Does Domestic Energy Consumption Affect GDP of a Country? A Panel Data Study

Abstract

The present study is an attempt to test the relationship between energy consumption, energy efficiency, CO2 Emissions and economic growth for a set of some developed, transition and developing counties. For this purpose, panel data on various factors of GDP growth has been taken for 18 developing, 16 transition and 18 developed countries from 1980–2013. The paper uses the variant of Solow model to provide the economic justification behind the econometric estimation of regression model which includes energy consumption per capita, CO2 emissions and energy efficiency as one of the independent variables affecting GDP growth of a country, among others. To estimate the regression model, the study uses various panel data estimation methodologies such as: panel data cointegration, panel causality (assuming homogeneous and heterogeneous panels), panel VECM, panel VAR and panel data ARDL and SURE. The results help us to find out he short run and long-run relationship between the policy variables. The paper also tests the direction of causality between energy consumption and GDP and per capita GDP growth by working on the following hypotheses:(a) Neutrality Hypothesis, which holds that there is no causality (neither direction) between these two variables; (b) Energy conservation hypothesis, which holds that there is evidence of unidirectional causality from GDP growth to energy consumption; (c)Growth hypothesis, energy consumption drives GDP growth; and (d) Feedback hypothesis, which suggests a bidirectional causal relationship between energy consumption and GDP growth. S-shaped relationship between energy consumption and per capita GDP is also tested by hypothesizing that with high GDP, first energy consumption increases at an increasing rate and then increases at a decreasing rate. The overall conclusion emerges from the analysis is that per capita energy consumption has a negative impact on growth of per capita GDP in developing countries and transition economies but positive impact in case of developed countries. This may be due to the fact that in developed nations, the energy consumption expenditures may be more devoted to technological progress in alternative source of oil like shell gas or in expenditures related to renewable energy intensive technological products. The developing and transition countries although trying to put efforts in increasing expenditures in alternative energy sources like non-renewable, oil consumption still seem to not have many alternatives sources of energy. Therefore, reducing oil expenditures tend to promote growth among developing countries. Growth, Energy Conservation and Feedback hypotheses tend to work for developed, transition and developing countries. Also, the direction of causality may run from growth per capita to energy consumption depicting a S-shaped relation signifying that as society matures energy consumption increases but at a decreasing rate.