The Relationship Between Energy Intensity and Income Levels: Forecasting Long Term Energy Demand in Asian Emerging Countries

Abstract

This paper analyses long-term trends in energy intensity for ten Asian emerging countries to test for a non-monotonic relationship between energy intensity and income in our sample. We estimate energy demand functions during 1973 1990 using a quadratic function of log income. We find that the long-run coefficient on squared income is negative and significant, indicating a change in trend of energy intensity. We then use our estimates to evaluate a medium-term forecast of energy demand in the Asian countries, using both a log-linear and a quadratic model. We find that in medium to high income countries the quadratic model performs better than the log-linear, with an average error of 9% against 43% in 1995. For the region as a whole, the quadratic model appears more adequate with a forecast error of 16% against 28% in 1995. These results are consistent with a process of dematerialization, which occurs as a result of a reduction of resource use per unit of GDP once an economy passes some threshold level of GDP per capita.