OECD nations show mixed progress toward energy and economic convergence

Abstract

Purpose – This study examines the convergence of energy diversification, financial development and per-capita income in OECD countries.

Design/methodology/approach – The research employs the club convergence test to assess convergence among OECD countries and uses Granger causality tests and panel regressions to identify the determinants of convergence, using data from 1997 to 2021.

Findings – The convergence tests showed no overall convergence but revealed convergence clubs for each factor. Granger causality tests indicated short-run bi-directional relationships between the variables. Long-run panel regression analysis confirmed that technological progress significantly improves per capita income and energy diversification. Additionally, it revealed bi-directional relationships between energy diversification and financial development, a uni-directional relationship from financial development to per capita income and a U-shaped effect of per capita income on energy diversification, with a turning point at $67,112.8 per year.

Practical implications – The findings suggest that within each convergence club, implementing microeconomic incentives for technology development and diffusion in energy, production, and financial services could help lagging countries catch up.

Originality/value – This study pioneers the testing of convergence in energy diversification, financial development and per capita income in OECD countries and identifies the determinants of this convergence.

Background and Motivation

In an era where global economies are confronted with the dual challenges of climate change and socioeconomic inequality, understanding how nations converge or diverge in energy use, financial development, and income growth has become more critical than ever. While existing research has delved into income and financial convergence across regions, significant gaps remain in analysing energy diversification alongside these factors, particularly within OECD countries. Addressing this important research void, China Finance Review International (CFRI) is pleased to present the paper titled "Energy diversification, financial development and economic development: an examination of convergence in OECD countries", which investigates whether energy diversification, financial development, and per-capita income converge over time in OECD nations.

Methodology and Scope​​

The study employed rigorous statistical methods to analyse data from 38 OECD countries spanning 1997–2021, a period marked by rapid technological innovation and shifting energy policies. The key approaches included:

• Club Convergence Tests: Utilising Phillips and Sul’s (2007, 2009) log-t framework, researchers identified subgroups of countries (convergence clubs) with similar growth trajectories in energy diversification, financial development, and income.
• Granger Causality Tests: To explore short-term relationships, the team tested whether changes in one variable (e.g., energy diversification) predict future changes in others (e.g., income).
• Panel Regression Models: Long-term drivers of convergence were analysed, controlling for factors such as technological progress, oil prices, and human development.

By innovatively combining these methods, the study disentangled overlapping trends and causal links, offering a holistic view of convergence dynamics.

Key Findings and Contributions

• No Universal Convergence, but Clubs Emerge: OECD countries do not uniformly converge across all three metrics. Instead, distinct clubs are formed based on energy diversification, financial development, and income levels. For example, three clubs emerged in energy diversification, with countries like Costa Rica, Luxembourg, and Latvia leading low-carbon clusters.
• Technology as a Double-Edged Sword: Technological progress boosted income and energy diversification, but widened gaps in financial development. Wealthier nations were able to adopt AI-driven energy innovations and accelerate the adoption of renewable energy, while others lagged.
• Circular Relationships: Short-term feedback loops were identified, where energy diversification spurred income growth, and financial development enhanced renewable energy investment.
• Long-term Drivers: The impact of income on energy diversification followed a U-shaped curve, with a turning point at $67,112.8 annual income (2015 USD). Below this threshold, richer nations relied more on fossil fuels.
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Why It Matters​​

This study challenges the assumption that OECD nations naturally converge toward shared development goals. Instead, it reveals a ​​patchwork of progress​​, where clubs of countries advance together while others lag. Key takeaways for policymakers:

• ​​Targeted Collaboration​​: Nations within convergence clubs can share best practices (e.g., renewable energy incentives).
• ​​Tech Equity​​: Bridging gaps requires international cooperation to democratise clean energy tech and financial tools.
• ​​Climate-Smart Policies​​: The U-shaped income-energy link underscores the need for tailored strategies, e.g., subsidies for low-income nations to bypass fossil fuels.

Practical Applications

• ​​​​​Researchers: Use the club convergence framework for analysing multi-dimensional convergence (energy, finance, income). U-shaped income-energy relationship challenges traditional models. Cultural and geopolitical factors are driving energy-diversification clusters, offering gaps for further research.
• ​​Policymakers​​: Support targeted policies for high-income clubs and low-income clubs. Emphasise aligning green banking regulations with energy transitions and advocating for international climate funds to bridge OECD technology gaps.
• ​​​Energy & Financial Institutions​​: Tailor R&D to club-specific needs and develop region-focused financing products. Diversifying portfolios across clubs mitigates divergence risks.
• ​​International Organizations​​: Prioritising funding for spillover potential and enforcing OECD-wide tech-transfer agreements with shared KPIs ensure equitable progress on sustainability goals.
• ​​Corporate Sustainability Teams​​: Integrating club convergence trends into ESG reporting aligns disclosures with OECD benchmarks, while co-developing standards with intra-club peers accelerates industry-wide adoption.

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