Electricity consumption and economic growth in the European Union: A causality study using panel unit root and cointegration analysis

Abstract

The climate change discussion and rising energy prices have resulted in an increase in the literature on the causal relationship between energy use and economic growth. In addition, there are also new developments in econometrics, most of all the use of panel unit root and cointegration techniques. However those techniques have not been applied in comparative studies covering the European electricity markets so far. The empirical investigation of the causality relationship between electricity demand and income for 15 European countries between 1978 and 2005 involves three steps. First, the order of integration is determined by applying standard ADF and panel unit root testing procedures. Second, cointegration techniques are performed in order to test for the long-run relationship between the variables in question. Finally, the existence and direction of causality in the short- and long-run will be assessed for each country by using vector error correction models and Granger causality tests.