Long Run Relationship between Energy Efficiency and Economic Growth in Pakistan: Time Series Data Analysis

Tahir Mahmood and Faiza Kanwal

Abstract

This study explores the nature of relationship between energy efficiency, measured by energy intensity (energy consumption to GDP ratio) and the level of economic activity, measured by GDP in Pakistan during 1980-2016. This study also analyzes the relationship between sectoral shares and energy efficiency. We used Error Correction Model (ECM) for empirical analysis to tests the existence of a long-term relationship between the energy intensity and GDP while using this model to capture the Granger causality between variables. Results of Johansen's co-integration show that causality exists at least in one direction. Results of ECM predict the existence of unidirectional causality from GDP to energy intensity. These findings support conservation hypothesis on the basis of unidirectional causality running from output to energy efficiency. It is further observed that energy intensity in Pakistan is expected to increase further in the light of growing shares of industrial and services sectors in the GDP.