Energy consumption, economic growth and CO2 emissions in Australia: the potential for energy conservation

This thesis examines the role of energy on economic output, the inter-relationship between them and discusses the potential for various energy conservation alternatives to reduce CO2 emissions in Australia. The analyses are based on time series models of the Australian economy. The role of energy on output is examined by employing a multivariate approach. The estimation result for the production function model demonstrates the primary role of energy on economic output in Australia. The long-run relationship and bidirectional causality between energy use and economic growth is confirmed by alternative modelling frameworks, econometric methods and different energy vectors. Direct cuts in energy consumption would therefore place a negative effect on output growth in Australia. Once reduction of energy consumption is found to be undesirable, if taken literally, this would adversely affect economic performance and, thus, the consideration of policy instruments promoting fuel switching and energy efficiency tend to be the central focus as a measure of energy conservation to reduce emissions. The possibility of interfuel substitution is examined empirically in this study by estimating a translog cost function for the aggregate economy and different sectors/sub-sectors. The empirical evidence indicates a weak form of substitutability among different energy types. However, the possibilities of substitution are found to be relatively stronger at the lower level of aggregation of the economy. For the ‗Electricity generation‘ sub-sector, which is at the centre of the CO2 emissions problem in Australia, the estimation results indicate the possible substitution betweencoal and gas, but estimated elasticity coefficients are small in magnitude. Moreover, existing technologies in coal are found energy using, suggesting the proposition that a large change in relative price would be essential to encourage low emitting technologies. The decomsposition of energy intensity, CO2 intensity and absolute CO2 is performed by applying Logarithmic Mean Divisia Index (LMDI) decomsposition approach. The result from the decomposition analysis of energy intensity shows that energy efficiency has deteriorated in electricity generation in Australia since the 1990s. This is somewhat different from the energy efficiency trends in the aggregate economy which generally show improvements of energy efficiency over the last few decades. However, several potential risk factors are observed from the recent trends, even at the aggregate level of the economy. For example, energy efficiency deteriorated in 2009 and was even reversed in 2006. It was found that some sectors/sub-sectors are lagging behind in reducing CO2 emissions from energy efficiency improvements and therefore require particular policy attention. The decomposition of CO2 emissions indicates that the future path of emissions reduction, especially in the context of attaining the targets for 2020 and beyond, is very challenging for Australia. The combined impact of scale effect (as measured by increases in wealth and population) has been a dominant factor in increasing emissions. On the positive side, the wealth effect has acted to slow down the rate of increase of per-capita emissions in the most recent period. Further investigation of the inverted U-shape trajectory between per-capita emissions and per-capita income provides support for the existence of an environmental Kuznets curve for CO2 emissions, along with a possibility of a turning point in the near future.