How Dependent Is Growth From Primary Energy? An Empirical Answer on 33 Countries Gael Giraud CNRS, PSE, CES, Labex REFI Zeynep Kahraman The Shift Project

Outline Introduction Empirical methodology The data Time series properties of the data Conclusion

Introduction Why is this relationship important ? Mainstream economic models do not include energy as a factor that could foster economic growth. Ecological economists, often ascribe to energy the central role in economic growth. Is energy an important driver of economic growth ? If so, what is the magnitude of the dependency of growth from energy ?

Introduction Why is this relationship important ? Oil prices and World GDP (1965 – 2011) Sources: BP statistical Review, 2012, Shilling et al. 1977, EIA, 2012, and World Bank (GDP), 2012.

Introduction Why is this relationship important ? Primary Energy Consumption and GDP (1965 – 2011) Source : BP statistical review, 2012, Shilling et al. 1977, EIA, 2012, and World Bank (GDP), 2012.

Introduction Why is this relationship important ? The GDP share of primary energy, U.S., Source: EIA,

Empirical methodology Variables under scrutiny is: -Primary energy consumption (million tons of oil equivalents) -GDP (in 2000 U.S dollars) -Gross Fixed Capital Formation (in 2000 U.S dollars) -Population (millions) World Bank, World Development Indicators

The data The analysis is based on a panel data covering the period from 1970 to 2011 for 33 countries. AlgeriaFranceNetherlands ArgentinaGermanyNorway AustraliaGreecePhilippines AustriaHungaryPortugal BelgiumIranSouth Korea BrazilIrelandSpain CanadaItalySweden ChileJapanThailand ChinaLuxembourgUnited States Costa RicaMalaysiaUnited Kingdom DenmarkMexicoVenezuela

Estimation of the long run relation lnGDP i,t = β i,0 + β i,1 ln NRG i,t + β i,2 ln EFF i,t-1 + β i,3 ln K i,t + ε i,t All the variables are per capita The main equation:

Time series properties of the data Cross section dependence, Unit Root and Co-integration tests 1.Cross Section Dependence Test of Pesaran 2.Unit Root Tests: First Generation: Levin, Lin and Chu test Breitung Im, Pesaran and Shin ADF-Fisher Philips Perron – Fisher Second Generation: CIPS test 3.Co-integration Tests: Pedroni’s residual co-integration tests Westerlund test common unit root process Individual unit root process

Emprical Results Cross section dependence test results VariableCD - test p̂p̂ p - value Y E CKCK Table 2. Pesaran cross-section dependence (CD) test results Null hypothesis: Cross-section independence CD ~ N(0,1)

Emprical Results Unit Root tests results VariablesWith trendWithout trend Y (1.000)2.701 (0.997) E (0.683)2.036 (0.979) CKCK (0.742) (0.985) (0.044) (0.892) Table 4. CIPS test results Null hypothesis: series are I(1). p tests are in parenthesis Table 3. First generation panel unit root test results

Emprical Results Co-integration tests results Table 5. Pedroni Residual Cointegration Test ValueZ valueP valueRobust p value Gt Ga Pt Pa Table 6. Westerlund panel cointegration test results

Emprical Results Estimation of the long run relation

Emprical Results Estimation of the long run relation Model:PMGMGCCEP Dependent variable: ∆Y it Energy consumption per capita (C it ) (0.053) *** (0.105) *** (0.213) *** Energy efficiency (E it-1 ) (0.064) *** (0.164) *** (0.214) *** Capital formation per capita (K it ) (0.016) *** (0.016) (0.016) *** Convergence coefficient (Y it-1 ) (0.085) *** (0.085) ** (0.214) *** Hausman test p value Table 7. Results of long-run estimations

Emprical Results Granger Causality Dependent Variable Sources of causation (independent variables) Short runLong run ΔYΔEΔCΔKECT ΔY ** *** *** *** ΔE *** *** 8.37 ** *** ΔC ΔK *** *** Table 8. Panel causality test results

Conclusion Primary energy is a key factor that drives GDP growth: its long-run output elasticity evolved around 0.6. Capital accumulation has played a minor role compared to energy : long-run elasticity for capital around 0.2. These estimations are also robust to the choice of various sub periods of time and subsamples of countries. There are good reasons to believe that, the output elasticity of energy is decoupled from its GDP share. Our inquiry does not suggest that energy use be the sole first-order factor driving growth. Efficiency plays a dual, almost comparable role. Energy and GDP cointegrate and energy use univocally Granger causes GDP in the long-run