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

Relationship between Energy Consumption 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

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

Population and Income ChinaIndiaUKUSA Population, total (millions) Urban population (% of total) GDP (current US$) (billions)

Energy and Emission by Country ChinaIndiaUKUSA GDP per unit of energy use (constant 2000 PPP $ per kg of oil equivalent) Energy use (kg of oil equivalent per capita) Combustible renewables and waste (% of total energy) Energy imports, net (% of energy use) Electric power consumption (kWh per capita) Electricity production from coal sources (% of total) CO2 emissions (kg per 2000 PPP $ of GDP) CO2 emissions (metric tons per capita) PM10, country level (micrograms/ cubic meter)

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?

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). Reduction in energy consumption Developed Developing

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)

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

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

Preliminary findings

Causal relationship: GDP – Energy Consumption Variables: GDP: X(t) Energie Consumption: Y(t) using time series X= {X t, X t-1, X t-2 …} Y= {Y t, Y t-1, Y t-2, …} Our Autoregressive Model: X t = c + φ 1 X t-1 + φ 2 X t-2 + … + φ p X t-p + Et Y t = c + θ 1 Y t-1 + θ 2 Y t-2 + … + θ p Y t-p + Et φ 1, …φ p and θ 1,... θ p : the parameters of our model c : a constant Et : an error term Methodology

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

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

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