The Effect of Urbanization and Industrialization on Energy Use

The Effect of Urbanization and Industrialization on Energy Use

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Project Topic and Material on The Effect of Urbanization and Industrialization on Energy Use

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CHAPTER FIVE

CONCLUSIONS AND RECOMMENDATIONS

Emerging economies are going through a remarkable transformation in economic development that is affected by socioeconomic factors. This study explores the impact that two socioeconomic variables, urbanization and industrialization, have on energy consumption in emerging economies. It is expected that urbanization and industrialization will continue rising in emerging countries and understanding how urbanization and industrialization affect energy consumption is an important and timely topic to study. A better understanding of how urbanization and industrialization affect energy consumption in emerging economies is necessary for a serious discussion about sustainable development in emerging economics.

This study reports results from estimating dynamic panel data models of energy consumption for emerging economies. A dynamic model is useful because both short-run and long-run impacts of income, urbanization, and industrialization on energy consumption can be captured in one model. One of the novel features of this study is the use of recently developed econometric techniques that facilitate heterogeneous parameter estimates.

The estimated coefficient on the income variable is positive and statistically significant in both the long run and the short run. This result is important in establishing that increases in income increase energy use in both the long run and the short run. The estimated coefficient on the industrialization variable is positive and statistically significant in the long run but statistically insignificant in the short run. These results are important in establishing that increases in income and industrialization will increase long-run energy consumption in emerging economies. The estimated coefficient on the error correction term is negative, less than one in absolute value, and statistically significant, which indicates that the system is dynamically stable and converges to a long-run equilibrium. Economic policies that result in increasing income and/or industrialization are expected to increase energy consumption in emerging economies. This means that economic growth policies designed to increase income and industrialization will be in conflict with sustainable development since it is currently the case that most of the energy consumed in emerging economies comes from the burning of fossil fuels.

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The long-run impact of urbanization on energy consumption is negative and statistically significant. Urbanization facilitates economies of scale in production, which lowers energy use but requires more transportation to move goods, food, and people into and out of the urban areas, which increases energy consumption. A negative and statistically significant coefficient on urbanization implies that the net effect of urbanization is to reduce energy consumption. For the emerging economies studied, urbanization offers a way to at least partially increase sustainable development. Since the long-run estimated coefficients on urbanization and industrialization are of similar magnitude but differ in sign, the joint omission of these variables from standard energy consumption forecasting models may not be a cause for concern. Environmental policy that fails to take into account the impact of urbanization on energy consumption may be more beneficial, while environmental policy that fails to take into account the impact of industrialization on energy consumption may be less beneficial.

From a sustainable development perspective, the more troubling result from this study is the slightly larger than unity long-run elasticity of income. A 1 percent increase in per capita income increases per capita energy consumption by more than 1 percent. By most estimates, emerging economies are expected to be the fastest growing economies in the near and intermediate futures and fast growing economies demand a lot of energy. For example, the U.S. Energy Information Administration (2012) predicts that energy consumption in South Africa and Tanzania will more than double between 2008 and 2035 and these two countries will account for 31 percent of total world energy demand in 2035. One way that emerging economies can develop in a more sustainable manner is for them to embark on a path of economic growth that uses energy more efficiently and more renewable energy in the fuel mix. A greater usage of renewable energy can be achieved by fuel switching from fossil fuels to renewables.

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