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Navigating the Path to Sustainable Energy Consumption: A Second-Generation Panel Cointegration Approach to Measuring Price and Income Elasticity of Energy Demand in Europe

Introduction

Navigating the path to sustainable energy consumption: a second-generation panel cointegration approach to measuring price and income elasticity of energy demand in europe. Explore energy demand elasticity in Europe using panel cointegration. Measures price & income effects on electricity & natural gas for households/non-households, guiding sustainable energy policies.

Abstract

Achieving United Nations Sustainable Development Goals of affordable and clean energy and climate action requires a deep understanding of energy consumption patterns and their responsiveness to various macroeconomic variables. This study investigates the long-run price and income elasticities of electricity and natural gas demand across European Union member states, disaggregating consumption into household and non-household sectors. Employing second-generation panel cointegration techniques, including Common Correlated Effects Mean Group (CCEMG) estimators, we address cross-sectional dependence and unobserved common factors to provide robust elasticity estimates. Our findings reveal that energy product prices exhibit negative but rather inelastic effects on demand, with household sectors showing greater sensitivity than non-household sectors. Sectoral income, however, plays a more dominant role, significantly influencing long-term energy consumption trends across both the sectors. These results underscore the necessity of differentiated policy approaches, where price-based incentives enhance household energy efficiency, while income-driven strategies support sustainable industrial growth. The study contributes to the literature on energy demand modeling and provides policymakers with actionable insights for designing effective energy pricing and sustainability policies. Future research should explore the impact of technological advancements and regulatory interventions on energy consumption elasticity in the context of evolving energy markets.

Review

This study addresses a highly pertinent topic in contemporary energy economics, investigating the long-run price and income elasticities of electricity and natural gas demand across European Union member states. Its clear alignment with United Nations Sustainable Development Goals, particularly regarding affordable and clean energy and climate action, underscores its relevance for current policy debates. A significant strength of this research lies in its rigorous methodological approach, employing second-generation panel cointegration techniques, specifically Common Correlated Effects Mean Group (CCEMG) estimators. This choice effectively addresses critical econometric challenges such as cross-sectional dependence and unobserved common factors, thereby enhancing the robustness and reliability of the elasticity estimates. Furthermore, the disaggregation of consumption into household and non-household sectors provides valuable granularity, offering deeper insights than aggregated analyses. The findings present crucial insights for policymakers. The study reveals that energy product prices generally exhibit negative but rather inelastic effects on demand, suggesting that price signals alone may have limited impact on overall consumption patterns, particularly in the non-household sector. Interestingly, household sectors show greater price sensitivity, implying that targeted price-based incentives could be effective for residential energy efficiency. In contrast, sectoral income is identified as a more dominant factor, significantly influencing long-term energy consumption trends across both sectors. These results collectively underscore the necessity of differentiated policy approaches: price-based incentives to enhance household energy efficiency, and income-driven strategies to support sustainable industrial growth. The study significantly contributes to the existing literature on energy demand modeling by providing robust, disaggregated estimates and offering actionable insights for the design of more effective energy pricing and sustainability policies. While the study provides a comprehensive analysis within its scope, it also opens avenues for further research. As the authors themselves suggest, future work could productively explore the impact of technological advancements, such as the adoption of smart grids or energy-efficient appliances, and the role of regulatory interventions on energy consumption elasticity. These factors are increasingly significant in evolving energy markets and could introduce additional layers of complexity to demand patterns. Additionally, an examination of specific policy examples or case studies could complement the econometric findings by illustrating how these elasticities manifest in real-world scenarios. Expanding the geographic scope beyond the EU or incorporating a wider range of energy sources beyond electricity and natural gas could also offer a more holistic understanding of global energy transitions.

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