Energy Price and CO2 Emission
Is higher energy price an effective instrument for sustainable development?
YiranZHA
2022-11-09
Introduction
The world was hit by spiking energy prices after Russia invaded Ukraine. Taking the US as an example, both electricity and utility price has been dramatically increasing after the outbreak of the Russia-Ukraine conflict.
Based on the classic supply-demand model, we might start to think about the soaring price related to a depressed need for traditional energy and a surging preference for renewable alternatives, leading to fewer emissions. Some media reported reduced greenhouse gas emissions with a higher cost on the poor. Others talked more about the negative effect of higher energy prices on sustainable goals. This article intends to first have an overview of the energy price trend since 2000. Then, analyze whether there is a generally meaningful association between higher energy prices and lower emissions based on data retrieved from official website of International Monetary Fund and International Energy Agency.
Energy Price Overview
The article analyzes 13 traditional energy products whose price movements relate to the product’s raw material. Different raw materials have different geopolitical sensitivities and face different domestic policies. Generally, energy prices tend to increase at a 99% confidence level.
## [1] "Liquefied petroleum gas (litre)" "Coking coal (tonne)"
## [3] "Regular unleaded gasoline (litre)" "Premium leaded gasoline (litre)"
## [5] "Steam coal (tonne)" "Light fuel oil (1000 litres)"
## [7] "Natural gas (MWh)" "Regular leaded gasoline (litre)"
## [9] "High sulphur fuel oil (tonne)" "Automotive diesel (litre)"
## [11] "Premium unleaded 95 RON (litre)" "Electricity (MWh)"
## [13] "Premium unleaded 98 RON (litre)" "Low sulphur fuel oil (tonne)"Price Oscillator and Up Tendency - Petroleum Products
All petroleum products experienced a price plunge between 2014 and 2016 after a decade of price upward. The World Bank attributed the price collapse to a growing supply glut, a booming U.S. shale oil production, and a weakening demand prospect. The price steadily climbs up after the incident and soars since the outbreak of the Russian-Ukraine war. Compared with other energy products, petroleum products are vulnerable to geopolitical conflicts and international dynamics.
Among the 8 petroleum products, the cross-country price range is tight regarding liquefied petroleum gas, automotive diesel, high sulphur fuel oil, and low sulphur fuel oil.
Notably, the United Kingdom (2003-2007) and France (2016-2021) adjusted their tax on low sulphur fuel oil.
Also, the dataset has an outlier, premium leaded gasoline, which further stresses the sensitivity to policy and regulations. We only have limited data on its price before 2006 since premium leaded gasoline has been widely prohibited for its negative externalities.
The prices of other petroleum products are dispersed among countries. For example, regular unleaded gasoline (Germany) and light fuel oil (Italy) are more expensive in Europe compared with other advanced economies.
Similarly, premium unleaded 95 RON, premium unleaded 98 RON are more affordable in Canada.
Relatively Stable - Coal & Natural Gas
With diversified exporters, the coal and natural gas market dynamic is relatively constant, experiencing a consistent tax rate and upward tendency.
Steadily Increasing - Electricity
The price of electricity, one of the key drivers of production, has continued to rise over the past two decades.
Interation between Energy Price and Carbon Dioxide Emission
Intuitively, we know that CO2 emissions have been decreasing for the last two decades, which parallels the overall upward trend in energy prices.
Does the negative correlation point to a causal relationship? Or is the correlation solid and constant? Deriving from the alluvial diagram, such a correlation is less robust than expected. Under the primary hypothesis, the higher tier of CPI is, the lower the emission. However, there is no sufficient evidence to separate the time and price elements.
The two regression models below further study the relationship between CO2 emission and energy price.
Model 1
This model selects four representative energy products, i.e., light fuel oil, automotive diesel, natural gas, electricity, and controls other demographic elements, studying the relationship between CO2 emission and prices of different energy products.
##
## Call:
## lm(formula = co2_per_capital ~ light_fuel_oil_1000_litres + automotive_diesel_litre +
## natural_gas_m_wh + electricity_m_wh + consumer_price_index +
## year + producer_price_index + purchasing_power_parities +
## u_s_dollar_exchange_rate, data = g20_price, na.action = na.omit)
##
## Residuals:
## Min 1Q Median 3Q Max
## -6.3606 -2.2606 0.0056 1.9917 6.6420
##
## Coefficients:
## Estimate Std. Error t value Pr(>|t|)
## (Intercept) -552.1076970 170.0575677 -3.247 0.00129
## light_fuel_oil_1000_litres 0.0015495 0.0007581 2.044 0.04178
## automotive_diesel_litre -5.4351108 0.7176410 -7.574 0.000000000000388
## natural_gas_m_wh 0.0002136 0.0105060 0.020 0.98379
## electricity_m_wh -0.0053790 0.0042177 -1.275 0.20311
## consumer_price_index -0.1017865 0.0939127 -1.084 0.27925
## year 0.2874668 0.0867259 3.315 0.00102
## producer_price_index -0.0090730 0.0664901 -0.136 0.89155
## purchasing_power_parities 0.0606535 0.0236377 2.566 0.01074
## u_s_dollar_exchange_rate -0.0691510 0.0259536 -2.664 0.00810
##
## (Intercept) **
## light_fuel_oil_1000_litres *
## automotive_diesel_litre ***
## natural_gas_m_wh
## electricity_m_wh
## consumer_price_index
## year **
## producer_price_index
## purchasing_power_parities *
## u_s_dollar_exchange_rate **
## ---
## Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
##
## Residual standard error: 2.874 on 322 degrees of freedom
## (592 observations deleted due to missingness)
## Multiple R-squared: 0.2919, Adjusted R-squared: 0.2721
## F-statistic: 14.75 on 9 and 322 DF, p-value: < 2.2e-16Model 2
This model uses CPI energy as an instrument for energy price. Compared with the first model, the prices of different products are weighted, considering their significance to living requirements.
##
## Call:
## lm(formula = co2_per_capital ~ cpi_energy + consumer_price_index +
## year + producer_price_index + purchasing_power_parities +
## u_s_dollar_exchange_rate, data = g20_price_2, na.action = na.omit)
##
## Residuals:
## Min 1Q Median 3Q Max
## -8.0663 -2.9106 -0.7811 2.8062 7.9144
##
## Coefficients:
## Estimate Std. Error t value Pr(>|t|)
## (Intercept) -677.415268 57.885821 -11.703 < 2e-16 ***
## cpi_energy 0.077236 0.010307 7.494 0.000000000000083 ***
## consumer_price_index -0.267578 0.030022 -8.913 < 2e-16 ***
## year 0.357617 0.029388 12.169 < 2e-16 ***
## producer_price_index -0.144249 0.024518 -5.883 0.000000004368543 ***
## purchasing_power_parities 0.125465 0.008830 14.209 < 2e-16 ***
## u_s_dollar_exchange_rate -0.116362 0.009866 -11.795 < 2e-16 ***
## ---
## Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
##
## Residual standard error: 3.766 on 3773 degrees of freedom
## (1764 observations deleted due to missingness)
## Multiple R-squared: 0.1682, Adjusted R-squared: 0.1669
## F-statistic: 127.1 on 6 and 3773 DF, p-value: < 2.2e-16Comparison and Analysis
The residual standard error (RSE) in the first model is:
## [1] 2.874387The residual standard error (RSE) in the second model is:
## [1] 3.766016From RSE, the first model is better than the second one (2.87 vs. 3.77) by a relatively minor amount. However, the improvement is based on the cost of degree of freedom (322 vs. 3773). Also, the price variables are statistically insignificant. So, Model 2 fits the situation better.
co2_per_capita = - 677.42 + 0.08 cpi_energy + 0.35 year – 0.27 cpi– 0.14 ppi + 0.13 ppp – 0.17 usd_exchange_rate
According to the model, the energy price and emission volume are positively related. However, this effect can be almost neglected due to the small coefficient and the small magnitude of cpi-energy. In this model, the most economically significant effect factor is “year,” which implies that year-related fixed effect factors are more related to emissions.
Through the above analysis, we can at least know that: in general, raising the price of vital energy hurts the lower class and does not have a clear positive impact on sustainable development.