The Effects of Alternative Energy Consumption on Inflationary Trends in Sustainable Growth: A Quantile Study in the European Union

ABSTRACT

This study examines the effects of the green energy transition and foreign direct investment on inflationary dynamics, distinguishing between general price inflation and electricity price inflation across 27 EU member states over 2014–2024. Using feasible generalized least squares, instrumental variables generalized method of moments, and quantile method of moments regression, the model specifies inflation as a function of renewable and nuclear energy consumption shares, energy intensity, outward and inward FDI, sectoral productivity, per capita income, green technology patents, and unemployment. The study tests the greenflation hypothesis, which posits that the reorientation toward renewables raises price levels, and the filter‐out hypothesis, which argues that outward FDI reduces domestic energy‐intensive capacity and lowers electricity price inflation. The findings reveal that electricity price inflation is substantially more responsive to energy transition variables than general price inflation. Outward FDI exerts a significant and negative effect on electricity prices, confirming the filter‐out hypothesis, while renewable energy consumption alleviates rather than amplifies electricity price pressure. Energy intensity is the only variable contributing positively and significantly to both inflation measures, and green technology development consistently reduces both. General Price inflation is primarily shaped by tertiary sector productivity and unemployment rather than by energy variables. The study recommends prioritizing energy efficiency improvements to contain inflationary pressures during the green transition. Facilitating the outward relocation of energy‐intensive capital and incentivizing green technology investment would further stabilize electricity prices while supporting the sustainability objectives of the European Green Deal.