Degree of persistence of energy mix diversification of the US states: fresh evidence using LM unit root tests with sharp or smooth breaks and cross-sectional dependence.

Abstract

Diversification of energy mix is related to the heterogeneity of contributions of energy sources in the energy consumption basket of nations. Its persistent degree reveals the efficiency of energy-related policies or shocks to diversify the contributions of energy sources in the energy mix. For the first time, the current study measures the diversification level of energy mix of the USA and its 51 states and examines its stochastic behavior to analyze its degree of persistence. To this end, we calculated the diversification of energy mix using Herfindahl-Hirschman index over the period 1960-2020. Then, we applied two novel versions of LM unit root tests that can incorporate sharp or smooth breaks and common factors (to control for cross-sectional dependence) to quantify the stochastic behavior of time series of Herfindahl-Hirschman index. Our results indicate (i) the energy mix of most of the US states diversified over the period. (ii) Most parts of diversification of energy mix occurred from mid of the 1970s to first half of the 1990s. (iii) Sharp breaks of deterministic part (intercept and slope of the linear trend) of Herfindahl-Hirschman indexes occurred coinciding with oil prices shocks in two decades 1970 and 1980. (iv) The Herfindahl-Hirschman index of most of states display stationary behavior, which indicate the pro-diversification policies, e.g., which are implemented to develop renewable energy sources, have transitory effects and policymakers should implement long-horizon policies to achieve their targeted level of diversification.