How Dependent Is Growth From Primary Energy? An Empirical Answer on 33 Countries

How Dependent Is Growth From Primary Energy? An Empirical Answer on 33 Countries www.theshiftproject.org

Outline • Introduction • Empirical methodology • The data • Time series properties of the data • Conclusion

Introduction Why is this relationship important ? • Mainstream economic models do not include energy as a factor that could foster economic growth. • Ecological economists, often ascribe to energy the central role in economic growth. • Is energy an important driver of economic growth ? • If so, what is the magnitude of the dependency of growth from energy ?

Introduction Why is this relationship important ? Oil prices and World GDP (1965 – 2011) Sources: BP statistical Review, 2012, Shilling et al. 1977, EIA, 2012, and World Bank (GDP), 2012.

Introduction Why is this relationship important ? Primary Energy Consumption and GDP (1965 – 2011) Source : BP statistical review, 2012, Shilling et al. 1977, EIA, 2012, and World Bank (GDP), 2012.

Introduction Why is this relationship important ? The GDP share of primary energy, U.S., 1970-2010. Source: EIA, http://www.eia.gov/totalenergy/data/annual/pdf/sec1_13.pdf

Empirical methodology • Variables under scrutiny is: • Primary energy consumption (million tons of oil equivalents) • GDP (in 2000 U.S dollars) • Gross Fixed Capital Formation (in 2000 U.S dollars) • Population (millions) World Bank, World Development Indicators

The data • The analysis is based on a panel data covering the period from 1970 to 2011 for 33countries.

Estimation of the long run relation The main equation: lnGDPi,t= βi,0+βi,1 lnNRGi,t+βi,2 lnEFFi,t-1+βi,3 lnKi,t+εi,t All the variables are per capita

Time series properties of the data Cross section dependence, Unit Root and Co-integration tests • Cross Section Dependence Test of Pesaran • Unit Root Tests: • First Generation: • Levin, Lin and Chu test • Breitung • Im, Pesaran and Shin • ADF-Fisher • Philips Perron– Fisher • Second Generation: • CIPS test • Co-integration Tests: • Pedroni’s residual co-integration tests • Westerlund test common unit root process Individual unit root process

Emprical Results Co-integration tests results Table 5. Pedroni Residual Cointegration Test Table 6. Westerlund panel cointegration test results

Emprical Results Estimation of the long run relation Can we quantify this long-run relationship ? The short-run speed of convergence towards the equilibrium relation ?An ECM approach: "ϕi" is the error correction term, "βi" is long-run coefficients, δ incorporates short-run information

Emprical Results Estimation of the long run relation Table 7. Results of long-run estimations

Emprical Results Granger Causality Table 8. Panel causality test results

Conclusion • Primary energy is a key factor that drives GDP growth: its long-run output elasticity evolved around 0.6. • Capital accumulation has played a minor role compared to energy: long-run elasticity for capital around 0.2. • These estimations are also robust to the choice of various sub periods of time and subsamples of countries. • There are good reasons to believe that, the output elasticity of energy is decoupled from its GDP share. • Our inquiry does not suggest that energy use be the sole first-order factor driving growth. Efficiency plays a dual, almost comparable role. • Energy and GDP cointegrateand energy use univocally Granger causes GDP in the long-run

How Dependent Is Growth From Primary Energy? An Empirical Answer on 33 Countries