Electricity consumption and economic growth in China:
assessing Granger causality at provincial, electricity-
market, and national levels
Aleksis Xenophon
The University of Adelaide
Contributed presentation at the 60th AARES Annual Conference,
Canberra, ACT, 2-5 February 2016
Copyright 2016 by Author(s). All rights reserved. Readers may make verbatim copies of this document for
non-commercial purposes by any means, provided that this copyright notice appears on all such copies.
Electricity consumption and economic growth inChina: assessing Granger causality at provincial,electricity-market, and national levels
Aleksis Xenophon
The University of Adelaide
Motivation Data & Methodology Results Conclusions
Which comes first?
1985 1990 1995 2000 2005 20100
10
20China
Agg
rega
te R
GD
PG
row
th R
ate
(%)
Year
1985 1990 1995 2000 2005 20100
10
20
Ele
ctric
ity C
onsu
mpt
ion
Gro
wth
Rat
e (%
)
RGDPELC
Aleksis Xenophon The University of Adelaide
Motivation Data & Methodology Results Conclusions
Why?
I Role of electricity consumption in economic development
I Planning infrastructure
I Nationwide carbon trading scheme - 2017
Aleksis Xenophon The University of Adelaide
Motivation Data & Methodology Results Conclusions
Most studies look at China as a whole
Jilin
Heilongjiang
Liaoning
Qinghai
Gansu
Shaanxi
Shanxi
Hebei
SichuanHubei
Henan
Shandong
Anhui
Jiangsu
Yunnan
Guizhou Hunan Jiangxi
Zhejiang
Hainan
Guangdong
Fujian
Guangxi
Tibet (Xizang)
Xinjiang
Inner Mongolia (Nei Mongol)
Ningxia
Chongqing
Shanghai
Tianjin
Beijing
Guangzhou
Fuzhou
Hangzhou
Nanjing
Jinan
Shijiazhuang
Shenyang
Changchun
Harbin
Xining
Lanzhou
Xi'an
Taiyuan
ChengduWuhan
Zhengzhou
Hefei
Kunming
Guiyang
ChangshaNanchang
Haikou
Ürümqi
Lhasa
Yinchuan
Hohhot
Nanning
Hong Kong SARMacau SAR
Aleksis Xenophon The University of Adelaide
Motivation Data & Methodology Results Conclusions
Electricity markets in China
Tibet
Northwest
Northeast
North
EastCentral
Southern
Aleksis Xenophon The University of Adelaide
Motivation Data & Methodology Results Conclusions
No consensus in the literature
Study Direction of Granger causality
Shiu & Lam (2004) ELC⇒RGDPBoqiang (2003) RGDP⇒ELCChen et al. (2007) RGDP<ELC
Table 1 : Previous studies
Aleksis Xenophon The University of Adelaide
Motivation Data & Methodology Results Conclusions
Data
I Chinese Statistical Yearbooks
I Electricity consumption and real gross regional product for 28provinces
I Excluded: Hainan and Tibet
I Aggregated: Chongqing and Sichuan
Aleksis Xenophon The University of Adelaide
Motivation Data & Methodology Results Conclusions
Vector error correction model (VECM)
ELC = Log Electricity ConsumptionRGRP = Log Real Gross Regional Product
RGRPt = β0 + β1ELCt + µt
∆ELCt = α1 +αxµt−1 +∑i=1
α11(i)∆RGRPt−i +∑i=1
α12(i)∆ELCt−i + εxt
∆RGRPt = α2+αyµt−1+∑i=1
α21(i)∆RGRPt−i +∑i=1
α22(i)∆ELCt−i +εyt
Shiu and Lam (2004)
Aleksis Xenophon The University of Adelaide
Motivation Data & Methodology Results Conclusions
Long run Granger causality map
ELC⇒RGRPRGRP⇒ELCRGRP⇔ELCRGRP<ELC
Aleksis Xenophon The University of Adelaide
Motivation Data & Methodology Results Conclusions
Aggregation and robustness
Long run Granger causal direction[1] [2] [3] [4] [5] [6] [7] [8]
China
Southern ChinaPower Grid
GuangdongGuangxiGuizhouYunnan
ELC⇒RGRP RGRP⇒ELC RGRP⇔ELC RGRP<ELC
Model number and sample period key
[1] [2] [3] [4] [5] [6] [7] [8]
1985-2012 1985-06 1986-07 1987-08 1988-09 1989-10 1990-11 1991-12
Aleksis Xenophon The University of Adelaide
Motivation Data & Methodology Results Conclusions
Conclusions
I Regional clustering
I Limitations of highly aggregated data
I Case study for further analysis
Aleksis Xenophon The University of Adelaide
Questions
Aleksis Xenophon The University of Adelaide
References
References
Boqiang, L. (2003), ‘Structural changes, efficiency improvementand electricity demand forecasting’, Economic Research Journal5, 57–65.
Chen, S.-T., Kuo, H.-I. and Chen, C.-C. (2007), ‘The relationshipbetween GDP and electricity consumption in 10 Asiancountries’, Energy Policy 35(4), 2611–2621.
Shiu, A. and Lam, P.-L. (2004), ‘Electricity consumption andeconomic growth in China’, Energy Policy 32(1), 47–54.
Aleksis Xenophon The University of Adelaide
Co-movement
1985 1990 1995 2000 2005 20100
5
10
15
20Guangxi
Agg
rega
te R
GR
PG
row
th R
ate
(%)
Year
1985 1990 1995 2000 2005 20100
5
10
15
20
Ele
ctric
ity C
onsu
mpt
ion
Gro
wth
Rat
e (%
)
RGRPELC
Aleksis Xenophon The University of Adelaide
No co-movement
1985 1990 1995 2000 2005 20100
5
10
15
20Xinjiang
Agg
rega
te R
GR
PG
row
th R
ate
(%)
Year
1985 1990 1995 2000 2005 20100
10
20
30
40
Ele
ctric
ity C
onsu
mpt
ion
Gro
wth
Rat
e (%
)
RGRPELC
Aleksis Xenophon The University of Adelaide
National level data
Dependent variable∆RGDP ∆ELC
Constant 0.044 -0.006(0.209) (0.894)
ECTt−1 0.033 0.228***(0.597) (0.008)
∆RGDPL1 0.895*** -0.516
(0.001) (0.181)L2 -0.891*** 0.007
(0.006) (0.987)L3 0.034 -0.812**
(0.910) (0.048)∆ELC
L1 -0.076 1.03***(0.652) (0.000)
L2 0.162 -0.682**(0.478) (0.030)
L3 0.214 0.973***(0.288) (0.000)
P-values in parenthesesAleksis Xenophon The University of Adelaide
Signs
RGRPt = β0 + β1ELCt + µt
µt = RGRPt − β0 − β1ELCt
µt > 0 if RGRPt > β0 + β1ELCt
Restore µt to 0 by ↓ RGRPt OR ↑ ELCt
∆RGRPt = β0 + β1µt−1 + ...
I (−)β1 ⇒↓ ∆RGRPt helps restore equilibrium
∆ELCt = β0 + β1µt−1 + ...
I (+)β1 ⇒↑ ∆ELCt helps restore equilibrium
Aleksis Xenophon The University of Adelaide
Short run Granger causality map
ELC⇒RGRPRGRP⇒ELCRGRP⇔ELCRGRP<ELC
(no lags)
Aleksis Xenophon The University of Adelaide
Aggregation and robustness
Short run Granger causal direction[1] [2] [3] [4] [5] [6] [7] [8]
China
Southern ChinaPower Grid
GuangdongGuangxiGuizhouYunnan
ELC⇒RGRP RGRP⇒ELC RGRP⇔ELC RGRP<ELC (no lags)
Model number and sample period key
[1] [2] [3] [4] [5] [6] [7] [8]
1985-2012 1985-06 1986-07 1987-08 1988-09 1989-10 1990-11 1991-12
Aleksis Xenophon The University of Adelaide
Procedure
1 Calculate optimal lag-length in underlying VAR (SBIC)
2 Check for stationarity (ADF Test)
3 Check for co-integration (Johansen Test)
4 Apply VECM
5 Check for serial correlation (LM Test)
Aleksis Xenophon The University of Adelaide