Does trade uncertainty matter for the composition of energy consumption?

Abstract

In this paper, we firstly identify the effects that trade uncertainty has on the composition of energy consumption using global panel data over the period 1990–2019. Trade uncertainty is innovatively constructed based on non-gravity trade, which has much more volatility than gravity trade, and non-gravity trade, is estimated from the unforecastable component of linear estimation in a gravity model, not being determined by economic fundamentals. Our results show that different types of energy consumption demonstrate heterogeneous responses to trade uncertainty shocks. Specifically, a 1 % increase in GDP induced by negative trade uncertainty shocks will increase the non-renewable energy consumption by around 1.2 %, while reducing the renewable energy consumption by around 1.7 %. These results survived a number of robustness checks including heteroscedasticity for identification, different types of energy, and different instrument variables, excluding trade uncertainty related to US–China trade tension, confirming that changes in energy consumption are triggered by the transitory income shock, driven by trade uncertainty.