The Complex Interplay Between Sectoral Energy Consumption and Economic Growth: Policy Implications for Iran and Beyond

Abstract

Iran's abundant energy reserves starkly contrast with recent power and gas shortages, particularly impacting the industrial sector. Furthermore, long-term trends reveal a concerning pattern where total primary energy consumption has outpaced economic growth, doubling in recent decades. These challenges emphasize the need for a thorough evaluation of the intricate interplay between sectoral energy consumption and economic output in Iran, bearing profound policy implications. The current study employs ARDL and VECM approaches to analyze empirical long- and short-term dynamics. Regarding Iran, the results unveil causal relationships from industrial energy consumption to GDP and from GDP to energy consumption in buildings. Notably the significant positive value of elasticity of GDP with respect to industrial energy use highlights the need for nuanced energy management measures. Variations across sectors underscore the justification for recognizing industrial energy consumption as productive energy use. The results gain additional support from a panel data analysis spanning fourteen diverse countries, bearing significance for IAMs applied in climate change research. While IAMs traditionally employ total energy consumption or the sectoral energy uses collectively, as production factors, the research highlights the need to reevaluate model frameworks for potential different outcomes from established practices.