary rise in inflation in the short term.

Hypothesis 2 (H2).

Energy diversity may reduce inflationary pressures and lower inflation rates in the long term.

Within the framework of these hypotheses, it may be useful to conduct an empirical analysis to better understand the effects of energy diversity on inflation in the short and long term. In this perspective, the ARDL approach stands out as it presents both short-term and long-term effects.

On the other hand, Ref. [3] tested whether the transition to renewable energy leads to low energy inflation in countries with abundant renewable energy sources. The results were inconsistent with theoretical expectations and demonstrated that the adoption of renewable energy does not reduce energy inflation rates linked to fossil fuel prices. The authors attribute this result of the study, which covers the period 1973–2022 and 75 countries, to factors such as energy policies, market structures, and price controls in the country. Therefore, although it is assumed that the transition to renewable energy could reduce inflationary pressure in the long term, this can be better understood through detailed analyses conducted on a country-by-country basis, as mentioned by [3].

The study aims to determine the impact of energy diversity and renewable energy diversity on inflation by using the energy diversification index. For this purpose, we computed the renewable energy diversity index ($REN$) based on Ref. [26]’s energy diversity index ($ENER$). Ref. [26] computed the energy diversification index through the Herfindahl–Hirshman diversification index using the formula in Equation (1). Here, n_i and x_ijt denote the number of energy sources included in the index for country i and the total energy consumption of source j for country i in year t, respectively, while X_it denotes total energy consumption for country i in year t. The index considers the following types of energy: oil, gas, coal, nuclear, hydropower, and renewable energy (solar, wind, geothermal–biomass–other). However, our $REN$ calculation only considers renewable energies (wind, solar, geo–bio–other), thus implying diversity only in renewable sources. The formula applied for calculating the index is as follows [26,27],

$${\displaystyle \frac{{\sum }_{j=1}^{n_i}{\left(\frac{x_{it}}{X_{it}}\right)}^2-\frac{1}{n_i}}{1-\frac{1}{n_i}}}.$$

(1)

We investigated the effect of energy diversification on inflation with Model 1, below. While investigating the impact of energy on inflation, money supply, economic growth, current account balance, and unemployment rate are included in the model as being potential control variables following studies such as [64,65,66,67,68,69,70]. Money supply and economic growth are widely accepted variables that have an impact on inflation. China has been running a current account surplus almost every year since the 1990s. This situation could be significant in terms of inflation. Unemployment rates, which were around 2.3% in the 1990s, rose to 4% in the 2000s and reached 5% at the beginning of the 2020s [71]. Since rising unemployment has the potential to affect inflation, it has been added to the model as an explanatory variable. Anyway, we appreciate that the list of confounding variables may not be comprehensive.

$$\mathrm{Model} 1 INF=f(ENER,MON,GDP,BAL,UNEM)$$

(2)

Here, the dependent variable $INF$ is the inflation rate based on the consumer price index. $ENER$ is the index that measures energy diversity. As mentioned, $ENER$ is the index calculated by [26] to cover all energy types. Ref. [26] calculated the index for the period 1995–2018. The current data of the index was calculated by the authors in accordance with Ref. [26]’s method shown in Equation (1). $MON, GDP,BAL, \mathrm{a}\mathrm{n}\mathrm{d} UNEM$ denote money supply, economic growth, current account balance, and unemployment rate. In order to represent monetary expansion, we used the broad money growth rate (%). Economic growth is reflected by the GDP growth rate (%). $UNEM$ shows unemployment (% of total labor force) according to the ILO estimation. These indicators have been used in the model in accordance with the forms commonly used in the literature [65,66,67,68,69,70]. This allows for comparison with previous studies that used the same variables and aims to reveal the effect of energy diversity, which is the focus of this study, on inflation. The data covers the period 1991–2023.

The data of $MON, GDP, BAL, \mathrm{a}\mathrm{n}\mathrm{d} UNEM$ are taken from the World Bank website [71]. The energy data used to calculate the $REN$ and $ENER$ indices are sourced from [20].

We also investigated the renewable energy diversification on inflation as in Model 2.

$$\mathrm{Model} 2 INF=f(REN,MON,GDP,BAL,UNEM)$$

(3)

To this aim, unlike Model 1,$REN$ was included in the model instead of $ENER$.

As for the relationship between renewable energy diversity and inflation, similar to the relationship between energy diversity and inflation, the following hypotheses can be proposed. Although the focus is primarily on the long-term relation, we also include the short-term relation as a secondary hypothesis focus:

Hypothesis 3 (H3).

Renewable energy diversity may reduce inflation rates in the long run.

Hypothesis 4 (H4).

Renewable energy diversity may cause a rise in inflation rates in the short run.

Renewable energy diversity refers to a country having an energy mix consisting of several renewable energy sources (such as solar, wind, geothermal, biomass, and others). Investing in various renewable energy sources may have a different impact on inflation compared to relying on a single renewable energy source. This is because the construction of renewable energy sources will not be equally costly. This difference in costs may be reflected in inflation. Additionally, not all renewable energy sources may be equally efficient. Furthermore, changes in weather conditions may limit the production of a single renewable energy source. In other words, the availability of varied renewable energy sources can provide an advantage in energy production. As Ref. [72] pointed out, the dependence of renewable energy sources on weather conditions allows energy production from a single source to be carried out mostly during certain periods of the year. In this case, the continuous energy supply and sustainability of energy necessitate the storage of energy. However, the assembly and maintenance costs of energy storage technologies and systems are high [39,72,73]. On the other hand, the ability to obtain energy from a range of renewable energy sources can enable renewable energy production to be carried out throughout the year (at least over a wider time frame). This advantage increases the importance of promoting a variety of renewable energy sources.

Hypothesis 1 posits that energy diversity will cause inflation to rise in the short term, while Hypothesis 4 posits that renewable energy diversity may cause inflation to rise in the short term. Hypothesis 1 refers to the diversity of all energy sources, both renewable and non-renewable. Here, it is a matter of countries transitioning from a single energy source, such as oil, to gas, coal, nuclear energy, and renewable energy sources. Hypothesis 4, on the other hand, refers only to the diversity of renewable energy sources. In other words, it is suggested that countries should not remain dependent on only one renewable energy source, such as solar, wind, or biofuels, but rather that all renewable energy sources should be developed and applied to produce energy. The fundamental basis for both hypotheses is the high cost of constructing infrastructure. However, as proposed in Hypothesis 2, it is believed that in the long term, different renewable and non-renewable energy sources protect against price increases that would be encountered if only a single energy source, such as oil, were used. This situation is explained by the fact that these energy sources generally offer efficiency and innovation advantages. Similarly, as stated in Hypothesis 3, if the diversity of renewable energy sources such as solar, wind, and biofuels is ensured, a decrease in inflation can be expected in the long term compared to relying on a single renewable energy source. The fact that obtaining energy from different renewable energy sources in a country reduces inflationary pressure can be explained by the storage costs of renewable energy and the ability to produce energy throughout the year, as indicated by Refs. [39,72,73].

In this case, it is expected that energy diversity and renewable energy diversity will cause an increase in inflation in the short term and a reduction in the long term. Therefore, when Models 1 and 2 are reformulated as in Equations (4) and (5), it is predicted that the signs of the coefficients ${\varnothing }_1$ and ${\rho }_1$ of the $ENER$ and $REN$ variables will be negative in the long term and positive in the short term.

$${ INF}_t={\varnothing }_1{ENER}_t+{\varnothing }_2{MON}_t{+{\varnothing }_{3}GDP}_t+{\varnothing }_4{BAL}_t+{\varnothing }_5{UNEM}_t+{\varnothing }_0 {+€}_t$$

(4)

$${ INF}_t={\rho }_1{REN}_t+{\rho }_2{MON}_t{+{\rho }_{3}GDP}_t+{\rho }_4{BAL}_t+{\rho }_5{UNEM}_t+{\rho }_0{+€}_t$$

(5)

The Augmented ARDL approach was used for the estimation of Model 1 and Model 2 and the AARDL model was constructed as follows:

$$\begin{gathered} ∆{INF}_t={\sum }_{i=1}^k{{\beta }_{1i}∆INF}_{t-i}+{\sum }_{i=0}^l{{\beta }_{2i}∆REN}_{t-i}+{\sum }_{i=0}^m{{\beta }_{3i}∆GDP}_{t-i}+ {\sum }_{i=0}^s{{\beta }_{4i}∆MON}_{t-i}+ {\sum }_{i=0}^n{{\beta }_{5i}∆BAL}_{t-i} + \\ {\sum }_{i=0}^p{{\beta }_{6i}∆UNEM}_{t-i}+{\alpha }_1{INF}_{t-1}+{\alpha }_2{REN}_{t-1}+{\alpha }_3{GDP}_{t-1}+ {{\alpha }_4{MON}_{t-1}+\alpha }_5{BAL}_{t-1}+{{\alpha }_{6}UNEM}_{t-1}+{\beta }_0+{ϵ}_t \end{gathered}$$

(6)

$$\begin{gathered} ∆{INF}_t={\sum }_{i=1}^k{{\beta }_{1i}∆INF}_{t-i}+{\sum }_{i=0}^l{{\beta }_{2i}∆ENER}_{t-i}+{\sum }_{i=0}^m{{\beta }_{3i}∆GDP}_{t-i}+{\sum }_{i=0}^s{{\beta }_{4i}∆MON}_{t-i}+{\sum }_{i=0}^n{{\beta }_{5i}BAL}_{t-i}+ \\ {\sum }_{i=0}^p{{\beta }_{6i}∆UNEM}_{t-i}+{\alpha }_1{INF}_{t-1}+{\alpha }_2{ENER}_{t-1}+{\alpha }_3{GDP}_{t-1}+{\alpha }_4{MON}_{t-1}+{\alpha }_5{BAL}_{t-1}+{{\alpha }_{6}UNEM}_{t-1}+{\beta }_0+{ϵ}_t \end{gathered}$$

(7)

In the equations, ${\beta }_0$ and ${ϵ}_t$ denote the constant term and error term. There are 3 cointegration tests in the AARDL model proposed by [74]. The first one is the F-overall test. In this test, the basic hypothesis is as follows: ${ \alpha }_1={ \alpha }_2={\alpha }_3={\alpha }_4={\alpha }_5={\alpha }_6=0$. In the t-dv test, the basic hypothesis is ${\alpha }_1=0$ and is based on testing the significance of the lagged value of the dependent variable. In the F-idv test introduced by [74], the null hypothesis is formed as follows ${\alpha }_2={\alpha }_3={\alpha }_4={\alpha }_5={\alpha }_6=0$. In order to talk about the existence of a cointegration relationship between variables, all 3 test results should provide information that cointegration exists.

AARDL is a cointegration and estimation method that can be used when the dependent variable is stationary at the level. In the traditional ARDL model introduced by [75], the dependent variable is required to satisfy the conditions of being a unit root at the level and stationary in the first difference. The independent variables, on the other hand, can be stationary at the level or in the first difference. Therefore, the traditional ARDL method cannot be applied when the dependent variable is stationary at the level. The AARDL method, however, is a technique that allows us to perform cointegration analysis and estimate short- and long-term forecasts in such a situation where the dependent variable is stationary at the level.

In this study, the AARDL method is preferred because the dependent variable is stationary at the level, and some of the explanatory variables are stationary at the level, while others are stationary at the first difference.

5. Results and Discussion

In the empirical analysis of the study, the primary objective is to determine the stationarity of the series. Ref. [76]’s unit root test was also utilized. According to the findings summarized in

Table 1. Results of LS unit root test.

Variables	Level			First Diff.
	Lag	Break Dates	t-Stat.	Lag	Break Dates	t-Stat.
INF	0	1997 2003	−3.978 **
GDP	1	2007 2019	−2.487	0	1995 1997	−12.124 ***
REN	2	1996 2013	−5.619 ***
ENER	2	1995 2011	−2.567	2	1999 2008	−4.151 ***
UNEM	1	2009 2020	−2.088	0	1995 1998	−5.893 ***
BAL	1	2001 2012	−3.347 *	0	1995 2007	−7.185 ***
MON	2	2008 2016	−3.420 *	1	1996 2011	−5.718 ***

***, ** and * indicate significance at the 1%, 5% and 10% levels respectively.

, $INF$ and $REN$ are stationary at the level. $GDP,ENER,UNEM,BAL$ and $MON$ are stationary at first difference. We can conclude that the dependent variable $INF$ is I(0). Therefore, we can investigate the existence of a cointegration relationship between the variables utilizing the AARDL method.

Cointegration test results for Model 1 are reported in

Table 2. Results of cointegration tests for Model 1 and Model 2.

	Model 1	Model 2	Critical Values
			10%		5%		1%
Tests	Test stat.	Test stat.	I(0)	I(1)	I(0)	I(1)	I(0)	I(1)
F-all	6.348	10.519	2.578	3.858	3.125	4.608	4.537	6.37
t-dv	−4.927	−6.386	−2.57	−3.86	−2.86	−4.19	−3.43	−4.79
F-idv	5.742	9.311	2.07	3.67	2.59	4.40	3.70	6.15

The critical values for the tests F-all, t-dv, and F-idv are obtained from [77], [75], and [74], respectively.

. The F-all test statistic is above the critical value of I(1), at the 5% significance level. In this case, the H0 hypothesis, which states that there is no cointegration, is rejected. Similarly, it is seen that the t-dv statistic is greater than the upper bound critical value in absolute value. According to this result, it can be said that the lagged dependent variable is significant. The fact that F-idv is above the upper bounds critical value shows that the basic hypothesis stating that there is no cointegration for the lag of the independent variables is rejected. Thus, it is concluded that there are no degenerate situations mentioned in [74]. In short, all three tests indicate that there is cointegration. As a result, the AARDL model is valid, and there is a cointegration relationship between overall energy diversity, economic growth, money supply, current account deficit, and unemployment and inflation. Similarly, for Model 2 in Table 2, all three cointegration tests indicate that there is a cointegration relationship at a significance level of 5%.

The long-term results of Model 1 are reported in

Table 3. Results of AARDL for Model 1 (ARDL(1, 0, 1, 1, 1, 0)).

Long Run			Short Run
Variables	Coeff.	Prob.		Coeff.	Prob.
GDP	4.104	0.005	∆GDP	0.996	0.008
ENER	−5.099	0.009	∆BAL	−0.133	0.314
UNEM	0.117	0.925	∆MON	0.259	0.552
BAL	−0.397	0.110	ecm(−1)	−0.800	0.000
MON	1.659	0.030	C	−13.456	0.000
Diagnostic tests	Test stat.	Prob.		Test stat.	Prob.
Jarque–Bera	0.224	0.894	ARCH	0.231	0.620
Breusch–Godfrey	0.782	0.313	Ramsey–Reset	1.184	0.288

. The effect of energy diversity on inflation is negative. This result indicates that energy diversity has a disinflationary effect, and inflation will fall when there is no dependence on a single energy source. The fact that energy consumption is largely fueled by oil is an important factor that increases inflation through increases in both the exchange rate and the international price of oil. Increasing energy diversity will reduce the dependence of countries on oil. As a result, inflation can be expected to decrease. In other words, obtaining energy from other energy sources instead of importing oil provides a significant decrease in energy prices. As a result, it can be mentioned briefly that energy diversity appears to be an important factor in controlling overall price levels. In the short run, economic growth causes inflationary effects. When evaluating the findings of Model 1, it is understood that Hypothesis 1 is valid. Hypothesis 1 suggested that the overall energy diversity consisting of renewable and non-renewable energy sources would reduce inflation in the long term. The fact that the coefficient of the $ENER$ variable is negative and significant in the long term indicates that this hypothesis is valid. However, it was found that energy diversity does not serve a role among the variables determining inflation in the short term. This finding suggests that the claim made in Hypothesis 2 is not valid. Therefore, investing in multiple energy sources will not yield a short-term inflationary effect due to the high costs associated with the construction of the relevant energy sectors. The fact that energy diversity has no short-term cost on inflation and reduces inflation in the long term further increases the attraction of energy diversity. The long-term findings of our study are consistent with the results of [25]. However, Ref. [25] found that renewable energy consumption also reduces inflation in the short term in the Iranian economy. Ref. [43], on the other hand, did not find a significant effect of renewable energy on inflation but observed that inflation triggers renewable energy consumption.

The fact that the impact of energy diversity on inflation in the short term is not as positive and significant as expected may be linked to technological developments in China. Technological progress in China may prevent the cost of modern technology required for renewable and non-renewable energy investments from increasing as much as expected. Policies such as energy incentives may also prevent energy investments from having an increasing impact on inflation. In developed countries, policies such as incentives and subsidies can be implemented to minimize the impact of investments in the energy sector on cost inflation. In short, as indicated in Refs. [3,62], the country’s energy, investment, monetary, and other policies should be scrutinised in detail.

According to the long-term coefficient estimates of Model 2 demonstrated in

Table 4. Results of AARDL for Model 2 (AARDL(1, 1, 2, 1, 2, 0)).

Long Run			Short Run
Variables	Coeff.	Prob.		Coeff.	Prob.
GDP	2.255	0.004	∆GDP	0.637	0.026
REN	−1.393	0.000	∆REN	−0.472	0.196
UNEM	0.412	0.649	∆BAL	0.097	0.395
BAL	−0.477	0.017	∆BALt−1	0.252	0.048
MON	1.534	0.034	∆MON	−0.754	0.050
			∆MONt−1	−1.524	0.003
			ecm(−1)	−1.125	0.000
			C	−11.530	0.000
Diagnostic tests	Test stat.	Prob.		Test stat.	Prob.
Jarque–Bera	1.269	0.530	Breusch–Pagan	1.538	0.205
Breusch–Godfrey	0.788	0.248	Ramsey–Reset	0.276	0.605

, renewable energy diversity, money supply, economic growth, and current account balance have a statistically significant effect on inflation. Among these variables, the effect of renewable energy diversity on inflation is negative. Obtaining renewable energy from different sources has a disinflationary effect. This can be explained by the fact that renewable energy sources such as solar and wind depend on different weather conditions. Changing seasons may reduce the amount of renewable energy when dependent on a single renewable energy source. Diversification of renewable energy sources can ensure the stability of renewable energy production in different seasons. Maintaining renewable energy production in changing weather conditions can also reduce the cost of storing renewable energy. In addition, the development of renewable energy resources in different regions can facilitate access to energy for those living in those regions. This may also provide advantages in terms of storage and transport costs of renewable energy. The disinflationary effect of renewable energy diversity supports the findings of Refs. [4,24,25]. When these results are evaluated within the framework of hypotheses regarding renewable energy diversity and inflation, Hypothesis 3 is validated. However, no evidence supporting that Hypothesis 4, which relates to the short term, has been observed. According to the short-term results, the effect of renewable energy diversity on inflation is statistically insignificant. This finding is inconsistent with the expectation that renewable energy diversity would trigger inflation in the short term. Therefore, it can be claimed that investing in a variety of renewable energy sources rather than relying on a specific renewable energy source in the short term does not have a cost-increasing or cost-reducing effect. This result also implies that the construction of a variety of renewable energy sources requires approximately the same level of capital.

In sum, meeting countries’ energy needs from all renewable energy sources rather than solely from solar or wind power will contribute to a reduction in inflation in the long run. In the short term, renewable energy diversity is not expected to put pressure on inflation due to cost factors. Therefore, countries producing energy from different renewable energy sources may be beneficial in achieving the desired low inflation target in the long term without causing inflationary pressure in the short term. Therefore, it is recommended that countries consider all renewable energy sources when designing their energy strategies. Similarly, having a portfolio of renewable and non-renewable energy sources rather than relying on a particular energy source puts downward pressure on inflation. Therefore, energy diversity is a strategic necessity that benefits not only the environment but also price stability. As stated by Refs. [12,13], energy diversity is crucial for sustainable development for both developed and developing countries that are dependent on external energy sources. COVID-19 and the Russia–Ukraine war have further emphasised the importance of renewable energy in meeting countries’ energy needs [6].

On the other hand, money supply has a positive impact on inflation both in Model 1 and Model 2. These findings are consistent with the findings of Refs. [65,70]. It is theoretically accepted that monetary expansion will have an inflationary effect. According to Ref. [78], ‘inflation is always and everywhere a monetary phenomenon’. According to the quantity theory of money, inflation is associated with the money supply. An increase in the money supply results in an increase in prices.

Nothing is definite about economic growth and inflation [79]. For example, a positive relationship can be mentioned about the relationship between economic growth and inflation. It is predicted that the increase in investments, consumption, and demand as a result of economic growth will trigger inflation. However, economic growth also implies an increase in production and will lead to a decrease in inflation [69]. In addition, focusing on price stability in countries with high income levels ensures a sound monetary and fiscal policy. Ensuring institutionalization in a developed country establishes an environment of trust. Therefore, economic growth can be expected to be accompanied by a fall in inflation. In this study, the observed positive association is consistent with the findings of Refs. [65,67]. But Refs. [68,79,80] reported that economic growth has a negative impact on inflation.

The current account deficit is expected to increase inflation as it indicates that the country’s current account revenues are higher than its expenditures. Current account deficit means that exports are lower than imports or other receipts (e.g., foreign aid, remittances, etc.) are lower than expenditures. Excess imports may trigger inflation through imported inflation. It may raise prices through inputs and other imported goods. In particular, imports of consumption goods may push up prices but may not have an increasing effect on production. Since the decrease in exports will reduce the taxes collected from exports, government expenditures and other investments financed by tax revenues will be financed by borrowing or printing money, which in turn results in inflation. In the case of a decrease in foreign aid or workers’ remittances, the inability to realize investments and projects financed by these revenues may adversely affect economic growth and lead to inflation. On the other hand, a decrease in such revenues may reduce consumption and thus reduce inflation. Foreign trade, foreign aid, and balance of payments are known to affect economic growth. Based on Ref. [81]’s approach, it is believed that openness and foreign trade also reduce the control over money supply [64,69,82,83]. It is also possible that the current account deficit could boost the exchange rate and thereby accelerate inflation by conveying an unfavorable impression of the country’s economy. The evidence from this study that the current account deficit reduces inflation is consistent with the findings of Ref. [64] for Jordan. As stated by Ref. [64], this may be due to the production of import-substitute goods in the long run and the reduction in excess demand in the economy as a result of the current account deficit.

In theory, a trade-off between inflation and unemployment can be expected within the framework of the Phillips Curve [84]. However, it is accepted that in the long run, the trade-off between unemployment and inflation will not exist, and unemployment will return to the natural rate of unemployment. The findings obtained here are that the effect of unemployment on inflation is insignificant. Thus, it is seen that unemployment rates do not affect inflation in the long and short term in the Chinese economy.

The validity of Model 1 and Model 2 is determined by the diagnostic tests in Table 3 and Table 4. The probability value of the Breusch–Godfrey LM test is greater than 0.05, and the null hypothesis of no autocorrelation cannot be rejected. The Breusch–Pagan–Godfrey or ARCH tests also show that there is no heteroscedasticity problem. It is determined that the series is normally distributed, and there is no specification problem in the model because the probability values of Jarque–Bera and Ramsey–Reset tests are above 0.05.

CUSUM and CUSUMSQ graphs in Figure 1 and Figure 2 also provide information that Model 1 and Model 2 are stable. Since the parameters of the models are within the confidence limits, it can be concluded that the estimation results are reliable.

Finally, causality analysis was also conducted in the study. For this purpose, Ref. [85]’s causality test was preferred. In the estimations performed with this test, which is based on the VAR model and flexible in terms of the stationarity properties of the variables, the maximum degree of integration is 1 since the variables consist of I(0) and I(1). The appropriate lag length was determined as 1 according to the VAR model.

The causality test results summarized in

Table 5. Results of the causality test.

Relationship	Test Stat.	p-Value
REN → INF	29.104	0.000
INF → REN	0.401	0.526
GDP → INF	25.123	0.000
INF → GDP	1.039	0.308
BAL → INF	14.156	0.000
INF → BAL	3.690	0.054
MON → INF	15.575	0.001
INF → MON	2.527	0.111
UNEM → INF	2.986	0.084
INF → UNEM	0.849	0.356
ENER → INF	5.249	0.072
INF → ENER	3.178	0.204

indicate that there is a unidirectional causality relationship flowing from renewable energy diversity to inflation. There is no causality relationship running from inflation to renewable energy diversity. The causality relationship between energy diversity and inflation is also valid for a 10% significance level and is unidirectional. The direction of causality is moving from energy diversity to inflation. These results confirm the long-term findings that renewable energy diversity and overall energy diversity affect inflation. It is accepted that economic growth is the Granger cause of inflation. Inflation, on the other hand, is not a Granger cause of economic growth. The causality relationship between the current account deficit and inflation is bidirectional. While there is a causality running from the current account balance to inflation, there is a causality running from inflation to the current account balance. A causality relationship is observed from money supply to inflation. However, there is no causality from inflation to money supply. Unemployment is the cause of inflation at the 10% significance level. There is no causality relationship flowing from inflation to unemployment.

6. Conclusions

In recent years, it has been denoted that renewable energy consumption has a disinflationary effect. In this study, the influence of renewable energy on inflation is investigated by applying renewable energy diversity. For this purpose, an index that considers only renewable energy sources is calculated. As a result of the analysis conducted with the Augmented AARDL method, it is determined that renewable energy diversity has a negative effect on inflation in the long run. Thus, it is concluded that inflation decreases as renewable energy diversity increases. In other words, generating energy from different renewable energy sources rather than from one renewable energy source reduces inflation. The study also investigated the effect of the overall energy diversity, which takes into account all types of energy consumed in China, on inflation. The results demonstrate that inflation falls as energy diversity rises in the long run. Among the other explanatory variables in the model, economic growth and money supply have a positive impact on inflation. The effect of the current account deficit on inflation is negative. A Toda–Yamamoto causality test is also performed. The results of this test revealed that there is a unidirectional causality running from renewable energy diversity to inflation. Similarly, there is a unidirectional causality running from overall energy diversity to inflation.

China has a large geographical area. It also has different climate characteristics such as monsoon, desert, tropical, and terrestrial. For this reason, China can gain an advantage in terms of inflation by diversifying its renewable energy sources rather than relying on a single source. As is well known, solar, wind, and biofuel energy sources are not always available in the same quantities throughout the year. Therefore, the development of different renewable energy sectors can enable energy production from renewable sources even under changing weather conditions and during different times of the year. Thus, the total amount of energy obtained from the renewable energy sector can also increase, resulting from renewable energy diversity. Renewable energy diversity may also reduce energy storage and transportation costs by enabling energy production in a wider and more diverse geographical area within the country, thereby contributing to a decrease in inflation. The aforementioned advantages of renewable energy diversity can contribute to a decrease in inflation in China. The results of the analysis indicate that a 1% increase in renewable energy diversity could lead to a decrease of approximately 1.4% in inflation.

In addition to renewable sources, the increase in energy diversification, such as coal, natural gas, and nuclear energy, also contributes to disinflation in China. The findings of the analyses indicate that a 1% increase in energy diversity will lead to an approximately 5% decrease in inflation. The usage of renewable and non-renewable energy sources that will reduce dependence on oil will considerably reduce inflation. In sum, the diversity of renewable and non-renewable energy sources can support economic stability by minimizing energy-related inflationary effects on the national economy. However, it is seen that the inflation-reducing effect of overall energy diversity is greater than that of renewable energy diversity. This situation can be interpreted as meaning that shocks in oil prices have a significant effect on inflation and that, therefore, minimizing the impact of oil shocks through ensuring energy diversity could exert a significant downward pressure on inflation. China’s leading position in coal consumption worldwide and its significant investments in nuclear energy are also important in terms of constituting an alternative to oil. In short, energy diversity is more effective than renewable energy diversity in reducing inflation. However, the effect of renewable diversity on reducing inflation is also important and should not be underestimated.

As a result, it can be claimed that when China diversifies its energy sources and becomes less dependent on oil, this leads to a disinflationary effect. In particular, high oil consumption and imports from abroad are considered to be an important factor that triggers inflation through shocks in oil prices. As the renewable energy sector develops as an alternative to oil and renewable energy diversity increases, a downward trend in inflation can be observed. The country’s emphasis on the diversification of renewable energy sources rather than the development of only one energy source in renewable energy may lead to a decline in inflation.

Renewable energy consumption and investments are encouraged in order to reduce global warming and environmental pollution. China’s significant increase in renewable energy investments has made it the leading country in the development of the renewable energy sector in the world. This situation may lead to a favorable reflection of the growing renewable energy sector on macroeconomic variables. It can be said that the development of the renewable energy sector in China is also beneficial for the reduction in inflation. For this purpose, incentives for the different renewable energy sources should be continued. In this context, for example, governments can increase R&D expenditures and provide incentives to make the renewable energy sector more attractive.