CO₂ emissions and energy prices in the Asia-Pacific region

CO₂ emissions for a country depend directly on the size of the economy or the size of the population. In the following analysis, population has been chosen as the normalizing factor, so an attempt is made to explain the behaviour of CO₂ emissions per capita. If CO₂ emissions can be explained in terms of economic criteria then it will be possible to calculate the marginal impact of a change in CO₂ emissions for a change in the independent variables. The independent (explanatory) variables are simply the real GDP per capita and real price of energy.

Why look at the whole Asia-Pacific region rather than just Canada? Canada is one of the few industrialized Annex I countries in the region. The countries in the Asia-Pacific region are at different stages of economic development, so it is relevant to see whether the Canadian experience is typical or atypical of developing countries.

The Importance of Real GDP per Capita and Energy Prices for CO₂ Emissions

Since CO₂ emissions are so closely tied to energy use, it seems natural to attempt to explain CO₂ emissions per capita as a function of the same sort of economic variables used in explaining energy demand, namely real GDP per capita and real energy prices. It is hypothesized that the marginal response to real GDP per capita and to real energy prices are the same for each country, but the intercept term could be different to account for country-specific CO₂ emission infrastructure.

The model consists of twenty countries in the Asia-Pacific and South Asia region. The countries are Bangladesh, Hong Kong, India, Indonesia, Japan, New Zealand, South Korea, Malaysia, Pakistan, Philippines, Sri Lanka, Taiwan, and Thailand in the Asia region and Canada, Chile, Colombia, Ecuador, Mexico, Peru, and United States in the Americas region.

It would be ideal to have an aggregate price index for all energy types, but such an index is not always available for developing countries. Since it is necessary to have the same measure of real prices for all countries and since oil has the largest share amongst energy fuels in most countries, the price of fuel oil in the industrial sector is chosen as the unit of measure.

Data for Asia-Pacific Region and the Economic Model

Data for CO₂ emissions, real fuel oil prices in the industrial sector, real gross domestic product (GDP) per capita, and exchange rates have been collected from 1977 to 1992 for twenty countries in the Asia-Pacific and South Asia region. The data were obtained from a number of different sources.

The CO₂ emissions per capita data show an obvious pattern of increasing CO₂ emissions per capita with real GDP per capita. It is less obvious that CO₂ emissions per capita decline as real fuel oil prices increase.

Econometric Results for Asia-Pacific Region

Those countries with either large populations or large economies have high CO₂ emissions. In order to compare CO₂ emissions between countries, they are measured in per capita terms. Generally, the industrialized countries (Australia, Canada, Japan, New Zealand, and USA) have the largest CO₂ emissions per capita. Some developing countries with relatively high levels of real GDP per capita (Hong Kong, South Korea, Singapore, and Taiwan) also have relatively high levels of CO₂ emissions per capita. Despite its low level of economic development, China has relatively large levels of CO₂ emissions because of the very significant share of energy consumption met by coal. Canada has the second highest level of CO₂ emissions per capita behind the USA.

The data support the hypothesis. CO₂ emissions per capita are positively related to real GDP per capita and negatively related to the real price of fuel oil. When the countries are grouped together by income class, the real price of fuel oil is only statistically significant for high-income countries. The coefficient for real GDP per capita in low-income countries is lower than it would have been had China been included in the sample.

The GDP elasticities show an almost unit elasticity for low-income and middle-income countries and an elasticity of only 0.36 for high-income countries. The price elasticities are all very inelastic, although they show a more inelastic response in low and middle income countries.

The smallness of the price elasticities is surprising. To test the robustness of the econometric results, the cross-section of 20 countries is estimated for 1992 only. The elasticities are larger – and more realistic. For instance, the elasticity of CO₂ emissions per capita with respect to real GDP per capita is 1.39 (more than double the previous elasticity) and with respect to real price of oil is –0.54.

The smallness of the price elasticities for aggregate CO₂ emissions could be related to the fact that we used the fuel oil price in the manufacturing sector as a proxy for an aggregate energy price index. The IEA provides a disaggregation of CO₂ emissions by fuel and by end-use sector but only for 1990 and 1996. Therefore, it is possible to test the size of the estimated price elasticity using the 1990 cross-section data of 20 countries for all CO₂ emissions, for CO₂ emissions emanating from oil use, for CO₂ emissions emanating from oil use in manufacturing, and finally for CO₂ emissions emanating from oil use in road transportation. Using the same variable for oil price, the price elasticity is larger for oil-initiated CO₂ emissions than for aggregate CO₂ emissions (-0.50 vs. –0.36) and larger for oil-initiated CO₂ emissions in the manufacturing sector than aggregate CO₂ emissions (-0.45 vs. –0.36). Finally, if a new oil price variable is created that is a quantity-weighted average of the price of motor gasoline and diesel oil then the price elasticity for oil-initiated CO₂ emissions in the road transportation sector is smaller than for aggregate CO₂ emissions (-0.16 vs. –0.36).