Does climate influence energy demand? A regional analysis

Abstract

The duality of cost minimization is used to examine the effects of climate change on US sectoral climatic regional energy demands from 1970 to 2014. The first order conditions of transcendental logarithm cost function provide sectorial compensated demands for energy. A system of demand share equations or sectorial compensated demand for energy is explained by exogenous prices, technology and distribution of climatic variables i.e. temperature and precipitation is estimated. The distribution includes the downside and upside first moment, i.e., mean and downside and upside second moment, i.e., variance. The estimated parameters are used to construct energy demand cross-price elasticities (CPE) and Allen elasticities of substitution (AES) for nine climatic regions. The Southwest, Northeast, and South are sensitive to rainfall distributions especially the transportation and industrial sectors while the Northeast, Central, and South are affected by temperature variations affecting residential and industrial sector energy use. The commercial sector uses the least energy because of improved technological changes. Consequently, there are high substitutions of commercial energy for both residential and industrial. The transportation sector has the least price and technical substitutions.