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GDP/Energy link - Rome 14th IAEE European Energy Conference

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The work of the Shift Project focuses on the link between energy consumption and the GDP growth. The econometrical research confirms the standpoint defended by ecological economists and introducing primary energy as a key factor that drives GDP growth. The results show that an increase of 10% of energy use per capita induces, on average, an increase (resp. decrease) of about 6 to 7% of GDP per capita. The research also concludes that the causality relation goes from the consumption of energy to growth in both the short and long-run.

These findings sharply contrast with the custom, popular in macroeconomics, that consists in calibrating the output elasticity of energy according to the cost share of energy. In most countries, this practice leads to the postulate that energy elasticity should be close to 0.08% on average.

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GDP/Energy link - Rome 14th IAEE European Energy Conference

  1. 1. How Dependent Is Growth From Primary Energy? An Empirical Answer on 33 Countries www.theshiftproject.org Gael Giraud CNRS, PSE, CES, Labex REFI Zeynep Kahraman The Shift Project
  2. 2. 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 ?
  3. 3. Introduction Why is this relationship important ? Sources: BP statistical Review, 2012, Shilling et al. 1977, EIA, 2012, and World Bank (GDP), 2012. 0 10000 20000 30000 40000 50000 60000 0 20 40 60 80 100 120 GDPbillionconstant$ Oil Price per barrel in constant 2011 $ World Oil prices and GDP (1965 – 2011)
  4. 4. Introduction Why is this relationship important ? Source : BP statistical review, 2012, Shilling et al. 1977, EIA, 2012, and World Bank (GDP), 2012. y = 0.6548x + 0.0103 -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% WorldGrossDomesticProductGrowth Primary Energy Consumption Growth Comparison of the World Gross Domestic Product growth with the World Primary Energy Consumption Growth
  5. 5. Introduction Why is this relationship important ? Source: EIA, http://www.eia.gov/totalenergy/data/annual/pdf/sec1_13.pdf 0% 2% 4% 6% 8% 10% 12% 14% 16% 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 U.S Energy Expenditures as Share of GDP
  6. 6. Empirical methodology Estimation of the long run relation lnYi,t = βi,0+ βi,1 lnCi,t+ βi,2 lnEi,t-1+ βi,3 lnKi,t+εi,t *All the variables are per capita The main equation:
  7. 7. Empirical methodology Estimation of the long run relation An ECM approach: ∆𝑦it= ϕi𝑦i,t−1 +β′1 𝑐it +β′2 𝑒it−1 +β′3 𝑘it+ 𝑗=1 𝑝−1 𝜆∗ ij∆𝑦i,t−j + 𝑗=0 𝑞−1 𝛿 ∗′ 1j∆𝑐i,t−j + 𝑗=1 𝑞−1 𝛿 ∗′ 2j∆𝑒i,t−j + 𝑗=0 𝑞−1 𝛿 ∗′ 3j∆𝑘i,t−j + μi+ αit+ε "ϕi" is the error correction term, "βi" is long-run coefficients
  8. 8. Empirical methodology The Data 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
  9. 9. Estimation of the long run relation The Data The analysis is based on a panel data covering the period from 1970 to 2011 for 33 countries. Algeria France Netherlands Argentina Germany Norway Australia Greece Philippines Austria Hungary Portugal Belgium Iran South Korea Brazil Ireland Spain Canada Italy Sweden Chile Japan Thailand China Luxembourg United States Costa Rica Malaysia United Kingdom Denmark Mexico Venezuela
  10. 10. Time series properties of the data Cross section dependence, Unit Root and Co-integration tests 1. Cross Section Dependence Test of Pesaran 2. Unit Root Tests: • First Generation: • Levin, Lin and Chu test • Breitung • Im, Pesaran and Shin • ADF-Fisher • Philips Perron – Fisher • Second Generation: • CIPS test 3. Co-integration Tests: • Pedroni’s residual co-integration tests • Westerlund test common unit root process Individual unit root process
  11. 11. Emprical Results Co-integration tests results Deterministic intercept and trend No deterministic intercept and trend Alternative hypothesis: common AR coefs. (within-dimension) Statistic Prob. Panel v-Statistic 19.10098 0.0000 Panel rho-Statistic -5.165067 0.0000 Panel PP-Statistic -10.56038 0.0000 Panel ADF-Statistic -9.640764 0.0000 Statistic Prob. Panel v-Statistic 12.12852 0.0000 Panel rho-Statistic -12.66436 0.0000 Panel PP-Statistic -17.26987 0.0000 Panel ADF-Statistic -16.24284 0.0000 Alternative hypothesis: individual AR coefs. (between-dimension) Statistic Prob. Group rho-Statistic -2.675141 0.0037 Group PP-Statistic -9.576716 0.0000 Group ADF-Statistic -8.976859 0.0000 Statistic Prob. Group rho-Statistic -12.03752 0.0000 Group PP-Statistic -20.42889 0.0000 Group ADF-Statistic -18.09532 0.0000 Pedroni Residual Cointegration Test Value Z value P value Robust p value Gt -4.130 -13.580 0.000 0.000 Ga -18.174 -9.531 0.000 0.000 Pt -22.424 -11.338 0.000 0.000 Pa -18.275 -12.740 0.000 0.000 Westerlund panel cointegration test results
  12. 12. Emprical Results Estimation of the long run relation Model: PMG MG CCEP Dependent variable: ∆Yit Energy consumption per capita (Cit) 0.6543 (0.053)*** 0.8083 (0.105)*** 0.5195 (0.213)*** Energy efficiency (Eit-1) 0.5860 (0.064)*** 0.8090 (0.164)*** 0.5164 (0.214)*** Capital formation per capita (Kit) 0.1018 (0.016)*** 0.0716 (0.016) 0.269 (0.016)*** Convergence coefficient (Yit-1) -0.5540 (0.085)*** -0.8433 (0.085)** -0.5724 (0.214)*** Hausman test p value 0.2304 Results of long-run estimations
  13. 13. Emprical Results Granger Causality Dependent Variable Sources of causation (independent variables) Short run Long run ΔY ΔE ΔC ΔK ECT ΔY - 10.93** 26.38*** 299.26*** -0.554*** ΔE 1754.6*** - 9526.42*** 8.37** -1.196*** ΔC 4.07 3.20 - 1.59 -0.533 ΔK 5.14 4.90 63.35*** - -0.273*** Panel causality test results
  14. 14. 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 cointegrate and energy use univocally Granger causes GDP in the long-run
  15. 15. The Shift Project Redesigning the Economy to Achieve Carbon Transition Thank you for your attention

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