Time-Varying Income and Price Elasticities for Energy Demand: Evidence from a Middle-Income (Primarily Non-OECD) Panel

Abstract

We estimate time-varying income and price elasticities for energy demand for a 26- country, middle-income (primarily non-OECD) balanced panel that spans 1996-2014. To do so, we employ a recently developed nonparametric local linear dummy estimation method that estimates the trend and coefficient functions in a highly non-linear way. We find that the price elasticity for energy demand is either insignificant or positive and small. While the income elasticity for energy demand behaves in a non-linear fashion over-time, it is always less than unity and is generally within 0.6-0.8. A GDP elasticity of less than one suggests that these middle-income countries are on the right-hand-side of an inverted-U energy intensity-GDP path that is consistent with the dematerialization process. Also, this finding suggests that energy intensity — but not energy consumption — in these countries will fall with economic growth. Hence, intensity-based targets may be met in a business-as-usual setting, but aggregate or per capita-based carbon emissions targets would likely require policy interventions.