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Undergraduate Economic Review

Abstract

In this paper, I estimate the long-run co-integrated relationship between energy demand and economic growth for 20 countries from the year 2000 to 2016. I use panel unit-root and heterogeneous panel co-integration tests to test for non-stationarity of the panels and to determine whether there is a long-run link between energy consumption and GDP per capita. The estimated model uses a first-difference OLS model to estimate income elasticity of energy demand; the empirical results of this model show that there is a long-run relationship between energy consumption per capita and GDP per capita. In the long-term, on average, with 1% increase in GDP per capita, energy consumption per capita on average increases by 0.327%. Moreover, our model provides evidence for an “inverted-U” relationship, thus supporting the theory that post-industrialization, we could expect income elasticity of energy demand to be negative because we have more efficient production technology, which allows us to produce the same output with less energy. However, since many countries like India and China are still developing and industrializing, there will be an ever-greater demand for energy. We need to research policies that will help provide for this increasing energy demand, but at the same time will reduce greenhouse gas emissions.

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