The intertemporal substitution effect of energy consumption under climate policy changes

Abstract

Based on the intertemporal substitution effect, the high inflation expectations can stimulate agents to consume now rather than in the future. However, under the background of global climate policy changes, how inflation expectations affect energy consumption? Using the bootstrap Granger full-sample causality test and sub-sample rolling window tests, this study examines the intertemporal substitution effect of energy consumption in the U.S. The results based on the full-sample data indicate no causality between inflation expectations and energy consumption, which suggests that the intertemporal substitution effect of energy consumption does not exist. Nevertheless, the rolling window method which estimates a time-varying causality identifies a short-lived positive effects of inflation expectations on energy consumption in a distinct sub-period before the global Paris agreement, but disappears since then. Therefore, the intertemporal substitution effect regarding energy consumption does not exist under the background of pressing carbon targets. The effects of energy consumption on inflation expectations can be positive or negative, which tells a cautionary tale about climate policies aiming at engineering lower carbon emissions.

Keywords:

• energy consumption
• inflation expectation
• intertemporal substitution effect
• climate policy

JEL:

• D84
• E31
• O13
• P28

Disclosure statement

All authors declare that they have no conflict of interest.

Data availability statement

The data used in this study are available from the University of Michigan (https://data.sca.isr.umich.edu) and the U.S. Energy Information Administration (https://www.eia.gov/).

Notes

1 The window size should include more than 20 observations. Furthermore, we estimated bootstrap rolling-window causality tests using 36- and 48-window sizes. The coefficients and p-values of bidirectional causalities between inflation expectations and energy consumption are estimated. The results maintain approximately the same, thus showing that the causality tests based on a 60-month window size are robust. Therefore, we report the results of it in this article, but the details of the results based on other window sizes are available upon request.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China under Grants 72203019 and 72033001.