|||**RE+1**|<br>**0 Scenario**|**2008 RV in RE**|**+ Scenarios**|<br>**RE+20**|**Scenario**||
|---|---|---|---|---|---|---|---|---|
||||$-Loss|_Av. $-Loss_|||$-Loss|_Av. $-Loss_|
||FF(%)|TERV(%)|(mil’s)|_(mil’s)_|FF(%)|TERV(%)|(mil’s)|_(mil’s)_|
|USA|60.9|-2.70|394,753|_67,236_|50.9|-2.26|328,434|_133,555_|
|JPN|74.0|-4.02|205,523|_28,982_|64.0|-3.48|176,749|_57,756_|
|GER|69.7|-4.98|191,306|_28,956_|59.7|-4.26|162,637|_57,625_|
|IND|54.7|-4.73|60,394|_11,639_|44.7|-3.86|48,909|_23,124_|
|KOR|52.4|-5.36|52,572|_10,788_|42.4|-4.33|42,085|_21,275_|
|MYS|86.6|-9.19|19,725|_2,539_|76.6|-8.13|17,244|_5,018_|

**Table 11.** The simulated effects of the 2008 RV increase in a scenario with a 10%, and 20% higher renewable energy share in the generating portfolio (RE+10, and RE+20).

This illustration suggests that the GDP loss which was incurred due to the increase in oil price volatility in 2008 could have been significantly reduced, if the share of renewable energy had been larger. In general it can be stated that the avoided GDP-losses, even in the RE+10 scenario, are of significant size and it is imperative to incorporate such figures in project appraisals of renewable energy investments. Figure 8. presents a summary of the simulated scenarios. It is important to note that the above simulations merely consider a 12 months period – however investments in renewable energies will strengthen the hedging mechanism and avoid GDP losses over many decades. The discounted future stream of avoided GDP losses is hence bound to be much higher than in the above illustration.

In practice it is important to note that above simulations do not advocate simply increasing renewable energy capacities for achieving stability. Renewable energy sources may themselves be subject to other forms of ‘volatility’, which may also affect its price stability. Hydropower for instance, as the most common form of renewable energy, may be influenced heavily by changing precipitation patterns due to climate change and erosion and sedimentation processes due to environmental degradation. Instead, the above simulations demonstrate the potential dimensions of economic benefits which may result from disconnecting the macroeconomy from volatile global oil markets.

# **6. Summary and Conclusions**

While the standard literature typically considers oil price shocks directly, this study investigates the effect of oil price volatility on economic activity by using the Realized Volatility measure by Andersen et al. (2001). This paper extends the analysis in the standard literature to emerging economies in Asia. Evidence from Granger causality tests, VAR estimation, Impulse Response Functions and Variance Decomposition suggests that increased oil price volatility has significant negative effects on economic growth in all sample countries, including net oil exporter Malaysia. These effects are found to be more adverse than those in the common ‘price shock’ literature – presumably because a persistent volatility increase has fundamental effects on expectations by increasing uncertainty and shortening planning horizons. However, in line with the literature it is found that the effect of a given volatility shock is limited to the short-run and becomes more significant when domestic inflation and exchange rate fluctuations are accounted for. This paper, however, does not explicitly account for the potential impacts from taxation at the individual country level.

Moreover, it is found that elasticities vary widely across countries. While standard literature merely distinguishes between net oil importers and exporters, this paper discusses further parameters which may determine the responsiveness of a country to oil price volatility: (i) the domestic oil production-consumption ratio, (ii) the oil import-export ratio, (iii) sectoral composition of GDP and (iv) the energy mix. Thus, when investigating the effects of oil price volatility, the status of net importer or exporter only yields limited insight. However, analyzing (i) and (ii) can inform about the extent to which countries are exposed to price volatility in global energy markets. Moreover, (iii) and (iv) can indicate how sensitive an economy is to a given level of exposure.

Out of these parameters, the energy mix is considered as a policy instrument in hedging against the negative effects of oil price volatility. We assume that only the fossil fuel element of the energy mix is directly exposed to global commodity market price volatility, and thus it is in principle possible to reduce overall portfolio volatility by increasing the renewable energy share (assuming it is price stable). In illustrative simulations it is 16