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Economic Development, Energy Market Integration and Energy Demand: Implication for East Asia

Yu Sheng () and Xunpeng Shi ()

Chapter 2 in Energy Market Integration in East Asia: Theories, Electricity Sector and Subsidies, pp 11-35 from Economic Research Institute for ASEAN and East Asia (ERIA)

Abstract: This paper uses the General Method of Moment (GMM) regression technique to estimate an cross-country energy demand function with a data set covering 71 countries over the period of 1965-2010. The estimated results show that rapid economic growth due to industrialization and urbanization tends to increase the energy consumption per capita, which in turn may generate a surge in the overall demand for energy. As is shown in the econometric results, an increase in economic growth (i.e. the dummy of GDP level) may increase 0.6 per cent of energy consumption per capita. Moreover, economic growth also leads to lower price and income elasticities (in absolute terms). However, energy market integration can help to reduce the energy demand pressure and to smooth the demand shock through decreasing the income elasticity and increasing the price elasticity in particular in the long run. This finding can be used to explain how cross-country institutional arrangement related to energy market may affect regional energy consumption patterns over the period of rapid economic growth and offer policy implications for East Asia, which is diversified in terms of development level.

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