Linking the Shadow Economy and Clean Energy Adoption: Insights from African Countries

Abstract

Despite worldwide concerted efforts to switch to clean energy sources, many African countries still rely on fossil fuels for their energy needs. This study aims to analyse the influence of the shadow economy on the adoption of clean fuels using data from 47 African countries over the 2000–2020 period. Results from Driscoll and Kraay (1998) and IV-GMM estimators reveal that the proliferation of informality hinders the adoption of clean fuels in Africa. This result is robust to panel VAR estimates and further robustness checks. Furthermore, lower tax revenue, low income and poor governance are channels through which the shadow economy hinders adoption of clean energy sources. Therefore, for effective pursuit of sustainable energy programs, African governments should lessen the spread of informality. This can be achieved through good governance, ease of doing business and reducing cumbersome bureaucratic procedures to ensure smooth transition and adoption of clean fuels by all.