Bivariate Cointegration Between Energy Consumption and Development Factors: A Case Study of Pakistan

Abstract

The relationship between total energy consumption and economic growth has been extensively explored in the past, but relatively few researchers have examined the increasing trend of energy consumption and development policies of a developing country like Pakistan as well as direction of causation of this relationship that remains controversial. The objective of this paper is to empirically investigate four alternatives but equally plausible hypotheses. These are as follows: (i) development factors cause total primary energy consumption, (ii) energy consumption cause development factors, (iii) there is a bidirectional causality between the two variables, and (iv) both variables are causality independent. To investigate the relationship between the two variables set, a time series cointegration and Granger causality tests have been employed separately. Secondary data pertaining to Pakistan from 1980 to 2009 has been used for analysis. The empirical result of causality strongly supports the bidirectional relationship between carbon dioxide emission and energy demand and industrialization and energy demand. There is a unidirectional causality relationship between the energy demand and population growth. However, neither agriculture value addition nor energy demand affect each other.

Keywords:

• Energy consumption
• Carbon dioxide emission
• Industry value added
• Agriculture value added
• Population growth
• Cointegration
• Pakistan

Notes

¹TPEC refers to the direct use at the source, or supply to users without transformation, of crude energy, i.e., energy that has not been subjected to any conversion or transformation process.

²I(1) represents a nonstationary in levels but it becomes stationary after differencing once.