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The Relationship Between Energy Consumption and Economic Growth

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Department of EconomicsUniversity of Calgary, Canada. | Term Paper The Relationship Between Energy Consumption and Economic Growth Name: Niou Wu ID: 10047639 Economics 427 Professor: W. D. Walls Monday, December 06, 2010 Introduction The term of “Energy”, have rarely been mentioned before. However, during the the 21st century, as the growth of economics, it has become a very hot topic which involving economic, natural science and social science and other fields. This paper is focuse on the relationship between the energy comsumption and the economic growth, especially in China.

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In the first part of this paper, I would like to introduce the definetion of energy and discuss the energy comsumption status over the world by using some statistical database. Additionally, I would like to use some actual case (based on database of China) to talk about the trends of the energy comsumption and the predicts of these changes. Secondly, I will discuss that how is the energy comsumption support and promote the development of the economics theoretically.

In the third part of this paper ,I would like to put forward some assumptions that the advantages and disadvantages which related to the increasing energy consumption.

One is that will the incresing energy comsumption promote the economic growth and help economic to achieve the sustainable econnomic development under the economic and environmental constraints? For testing my assumption, I would like to ues some real statistical data of the energy consumption of China to provide a deteiled analysis about this situation by using the Endogenous Growth Model which has been mentioned by Robert Lucas. The other assumption is that is there any adverse impact on the environment which has been caused by the increasing energy comsumption?

In this part, I will simply introduce the method to analyse my assumption by using the Kaya Identity Equation which mentioned by the Japanese economist Yoichi Kaya. As a result, by adopting the results of the assumptions above, we could safely come to our conclusion that there is a significant relationship between the Real GDP, capital stock, human capital and the energy comsumption in China, so for as to the whole world. Besides, These factors interact with each other, and we could call this kind of relationship as a long term equilibrium relationship.

I. Energy and Enrygy Comsumption i. Classification of Energy According to the Encyclopedia Britannica, energy is a kind of natural resouece which includes all fuel, water, sun and wind terms, it conversion of humans and it can provide the necessary energy for their own. The use of energy use can be divided into two categories: the first category is primary energy, the primary energy refers to the original form of energy in nature which exist in the world without the processing and transformation of any energy resources.

It also known as natural energy, which including fossil fuels (eg coal, crude oil, natural gas, etc. ), nuclear fuel, biomass energy, hydroenergy, wind energy, solar enery, geothermal energy , ocean energy, tidal energy, etc. The other category is called secondary energy. Secondary energy is processed by the conversion of the primary energy , such as electric power, steam, gas, gasoline, diesel oil, fuel oil, liquefied petroleum gas, alcohol, methane, hydrogen and coke and so on.

Generally, no matter how many Conversions of primary energy, the energy resouece which we obtained through these alternatives , collectively referred to as a kind of secondary energy. Thus, the energy which emitted during the processes of production such as high temperature flue gas, high temperature materials, thermal, emissions of gas and pressurized fluids, are also refers to a second energy. Additionlly , energy can sorted according to the characterics, renewable energy source and non-renewable energy resource.

The renewable energy usually refers to those energies that could be recycled in nature and do not cause an adverse (pollution) affect on the envirnment. Nowadays,international experts categorized the renewable energy to be traditional and new renewable energy. The traditional renewable resource mainly includes giant hydropower and biomass burnt directly; the new ewnewable energy mainly refers to small hydropower, solar energy, wind energy, biomass energy, geothermal energy and ocean energy, etc.

The non-renewable energy refers to the energy which formated million years ago, and this kind of eneregy can not be restored in a very short time. For example, the fossil fuels (coal, oil, natural gas, oil shale, etc. ), nuclear fuel (uranium, needles, etc. ). however, the reserves of the non-renewable energy are limited. In fact the exhaustive exploitation will led a decreadsing storage of the energy resourc until the depletion of the energy resource . ii. Trends of world energy consumption

As we know, the energy structure has always been an important concept of the energy system, which refers to the composition and the ratio that the various primary energy resource or the secondary resource in the total energy production (or total consumption). If we analyse the ration rom the total production of energy structure, it always refers to the structure of energy production; if we analyse the ratio from the total consumption of energy, it refers to the energy consumption structure.

With the rapid economic growth in developing countries, their energy demand will increase rapidly thus boosting the rapid growth of global energy consumption. The energy consumption of world has increased since 2007 by 1. 4% per year. The energy consumption will keep increse to 2035, from 495 quadrilion Btu in 2007 to 739 quadrilion Btu ( Figure 1 and Table 1 ) (EIA, 2010, P. 11). Figure 1. World marketed energy consumption, 1990-2035 (quadrilion Btu). Note: world marketed energy consumption by country grouping, 2007-1035: 2007: EIA, International Energy Statistics database (as of November 2009), web site www. ia. gov/emeu/international. Projection: EIA, World Energy Projection System Plus (2010). Table 1. World marketed energy consumption by country grouping, 2007-2035 (quadrilion Btu). Note: world marketed energy consumption by country grouping, 2007-2035: 2007: EIA, International Energy Statistics database (as november 2009), web site www. eia. gov/emeu/international. Projections: EIA, World Energy Projection Sysem Plus (2010). The global economic recession that began in 2008 and continued into 2009 had a profound impact on world income (as measured by GDP) and energy use.

After expanding at an average annual rate of 4. 9 percent from 2003 to 2007, worldwide GDP growth slowed to 3. 0 percent in 2008 and contracted by 1. 0 percent in 2009. Similarly, growth in world energy use slowed to 1. 2 percent in 2008 and then declined by an estimated 2. 2 percent in 2009. In the next twenty years, the world energy consumption of oil is still the most important energy resouce, the demand of the global oil will increas with an annual growth rate of 1. 9 percent, the daily average demand of global oil will rise from 77,000,000 barrels to 1. 1 billion barrels from 2001 to 2025, and 60% growth of them will accounted from the United States and some developing countries in Asina. Furthermore, there will be a rapid increase in the demand of oil which will lead to an increase in the world oil production. The report expected that by the year 2025, the daily average production of world oil will increase by 4,400 million barrels, and the increasing production of the world oil of OPEC countries are the major source supplers. On the other hand, there will be some changes in coal development trends.

In order to restrain the emissions of greenhouse because of the use of fossil fuel, seeking for the possibilities on slowing down the issues which caused by the climate change. During 1992 to 2000, many countries tried to reduce the emissions by cuting down the use of coal, which has the highest emissions to the environment. This kind of policies have led the coal consumption less than the increasing comsumption of the natural gas in 2000. However, due to rapid economic development, there still some adverse results , for explaming this, we use China as an example ( Table 2 ).

Unquestionally, the total energy consumption in China from 1995 to 2001 has increased, and the percentage of coal consumption decreased from 1995 to 2000, then it incresed again. Addtionally, the percentage of natural gas consumption increased from 1995 to 1998, then it decreased again. Fei, L et al. (2010) have claimed that,China, which has nearly 28% of coal consumption volume in the world, faced a adverse situation that the coal consumption has growed rapidly in recent years, with the sustainable economic growth, the emissions of greenhouse gas increase continuously.

Balanced against the increase in the demand of energy are energy security and climate change issues. For example, there is about 1% increase in the real GDP per capita increases the emissions of carbon dioxide by a value between 0. 39% and 0. 43% in China. In view of this situation, the growth rate of coal consumption should gradually slow down in the long run. II. The relationship between the energy consumption and the growth of economy i. The energy consumption affects the growth of economy The increasing energy consumption have promoted the productivity and the technology.

First of all, Input is a prerequisite for economic growth. Before we invested in other elements, there must have the energy to provide the necessary power to the operations, and the operations are also affected by the size and extent of the energy supply constraints, which means the operations cannot be driven without the energy even with all the inputs and the capacity of production. Lets back to the history, almost every major technological advances have been driven by the “energy revolution” to achieve the goals.

For instance, the supply of the coal has played a significant role for the widespread use of the steam engine; the electromotor has directly depended on the use of electricity; the development of teansport has related to the use of coal, oil and electricity. The progress of agricultural modernization, including mechanization, irrigation, electrification were also have depended on the use of energy. In addition, the demand which caused by the development and the utilization of energy production played a important role in promoting technological progress.

Almost every major breakthrough in the energy technology, caused a revolution in production technology, which led the social productive forced to a new level. Nicholas (2008) has discussed the relationship between the energy consumption and economic growth in Tanzania, by applying an ARDL bounds test based on the database of Tanzania, the empirical results of his study shows that there is a distinct unidirectional causal flow from the total energy consumption to the growth of economy , and this kind of relationship were both in the short run and the long run.

Additionally, there is a short-run causal flow from electricity consumption to the economic growth. All in all, the energy consumption has spured the economic growth in Tanzania. Another study which focused on the impact of energy consumption on economic growth in Taiwan by using the data for the period 1955 – 2003 under both linear and nonlinear models. As a result, under the linearr model, they found that the framework seemed mixed, it is depending on the theoretical setting used to estimate the effect of energy consumption on growth.

On the other hand, under the nonlinear model, there is a level dependent effect between the energy consumption and economic growth. All in all, they found that the changes in energy consumption have contributed to one of the factors that caused the structural change in the relationship between energy consumption and economic growth (Chien-Chiang, & Chun-Ping, 2007, p. 2293). III. Assumptions and analysis i. Endogenous Growth Model

Macroeconomic growth theory often overlooked the impact on the environment, how to balance the energy constraints and environmental constraints to achieve a sustainable economic growth has became one of the major prolems of the economic growth theory. “The human capital is different from the labor force because of the available accumulation of human capital, which against the unavaliable accumulation of the labor capital” (Robert, 1988, p. 8). Thus, we can add the elements of energy and the elements of energy and environmental constraints in the Lucas model, in order to discuss the impact of energy on economic growth.

It is necessary to achieve a sustainable economic growth, with the sustainable use of energy during a long term economic development. in order to get this kind of goal, the ratio, which between the absolutely value of the increase rate of energy input in the economic production and the increase rate of labor capital must less than the ratio between the elasiticity of the labor capital output and the elasiticity of the energy output. We assume that: Increase rate of energy input in the economic production is: ge ; Increase rate of labor capital is: gh;

Elasiticity of labor capital output is: ? +? ; Elasiticity of energy output is: 1-? ; |ge|gh<? +? 1-? It is easy to see that in a Lucas endogenous growth model, it is possible to achieve the sustainable economic growth under the condition which could ensure rhe sustainable use of energy. However, if we take this into the actual development of the current international energy situation, the result might be different. One factor is that the increasing volume of energy consumption, which means namely in the actual production process, ge>0.

Another factor is that because of the most of the world energy structure were with coal, oil-based, and the laggard energy technology plus other objective reasons, the world energy consumption is based on the non-renewable sources , such as coal, oil. And this kind of situation will not change in a short term. Although there were some progresses have been succeed in the development and utilization of the renewable resouces, it wasn’t enough. With the large population and the lower utilization of the renewablr resouece, the stock of world energy, ? ,is getting smaller. Thus, 1-? ill be much larger than before, which led the ? +? and the gh need to be bigger. For this reason, we should do the technical innovation, improve energy efficiency, efforts to transform economic growth mode, which will help us to achieve the sustainable development. ii. Application test and analysis ( Table 3. ) Table 3. GDP OF China from 1978 to 2007| ? | ? | Year| GDP (billion)| ? | % of increase| ? | GDP per capita| 1978| 3624. 10 | ? | 11. 70 | ? | 381. 00 | 1979| 4038. 20 | ? | 7. 60 | ? | 419. 00 | 1980| 4517. 80 | ? | 7. 80 | ? | 463. 00 | 1981| 4862. 40 | ? | 5. 20 | ? | 492. 0 | 1982| 5294. 70 | ? | 9. 10 | ? | 528. 00 | 1983| 5934. 50 | ? | 10. 90 | ? | 583. 00 | 1984| 7171. 00 | ? | 15. 20 | ? | 695. 00 | 1985| 8964. 40 | ? | 13. 50 | ? | 858. 00 | 1986| 10202. 20 | ? | 8. 80 | ? | 963. 00 | 1987| 11962. 50 | ? | 11. 60 | ? | 1112. 00 | 1988| 14928. 30 | ? | 11. 30 | ? | 1366. 00 | 1989| 16909. 20 | ? | 4. 10 | ? | 1519. 00 | 1990| 18547. 90 | ? | 3. 80 | ? | 1644. 00 | 1991| 21617. 80 | ? | 9. 20 | ? | 1893. 00 | 1992| 26923. 50 | ? | 14. 20 | ? | 2311. 00 | 1993| 35333. 90 | ? | 14. 00 | ? | 2998. 00 | 1994| 48197. 90 | ? | 13. 10 | ? | 4044. 00 | 995| 60793. 70 | ? | 10. 90 | ? | 5046. 00 | 1996| 71176. 60 | ? | 10. 00 | ? | 5846. 00 | 1997| 78973. 00 | ? | 9. 30 | ? | 6420. 00 | 1998| 84402. 30 | ? | 7. 80 | ? | 6796. 00 | 1999| 89677. 10 | ? | 7. 60 | ? | 7159. 00 | 2000| 99214. 60 | ? | 8. 40 | ? | 7858. 00 | 2001| 109655. 20 | ? | 8. 30 | ? | 8622. 00 | 2002| 120332. 70 | ? | 9. 10 | ? | 9398. 00 | 2003| 135822. 80 | ? | 10. 00 | ? | 10542. 00 | 2004| 159878. 30 | ? | 10. 10 | ? | 12336. 00 | 2005| 183084. 80 | ? | 9. 90 | ? | 14040. 00 | 2006| 209407. 00 | ? | 10. 70 | ? | 15931. 00 | 2007| 246619. 00 | ? | 11. 40 | ? | ? | ource: China Statistical Yearbooks, 1978 – 2007| ? | Table 4 : Table 4. Forecast of the supply of crude oil ( million barrels per day)| ? | Country/Year| ? | ? | ? | 2002| 2010| 2010| 2030| Middle East countries of OPEC| ? | ? | ? | 19| 22. 5| 37. 4| 51. 8| Other countries of OPEC| ? | ? | ? | 9. 2| 10. 7| 12. 4| 13| Russia| ? | ? | ? | 9. 5| 14. 6| 15. 4| 15. 9| Developing countries| ? | ? | ? | 14| 16. 6| 16. 2| 14. 8| source: International Energy Agency(IEA), World Energy Outlook 2004,p. 106| ? | Table 5 : The oil import interdependent between China and India : | 2002| 2010| 2020| 2030| D| I| P| D| I| P| D| I| P| D| I| P| China| 247| 84| 34| 375| 206| 55| 503| 342| 68| 636| 471| 74| India| 119| 82| 69| 160| 128| 80| 215| 187| 87| 267| 243| 91| Note: D= demand; I= net import quantum; p= % of interdependent source: International Energy Agency(IEA), World Energy Outlook 2004 Based on the database above, we could see that, China, for example, from the year 1978 to 2007 has a maintained positive growth in GDP, and the highest growth rate reached 15. 2% againsted the lowest 4. 1%. Especially in 2000, China’s annual GDP growth rate has reached more than 8. 0%.

From table 4 and table 5, we could see that there is a positive growth on China’s dependence on oil, the tables also predicted that in 2030 China’s net imports of crude oil will reached close to 6 times as it in 2002, and the total import volume from 331 in 2002 (million tons) to 1107 in 2030 (million tonnes). Thus , if we take China as an example, the demand of oil is still very large. Because of the rate of domestic oil development lags far behind the rapid economic development as China, so China’s dependence on net imported oil will be increasing during a long term. From the equation we mentioned before : |ge|gh<? +? 1-? e>0 and |ge| is positive increasing. Because 1-? will increase with the overdevelopment slowly and the icreasing level of education in China since 1978, we could assume that gh is increasing slowly year by year. For these reasons, under the condition that the change rate of gh is close to 1-? , our assumption is correct if the ? +? is much larger than ge, and that is true because the GDP of China increased rapidly since 1978, the change rate of ? +? must be much higher than the growth rate of the energy input in the economic production. So we could safely come to our conclusion that the energy consumption will promote the economic growth. ii. The adverse impact of energy consumption on environment One study which based on this problem used the statistic data to investigate the basic condition of living environment and energy consumption for Yangtze Delta Area. they impilied that under the dense population and the active economy, the density of automobile traffic in this area is exceedingly high and congestion. With the construction of road, it should be to adjust the balance between the cities and in a city, some road for the use of automobiles separated in grad from ordinary level roads should be developed to increase the convenience for people.

Furthermore, the living conditions for people who lives in this area has improved gradually. Third, Housing development should consider the economical condition of people and planned carefully (Weijun, Xingtian, Haifeng, Penglin, Jianxing, & Ojima. 2004, p. 1246). Weijun, G. , Xingtian, w. , Haifeng, L. , Penglin, Z. , Jianxing, R. , & Ojima, T. (2004, December). Living environment and energy consumption in cities of Yangtze Delta Area . Energy and Buildings, 36(12), 1241-1246. Lucas, R. E . , Jr. (1988, July). On the mechanics of economic development.

Journal of Monetary Economics, Elsevier, 22(1), 3-42. The energy consumption will also lead the adverse impact on the development of society, such as the environmental problems. In order to test my assumption, I would like to use the Kaya Identity Equation which mentioned by the Japanese economist Yoichi Kaya. According to Yoichi Kaya (1997), the driving force of carbon emissions ( F ), is depending on population ( P ) , GNP per capita (G) , the unit energy consumption of production value ( E ), and unit energy consumption , thus, F = P * (G / P) * (E / G) * (F / E) = P * g * e * f

Kaya, Y. , & Yokobori, K. (Eds. ). (1998). Environment, Energy, and Economy: Strategies for Sustainable. United Nations Univ. The reserchers who came from MIT used the KAYA identity to analysis the relationship between these four factors and the carbon emission among China, Japan, Europe, America between 1908 – 1999 (Table 6 ): Country| Population| GDP| Energy intensity| Carbon intensity| Carbom emission| China| 1. 37| 8. 54| -5. 22| -0. 26| 4. 00| Japan| 0. 41| 7. 54| -0. 57| -0. 96| 1. 47| OECD-Europe| 0. 53| 1. 74| -1. 00| -1. 06| 0. 18| U. S. A| 0. 96| 2. 15| -1. 64| -0. 1| 1. 23| Total average| 1. 60| 1. 28| -1. 12| -0. 45| 1. 30| Source: J. W. Tester, 2005 From the table above, we could find that there was a decline reat which is 5. 22% of energy intensity in China in the 20 years. Additionally, there is a decline rate which is 0. 26% of the carbon intensity in China during this period. In fact, due to the large population and the increasing GDP per capita, the carbon emission in China is still very high. Thus, the increasing GDP will not only drive the energy consumption, but also have some adverse impact on the envirnment. IV. Conclusion

In this paper, I have introduced the definition and the classification of the term of energy. Using the actual staus and trends of energy consumption in China as an example, discussed the trends of energy consumption over the whole world. At the second part of this paper, I have just simply analysed the relationship between the energy consumption and the growth economy, which focused on how does the increasing energy consumption related to the growth of the economy and our whole society. In general, the increasing in energy consumption will promote the development of the economy.

However, it is not always. In fact, there might be some adverse impact on the economy. At the third part, I have assumend that the impact on the economy which caused by the increasing energy consumption will be either good or terrible. For this reason, I have applied two different model and use the data of China as an example to test my assumptions. For the Endogenous Growth Model, I found that the increasing energy consumption does have good impact on the society because of the increasing GDP and the development of the education level since 1978.

However, on the other hand, when I was testing my second assumption by using the Kaya identity, I found that the incresing of energy consumption will cause the damage on our environment. According to my test, I could reach my conclusion that, there are significant cointegration relationship between the real GDP, energy consumption, capital stock and the human capital, this is also a long-term equilibrium relationship. As a factor, the increase in energy consumption will bring increased economic output; Similarly, when the total economy expands, demand for energy will increase human beens should promote our society carefully.

We must develop our society under a unquestuinal condition which is to imporve our society harmonious. That is human beings must uphold the premise of sustainable development under the condition with refers the rational use of our energy resources. ?? ???????????? ?? – ???????? ?? ???????????? ?? – ???????? ?? ???????????? ?? – ???????? ?? ???????????? ?? – ???????? ——————————————– [ 2 ]. . http://en. wikipedia. org/wiki/Endogenous_growth_theory. [ 3 ]. . http://en. wikipedia. org/wiki/Kaya_identity. [ 4 ]. . energy conversion. (2010). In Encyclop? dia Britannica.

Retrieved December 05, 2010, from Encyclop? dia Britannica Online: http://www. britannica. com/EBchecked/topic/187279/energy-conversion [ 5 ]. . Peidong, Z. , Yanli, Y. , Jin, S. , Yonghong, Z. , Lisheng, W. , & Xinrong, L. (2009, February ). Opportunities and challenges for renewable energy policy in China. Renewable and Sustainable Energy Reviews, 13(2), 439-449. [ 6 ]. . world marketed energy consumption by country grouping, 2007-2035: 2007: EIA,InternationalEnergy Statistics database (as november 2009), web site www. eia. gov/emeu/international. Projections: EIA, World Energy Projection Sysem Plus (2010). 7 ]. . U. S. Energy Information Administration. (2010, July). International energy outlook 2010. Washington, DC 20585: Author. [ 8 ]. . U. S. Energy Information Administration. (2010, July). International energy outlook 2010. Washington, DC 20585: Author. [ 9 ]. . U. S. Energy Information Administration. (2010, July). International energy outlook 2010. Washington, DC 20585: Author. [ 10 ]. .The total energy consumption and its composition. (n. d. ). Retrieved December 8, 2010, from China data online (CH1996000). [ 11 ]. . Fei, L. , Suocheng, D. , Xue, L. , Quanxi, L. , & Wangzhou, Y. 2010, November 12). Energy consumption -economic growth relationship and carbon dioxide emissions in China [Electronic version]. Energy Policy, In Press, Corrected Proof, 1-7. [ 12 ]. . Nicholas, M . O. (2009, Feburary). Energy consumption and economic growth nexus in Tanzania: An ARDL bounds testing approach. Energy Policy, 37(2), 617-622. [ 13 ]. . Chien-Chiang, L . , & Chun-Ping, C. (2007, Decembe). The impact of energy consumption on economic growth: Evidence from linear and nonlinear models in Taiwan. Energy, 32(12), 2282-2294. [ 14 ]. . The GDP of China from 1978 to 2007. (n. . ). Retrieved December 8, 2010, from China data online (CESY2007001). [ 15 ]. . U. S. Energy Information Administration. (2004). International energy outlook 2004. Washington, DC 20585: Author. [ 16 ]. . U. S. Energy Information Administration. (2004). International energy outlook 2004. Washington, DC 20585: Author. [ 17 ]. . Jefferson, W. T (Environmental and Energy Study Institute Presentation, March 1, 2007). The Future of Geothermal Energy Synopsis of a 15-month study of the potential of geothermal energy as a majorprovider of electric power for the US [Electronic version].

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