The role of energy in four countries’ economy: Causality analysis

1. The role of energy in four countries’ economy: Causality analysis Prepared by: Arjun Dhakal Ayse Ozge Kepenek Jiaqiao Lin Lydia Stergiopoulou Feb. 2nd, 2007

2. Relationship between EnergyConsumption and GDP • Economic growth is requiring less additional energy consumption, mainly as a result of structural changes in the economy. However, total energy consumption is still increasing.European Environmental Agency (April 2006) • A policy to reduce energy consumption aimed at reducing emissions is likely to have greater impact on the GDP of the developed rather than the developing world. OECD

6. Uncertainty in the relationship between energy use to GDP • Comparison among countries of the ratio of energy use to GDP is complicated by many factors. - geographical differences (climate, size) - differences in environmental impact among energy sources - the strength of this relation varies among regions over time

7. Population and Income

8. Energy and Emission by Country

9. Question= • To run and test, until recently if there is the causal relationship as mentioned in the references in selected countries For developed, E GDP E GDP , so if it is reasonable for them to take responsibility of mitigating CO2 emissions, if so what’s the relation of relevant measures to GDP For developing, E GDP ,so if they should reduce energy consumption to mitigate CO2 emission or through other measures, say, improving efficiency, increase alternative renewable energy, will these affect domestic income?

10. Comparison between two groups • From references for developing countries, energy use seems to play an equally important role in most of them. • Therefore, if the causal relationship is greater for them, then any restraint on energy consumption will exert more impacts on these countries compared to the more industrialised countries (Chontanawat, 2006; Sari & Soytas, 2007). Developed Reduction in energy consumption Developing

11. The Case of China • Unidirectional Granger causality found from electricity consumption to real GDP (Shiu & Lam, 2004) • Unidirectional Granger causality, from coal, coke, electricity and total energy consumption to real GDP but no Granger causality between oil consumption and real GDP (Shanghai). (Wolde-Rufael, 2004) The Case of India • Cheng (1999) finds no Granger causality running from energy consumption to economic growth, • While many papers find unidirectional Granger causality running from energy consumption to income.(Paul & Bhattacharya , 2004; Asafu-Adjaye ,2000; Masih and Masih , 1996)

12. Expanding energy consumption?! Promoting energy efficiency Decreasing energy intensity Diversify energy sources that are renewable

13. To conduct following analysis: Different energy category use vs. GDP Hydro- Coal Nuclear- Renewable- Coal consumption Electricity consumption/production Oil consumption Natural gas Energy efficiency

14. Preliminary findings

16. Methodology Causal relationship: GDP – Energy Consumption • Variables: GDP: X(t) Energie Consumption: Y(t) using time series X= {Xt,Xt-1, Xt-2 …} Y= {Yt,Yt-1, Yt-2, …} • Our Autoregressive Model: Xt = c + φ1Xt-1 + φ2Xt-2 + … + φpX t-p + Et Yt = c + θ1Yt-1+ θ2 Yt-2 + … + θp Yt-p + Et φ1, …φp and θ1 , ... θp: the parameters of our model c :a constant Et :an error term

17. Granger test • Technique for determining whether one time series is useful in forecasting the other • a series of tests on values of X and Y will determine if : • X values provide statistically significant information on future values of Y If yes then: • Time series X is said to Granger-cause Y • Meaning that GDP past trends influence future Energy Consumption trends

18. Expectations • To review the former findings and combine our causal analysis results to find if cut down the primary energy consumption will affect economic growth. • To find if expand renewable energy proportion will affect economic growth • To provide facts for policy making process

19. References • Asafu-Adjaye, J. (2000) The relationship between energy consumption, energy prices and economic growth: Time series evidence from Asian developing countries. Energy Economics, 22(6), 615-25. • Chontanawat, J., Leste,r C. Hunt, Richard, Pierse (2006). Causality between Energy Consumption and GDP: Evidence from 30 OECD and 78 Non-OECD Countries. In SEEDS(Surrey Energy Economics Discussion paper Series). • Hu, J.-L. & Wang, S.-C. (2006) Total-factor energy efficiency of regions in China. Energy Policy, 34(17), 3206-06. • Masih Abdul, M.M. & Masih, R. (1996) Energy consumption, real income and temporal causality: Results from a multi-country study based on cointegration and error-correction modelling techniques. Energy Economics, 18(3), 165-83. • Masih Abul, M.M. & Masih, R. (1998) A multivariate cointegrated modelling approach in testing temporal causality between energy consumption, real income and prices with an application to two Asian LDCs. Applied Economics, 30(10), 1287-98. • Sari, R. & Soytas, U. (2007) The growth of income and energy consumption in six developing countries. Energy Policy, 35(2), 889-98. • Shiu, A. & Lam, P.-L. (2004) Electricity consumption and economic growth in China. Energy Policy, 32(1), 47-54. • Soytas, U. & Sari, R. (2006) Energy consumption and income in G-7 countries. Journal of Policy Modeling, 28(7), 739-39. • Wolde-Rufael, Y. (2004) Disaggregated industrial energy consumption and GDP: the case of Shanghai, 1952-1999. Energy Economics, 26(1), 69-75. • ZhiDong, L. (2003) An econometric study on China's economy, energy and environment to the year 2030. Energy Policy, 31(11), 1137-50.