UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS NONRENEWABLE, RENEWABLE ENERGY CONSUMPTION AND ECONOMIC PERFORMANCE IN OECD COUNTRIES: A STOCHASTIC DISTANCE FUNCTION APPROACH A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN THI NGAN THAO Academic Supervisor DR. LE VAN CHON HO CHI MINH CITY, December 2015 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com DECLARATION “This declaration is to certify that this thesis entitled “Nonrenewable, renewable energy consumption and economic performance in OECD countries: a stochastic distance function approach” which is conducted and submitted by me in partial fulfilment of the requirements for the degree of the Master of Arts in Development Economics to the Vietnam – The Netherlands Programme. The thesis constitutes only my original works and due supervision and acknowledgement have been made in the text to all materials used.” Nguyen Thi Ngan Thao LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGEMENTS It is my pleasure to convey my heartfelt appreciation to those who greatly contributed to this thesis through supervision, support and encouragement. I would like to express my utmost gratitude to my supervisor, Dr.
Le Van Chon, for his excellent guidance, advocate, caring, tolerance and patience. It is my luck and honor to work under his supervision. His wisdom, knowledge, skill and wholehearted devotion to this paper have always touched, inspired and motivated me. Without his encouragement and persistent help, I would not have been able to complete this thesis.
I am very grateful to all the lecturers of the Vietnam – The Netherlands Programme (VNP), who not only delivered valuable knowledge to help me carry on this paper but also gave me inspirations to do research. I would like to send my special thanks to Prof. Nguyen Trong Hoai, Dr. Pham Khanh Nam and Dr.
Truong Dang Thuy who always accompanied us during the two – year master programme. I am very thankful to Dr. Pham Khanh Nam and Dr. Truong Dang Thuy for giving me encouragements and comments on my Concept Note and Thesis Research Design.
I would also like to thank all VNP staff for their conscientious assistance. I am thankful to my friends from VNP who shared bittersweet experiences of studying with me and always sent helps and encouragements whenever I needed. Besides, my sincere thankfulness also goes to my company’s managers and colleagues who kindly and understandingly facilitated my master studying. Finally, I am most grateful to Dad, Mom, Aunt, Sister and Brother for their unconditional love, endless support and limitless tolerance to me throughout my journeys.
LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABBREVIATIONS BTU : The British thermal unit CO2 : Carbon dioxide EC : Efficiency change G7 : The Group of Seven GDP : Gross domestic product GHG : Greenhouse gas IEA : The International Energy Agency K : Capital L : Labor NE : Nonrenewable energy NOx : Nitrogen oxides OECD : Organization for Economic Cooperation and Development PC : Productivity change RE : Renewable energy REN21 : The Renewable Energy Policy Network for the 21st Century SO2 : Sulfur dioxide TC : Technical change TE : Technical efficiency TOE : Tonne of oil equivalent TPES : Total primary energy supply US : United States US EIA : The U. Energy Information Administration UNFCCC : United Nations Framework Convention on Climate Change LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT Kyoto Protocol with the target of lowering greenhouse gas emission levels to mitigate the harsh aftermaths of global warming and climate change, primarily caused by fossil fuel using, has put a great pressure on developed countries, including OECD countries, which accounts for a large share of the world’s total energy consumption. This leads to the trend of shifting from nonrenewable energy to renewable energy recently, and also attracts the studies in this area. Utilizing the panel data of 34 OECD countries from 1990 to 2012, this paper estimates the stochastic distance function with four inputs (capital, labor, nonrenewable and renewable energy consumption) and one output (GDP) to analyze the effects of nonrenewable and renewable energy consumption on GDP, the relationship between two sources of energy, and the productivity change of OECD countries over the period.
Nonrenewable and renewable energy are proved to be substitutes of each other and positively contribute to economic growth. On the other hand, the high values of technical efficiency suggest that average OECD country operates almost as effectively as the best performer in the whole group whereas the measurement of productivity change shows that all productivity gain is attributed to the outward shift of the production frontier. Key words: nonrenewable energy, renewable energy, productivity change, distance function JEL classification: C67, Q43. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENTS CHAPTER 1: INTRODUCTION .2 Objective and research questions .3 Scope of the thesis .4 Structure of the thesis.
5 CHAPTER 2: LITERATURE REVIEW .1 Definition and classification of energy .2 Energy consumption and growth .1 Economic effects of energy consumption .2 Environmental effects of energy consumption .3 Nonrenewable and renewable energy consumption and economic growth .4 Productivity change and the Stochastic distance function .1 Definition of productivity change .2 Productivity change measurement and stochastic distance function. 18 CHAPTER 3: ECONOMETRIC MODEL .1 Stochastic Distance Function form .3 Computing partial effects among variables .4 Computing technical efficiency, efficiency change, technical change and productivity change. 25 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 4: ENERGY CONSUMPTION AND SUPPLY IN OECD COUNTRIES .1 OECD versus non – OECD .2 Energy consumption in OECD countries .1 Overview of energy consumption in OECD countries .2 Renewable energy consumption versus nonrenewable and total energy consumption .3 Energy supply in OECD countries .1 Overview of energy supply in OECD countries .2 Renewable energy supply in OECD countries. 34 CHAPTER 5: EMPIRICAL RESULTS .1 Partial effects among variables .2 Technical efficiency, efficiency change, technical change and productivity change.
57 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES Table 5.2: Descriptive statistics of variables.3: Correlation matrix between variables .5: Partial effects among variables .6: Average technical efficiencies of OECD countries (1990 – 2012) .7: Average efficiency change, technical change and productivity change of OECD countries (1991 – 2012). 48 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF FIGURES Figure 4.1: OECD versus non – OECD in term of population, GDP, total primary energy supply and production .2: Total final energy consumption by region in OECD (1971 – 2013) .3: Final energy intensity in OECD (1971 – 2013) .4: Sectorial energy intensities in OECD (1971 – 2013) .5: Energy consumption in OECD (1990 – 2012) .6: Sectorial renewable energy consumption in OECD in 1990 and 2013.7: Total primary energy supply in OECD (1971 – 2014).8: Composition of total primary energy supply in OECD (2014) .9: Composition of total renewable primary energy supply (2014) .10: Renewable energy shares in TPES of OECD versus other regions (2013) .1: Correlation between GDP and nonrenewable, renewable energy consumption .2: Average technical efficiency of OECD countries (1990 – 2012). 47 LIST OF APPENDICES Appendix 1: List of 34 OECD countries. 58 Appendix 2: Regression results.
59 Appendix 3: F – test results. 62 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 1: INTRODUCTION This chapter consists of four parts. First part presents the motivation for studying the thesis’s topic and a brief review of empirical researches on this subject. Main research questions and the scope of the whole study will be mentioned in the next two parts.
The last part gives an overview of this paper’s structure.1 Problem statement Energy is a vital resource for economic activities. Thus, the nexus between energy consumption and economic growth has attracted the attention of economic researchers, especially in recent years when industrial activity has proven its increasingly important role in growth (Lee and Chang, 2007; Narayan and Smyth 2008; Apergis and Payne, 2009). Not only economists but also climate activists take attentive look at energy consumption but due to a different reason: the use of energy, primarily nonrenewable energy, creates negative effects on the environment through greenhouse gas (GHG) emission, directly causing global warming and climate change (Intergovernmental Panel on Climate Change, 2007). Since 2005 when Kyoto Protocol took into effect, the pressure is greatly added to developed economies which take principle responsibility for exceedingly high levels of six main GHGs in the atmosphere.
According to United Nations Framework Convention on Climate Change (UNFCCC), countries are legally bound to cut down their joint GHG emission levels by 5.2% compared to that in 1990. The protocol targeted a 29% collective reduction by 2010 and that would tremendously ease the harsh impacts of economic activities on environment (UNFCCC, 2015). However, this protocol’s influence on global warming and climate change does not meet the expectation due to conflicts among major economies since energy conservation policies are predicted to have a huge impact on their economic performances. Some of biggest emitters like United States, China, India refused to sign on Kyoto Protocol because of the fear of losing competitive advantages against those who do not ratify the agreement.
Besides, the immediate outcomes of 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com reducing GHG emissions on economic growth are what make governments reluctant to be aware of climate change’s aftermaths. US leaders argued against scientists and climate activists that in compliance with the Protocol, about five million jobs would be potentially lost and the gross domestic product (GDP) would seriously suffer (Broehl, 2005). Nevertheless, under the increasing pressures from critics and countries which are following the Protocol and witnessing devastating consequences of natural calamity every year, those large countries will be no longer able to ignore the Protocol. Besides some industrialized nations opposing Kyoto Protocol, more than 140 other countries, including the European Union, ratified this treaty and adopted new energy policies to reach their assigned emission levels (Broehl, 2005).
In the process of compliance with the Protocol, renewable energy technologies have been accommodating countries with the most effective tool to fulfill their growing energy demands and attain global GHG reduction goals at the same time. The substitution between renewable energy for nonrenewable energy no longer serves the purpose of meeting emission levels but gradually becomes the new engine for countries to improve their technology and energy efficiency. International Renewable Energy Agency stated that the ramped up renewable energy policies from countries could double the share of renewable energy in global energy consumption by 2030 without any additional cost, while according to Intergovernmental Panel on Climate Change, 80% of global energy supply can be renewable energy by 2050 (UNFCCC, 2014). Being friendlier with the environment and potentially cost benefitted, renewable energy promoting policy is developing very fast globally.
According to the Renewable Energy Policy Network for the 21st Century (REN21), more than 100 nations, including leading economies, set up their national renewable energy generation and consumption goals (Broehl, 2005). The trend of shifting from nonrenewable energy to renewable energy in countries, especially developed countries, has been stirring up studies in energy economics area. 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Although there exist many researches digging the relationship between energy consumption and economic growth, most of them concentrates on energy consumption in general. With the use of time series data, significantly positive relationship between energy consumption and GDP is found in many empirical researches such as Stern (2000), Stresing, Lindenberger, and Kummel (2008), Yuan et al.
Applying panel date, the same result is also proven in the studies of Lee and Chang (2007), Narayan and Smyth (2008), Apergis and Payne (2009). Alper et al. (2013) utilized micro data of 47 US states and confirmed both short-run and long-run positive associations between energy and growth. Recently, researchers started to put renewable energy under investigation.