Examining Asymmetric Behavior between Energy Consumption and Economic Growth in Taiwan

1
Examining Asymmetric Behavior between Energy
Consumption and Economic Growth in Taiwan

• Jin-Li Hu
• Cheng-Husn Lin
• Institute of Business and Management
• National Chiao Tung University
• http//www.cc.nctu.edu.tw/jinlihu
• 2009.4.8

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Agenda

• Introduction
• Energy development in Taiwan
• Methodology
• Empirical results
• Concluding remarks

3
Introduction (1/9)

• Since the early 1980s, energy demand on a
  national and international basis has been
  extensively analyzed, initially motivated by
  concerns about security due to energy supply in
  view of the twin oil price shocks and later
  because concerns about climate change.
• Due to the growing pressure exerted on
  governments to mitigate carbon dioxide (CO2)
  emissions to slow down the rate of climate
  change, many countries worry about the negative
  impact on economic growth caused by the
  restricted use of fossil fuels.

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Introduction (2/9)

• Attention has recently been paid to obligations
  under the Kyoto Protocol that came into force in
  February 2005
• Many countries worry about the negative impact on
  economic growth by the restricted use of fossil
  fuels.
• Developed countries have to reduce greenhouse gas
  emissions by at least 5 below the 1990 level,
  while the United States has agreed to reduce
  emissions from its 1990 levels by 7 in the
  commitment period 2008-2012.
• Improving energy efficiency as one of the most
  cost-effective ways to meet their commitments.

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Introduction (3/9)

• Recently, to respond to the influence of the
  Framework
• Convention on Climate Change of the United
  Nations, Taiwans government held the National
  Energy Conference in 1998 and 2005 to decided
  upon appropriate strategies that are compatible
  with economic development, energy supply, and
  environmental protection (3E).
• Carbon dioxide emissions are expected to reduce
  to levels of 38 million tons of oil equivalent
  (MTOE) in 2015 and to 78 MTOE in 2025,
  respectively

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Introduction (4/9)

• Government authorities should constructively give
  an impetus to the management of carbon dioxide
  emissions in the energy sector.
• Energy investment plans the measurement of
  greenhouse emissions for energy sectors, the
  adoption of suitable green technologies, and
  electricity supply should pay fees in terms of
  the portion of non-renewable generated electric
  power.

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Introduction (5/9)

• The research issue of energy-output
  relationship in
• energy field
• Granger Causality
• GDP?Energy the policies for reducing energy
  consumption may be implemented with little or no
  adverse effects on economic growth, such as in a
  less energy-dependent economy
• Energy?GDP the use of energy consumption may
  adversely affect economic growth
• GDP?Energy energy consumption and economic
  growth are jointly determined and affected at the
  same time
• GDP Energy the so-called neutrality
  hypothesis, means that energy conservation
  policies do not affect economic growth

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Introduction (6/9)

• Cointegration Analysis
• Many recent studies explore the long-run
  equilibrium (or cointegration) relationship
  between energy consumption and economic growth
  with either a bivariate or multivariate
  framework.
• Equilibrium theories involving non-stationary
  variables require the existence of a combination
  of variables that are stationary and
  cointegration does not require that the long-run
  equilibrium relationship to be generated by
  market forces or the behavioral rules or
  individuals.
• The cointegration tests include Engle-Granger
  (1987), Autoregressive distributed Lag (ARDL
  Pesaran,1999), Johansen (1990), etc.

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Introduction (7/9)

• However, ..
• Enders (1995) points out that nonlinear long-run
  relationships possibly exist among a set of
  integrated variables.
• Balke and Fomby (1997) argue that movement toward
  the long-run equilibrium not need to occur in
  every period relative to the conventional
  assumption-that is, a tendency to move toward a
  long-run equilibrium is present every time
  period.

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Introduction (8/9)

• Fortunately, some works may support our
  conjunction
• Altinay and Karagol (2004) reports that the
  conventional unit root tests indicate the series
  contain a unit root, whereas the endogenous unit
  root tests reveal that the series are trend
  stationary with a structural break.
• Lee and Chang (2005) find that gas consumption
  seem to have structural breaks in the 1960s for
  Taiwan. After considering the structural breaks,
  the series is a stationary variable when Taiwan
  adopts its expansionary export trade policy. (the
  cointegration between energy consumption and GDP
  is unstable, and some economic events may impact
  the stability)
• Lee and Chang (2007) document that there exists a
  nonlinear relationship between energy consumption
  and economic growth in Taiwan by employing the
  threshold regression (TAR) in which the
  endogenous threshold values can be derived in
  energy consumption.

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Introduction (9/9)

• Research purpose
• The aim of this paper is to examine the long-run
  relationship between energy consumption and
  economic growth for Taiwan using a newly
  developed momentum threshold-autoregressive
  (M-TAR) cointegration method by Enders and Siklos
  (2001), who allow for asymmetric behavior.
• M-TAR adjustment can be particularly useful when
  policy makers are viewed as attempting to smooth
  out any large changes in a series.
• Another purpose is to utilize the disaggregated
  energy consumption at the sector level to detect
  whether each is cointegrated with economic
  growth.

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Energy development in Taiwan (1/3)

• Energy-output nexus in Taiwan
• 1980-1997 Taiwans economy enjoyed a remarkable
  annual economic growth rate of 7.59 and an
  average annual energy consumption growth of
  5.84, implying that domestic output consumes a
  relative lower level of energy.
• 1998-2002 the average annual economic growth was
  3.63, while the average annual energy
  consumption growth still sustained at 5.58,
  worsening energy efficiency.
• Some violent exogenous event shocks to the
  domestic economic activity the Asian financial
  crisis (1997-1999) and a recession in the global
  business cycle in 2001.
• Energy over-consumption cannot effectively
  enhance economic growth and may generate
  disequilibrium between energy consumption and
  economic growth.
• 2003-2006 energy consumption growth is 3.77 and
  economic growth is 4.51, the per-unit production
  still needs to consume a near unit of energy.

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Energy development in Taiwan (2/3)
The sum of the percentage of energy consumption
in residential, transportation and industrial
sectors to total energy consumption grows up to
80 over past thirty years.
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Energy development in Taiwan (3/3)

• 2005 National Energy Conference
• Carbon dioxide emissions are expected to reduce
  to 38 million tons of oil equivalent (MTOE) in
  2015 and to 78 MTOE in 2025, respectively.
• Taiwans government regulatory authority should
  establish a market mechanism to promote the
  rationalization of energy prices, liberalize the
  energy market, and consolidate the management of
  energy efficiency.
• The structures of energy allocation percentage in
  2025 are expected to drop to be fuel 41 to 45,
  oil 32 to 31, natural gas 16 to 19, nuclear
  energy to 4, and renewable energy 5 to 7.
• Energy investment plans

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The Method (1/6)

• Data sources
• The data for Taiwan used in this study consist of
  total final energy consumption (EC), industrial
  sector energy consumption (IND), transportation
  sector energy consumption (TRA), residential
  sector energy consumption (RES), and GDP (Y).
• All original energy consumption data are measured
  as kiloliters of oil equivalent (KLOE). The
  nominal gross domestic product series in the
  national currency is transformed into real gross
  domestic product in 2001 prices, using GDP
  deflators.
• The empirical data are calculated as the
  quarterly growth rate and the sample period is
  from 1983Q1 to 2006Q4.
• The source of the data is compiled from the
  AREMOS economic-statistic database.

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The Method (2/6)

• Threshold cointegration (Enders and Siklos, 2001)
• Enders and Siklos (2001) make an extension to the
  two-step symmetric testing strategy of Engle and
  Granger (1987) to test for a long-run
  relationship between two time series variables
  which take asymmetry into account.
• The resulting M-TAR testing procedure has shown
  good power and size properties relative to the
  alternative assumption of symmetric adjustment.

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The Method (3/6)

• First step
• Using OLS method to estimate the following base
  model representing the long-run equilibrium
  relationship
• where Yt is economic growth, ECt is the
  energy consumption growth, and ut denotes the
  disturbance term that may be serially correlated.
  The existence of the long-run equilibrium
  relationship involves the stationarity of ut.

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The Method (4/6)

• Second step
• To investigate the stationarity of ut, whether
  -2lt?lt0 has to be tested in the second step
  procedure given by
• where et is the white-noise disturbance and the
  residuals
• from (1) are used to estimate (2). Rejecting
  the null
• hypothesis of no cointegration (i.e., accepting
  the alternative
• hypothesis -2lt?lt0 ) implies that the residuals in
  (1) are
• stationary with zero mean.

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The Method (5/6)

• Second step (continued)
• The standard cointegration framework assuming
  symmetric adjustment toward equilibrium in (2) is
  misspecified if the adjustment process is
  asymmetric. Therefore, the residuals ( ) from
  (1) are then used to estimate the following M-TAR
  model
• where ?1 and ?2 are the speed of adjustment
  coefficients
• of , and The lagged
  values of are
• supposed to yield uncorrelated residuals and can
  be
• determined by the AIC model-selection criteria.

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The Method (6/6)

• How to search the specified threshold value
• The Heaviside indicator function is denoted as
  follows
• and is the threshold value. The threshold
  parameter , is endogenously
• determined using Chans (1993) method to search
  for the consistent estimate
• of the threshold. This method sorts the estimated
  residual series in ascending
• order and is called
  , where T denotes the number of usable
• observations. The largest and smallest 15 of
  the values are excluded.
• The estimated threshold yielding the lowest
  residual sum of squares is
• deemed to be the appropriate estimate of the
  threshold over the remaining
• 70.

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Empirical Results (1/4)

• Unit root tests

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Empirical Results (2/4)

• The cointegration and asymmetry tests

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Empirical Results (3/4)
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Empirical Results (4/4)

• Detecting the constancy of the cointegration
  space
• CUSUMSQ tests for basis model

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Concluding Remarks (1/3)

• This paper considers the possibility of a
  nonlinear effect between energy consumption and
  economic growth due to the recent observations
  that energy consumption is higher than economic
  growth in Taiwan, worsening energy efficiency. We
  suspect that the relationship between energy
  consumption and economic growth has a
  disequilibrium condition.
• Allowing for an asymmetric adjusting behavior of
  energy consumption and economic growth sheds new
  light on the explanation of the characteristics
  of the energy-growth nexus.
• The threshold cointegration tests confirm that
  there is a nonlinear cointegration relationship
  between energy consumption and economic growth in
  Taiwan.

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Concluding Remarks (2/3)

• The estimated vector error-correction models
  provide strong evidence that the deviations
  persistently adjust toward long-run equilibrium
  in a relative energy-efficient regime for the
  aggregate-level and in a relative
  energy-inefficient regime for the sector-level.
• The short-run weak exogeneity Granger causality
  tests support that there is Granger causality
  from energy to economic growth in the cases of
  the aggregate and industrial sector.
• Policy-makers should take into account the
  asymmetric adjustment behavior of the
  energy-growth nexus when building estimation and
  prediction models of economic growth for Taiwan
  in the future.

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Concluding Remarks (3/3)

• Policy Implications
• Implementing the energy demand side management
  (EDSM).
• Propagating the importance of energy-savings
  through education, public media, and social
  public.
• Legislative institutions and government sectors
  also should animate the liberalization of the
  energy market and consolidate the energy price
  mechanism to establish an efficient energy
  market.
• Government authorities should make efforts on the
  developments of renewable energy such as wind
  power, solar energy, and biomass fuels.
• Improving energy efficiency may alleviate the
  problems of greenhouse gas emissions as well as
  decoupling between energy consumption and
  economic growth.

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The End Any Questions?Pursuing Energy
Sustainable Development