Elsevier

Energy Economics

Volume 32, Issue 3, May 2010, Pages 550-556
Energy Economics

Nuclear energy consumption and economic growth in nine developed countries

https://doi.org/10.1016/j.eneco.2010.01.004Get rights and content

Abstract

This article attempts to test the causal relationship between nuclear energy consumption and real GDP for nine developed countries for the period 1971-2005 by including capital and labour as additional variables. Using a modified version of the Granger causality test developed by Toda and Yamamoto (1995), we found a unidirectional causality running from nuclear energy consumption to economic growth in Japan, Netherlands and Switzerland; the opposite uni-directional causality running from economic growth to nuclear energy consumption in Canada and Sweden; and a bi-directional causality running between economic growth and nuclear energy consumption in France, Spain, the United Kingdom and the United States. In Spain, the United Kingdom and the USA, increases in nuclear energy consumption caused increases in economic growth implying that conservation measures taken that reduce nuclear energy consumption may negatively affect economic growth. In France, Japan, Netherlands and Switzerland increases in nuclear energy consumption caused decreases in economic growth, suggesting that energy conservation measure taken that reduce nuclear energy consumption may help to mitigate the adverse effects of nuclear energy consumption on economic growth. In Canada and Sweden energy conservation measures affecting nuclear energy consumption may not harm economic growth.

Introduction

The high degree of concentration of energy supply sources where over 68% of oil is concentrated in the volatile region of the Middle East, and where 67% of gas reserves are concentrated in Russia, clearly involves risks in terms of the reliability of the supply of energy needs for many energy-importing countries (World Coal Institute, 2006, Fiore, 2006, Toth and Rogner, 2006, Elliot, 2007, Ferguson, 2007, World Energy Council, 2007, Gnansounou, 2008, Squassoni, 2009, Tol et al., 2009). Since the 1973 oil crisis, supply security has become a primary concern for many oil-importing countries and this insecurity has made the search for alternative sources of cheap domestic energy supply one of the main deriving forces behind the energy policy of many energy importing countries (Toth and Rogner, 2006). Diversifying the sources of energy and finding a stable, safe and clean energy supply have become one of the main priorities of energy policy for many countries (see, Fiore, 2006, Toth and Rogner, 2006, Elliot, 2007, Ferguson, 2007). As part of their strategy of increasing energy security, many countries have built nuclear power plants not only to reduce dependence on imported oil but also to increase the supply of secured energy and also to minimize the price volatility associated with oil imports (Toth and Rogner, 2006, Vaillancourt et al., 2008). The advantage of nuclear energy has also become even more pressing as a result of the Kyoto Agreement that requires signatories to cut back substantially on their emissions of CO2 in order to reduce global warming (Becker and Posner, 2005). Many believe that nuclear energy, as a virtually carbon free source of energy, is one of the solutions to global warming and energy security (Elliot, 2007, Ferguson, 2007). Hence, serious concerns over rising fossil fuel prices, energy security, and greenhouse gas emissions have brought the importance of nuclear energy to the forefront of the wider issue of the energy debate. As the IEA notes, nuclear energy is attracting new interest for increasing the diversity of energy supplies, for improving energy security, and for providing a low-carbon alternative to fossil fuels (International Energy Agency, IEA, 2008). Thus, the importance of nuclear energy as a potential source of energy security and as a virtually carbon free source of energy necessitates not only further research but also the use of alternative testing methodologies to examine the causal relationship between nuclear energy consumption and economic growth.

In a recent bivariate study on the causal relationship between nuclear energy consumption and economic growth, Yoo and Ku (2009) suggest that future research should investigate causal relationships using a more generalized multivariate system. In this paper, we do exactly that. Specifically, we examine the casual relationship between nuclear energy consumption and real GDP in nine developed countries for the period 1971-2005 which also includes capital and labor as additional variables. We include capital and labor as additional variables because nuclear energy alone might not be strong enough to spur economic growth. Further, exclusion of a relevant variable(s) makes the estimates not only biased as well as inconsistent but also no-causality in a bivariate system can result from neglected variables (Lütkepohl, 1982). It is possible that the introduction of a third or a fourth variable in the causality framework may not only alter the direction of causality but also the magnitude of the estimates (Loizides and Vamvoukas, 2005). In addition, since a four-variable case incorporates more information than a bivariate case, the causal inference drawn may be more reliable (Loizides and Vamvoukas, 2005). Thus, the previous bivariate causality tests between energy consumption and economic growth may be invalid due to the omission of important variables affecting both energy consumption and economic growth.

In this paper the empirical evidence is carried out using the procedure developed by Toda and Yamamoto (1995, hereafter TY) which is valid regardless of whether a series is I(0), I(1) or I(2), non-cointegrated or cointegrated of any arbitrary order. Secondly, unlike previous studies, this paper attempts to quantify how much feedback exists from one series to the other using the recently developed generalized forecast error variance decomposition technique proposed by Pesaran and Shin (1998) which is invariant to the ordering of the variables (see Payne, 2002).

The rest of the paper is structured as follows. In Section 2 we give a brief account of the role of nuclear energy followed in Section 3 by a short summary of the empirical literature. In Section 4 we present a short description of the methodology used, while the empirical evidence is discussed in Section 5. The summary and the concluding remarks are presented in Section 6.

Section snippets

The role of nuclear energy

Nuclear energy is one of the major sources of energy for many countries (see Fiore, 2006, Toth and Rogner, 2006). In the 1970s almost 25% of global electricity was generated from oil with nuclear energy accounting for only 3%. By 2002 while the global electricity supply from oil declined to 7.2%, nuclear energy expanded to 16.6% where it absorbed 75% of the decline in oil's share (see Toth and Rogner, 2006). As Fig. 1 shows, electricity production from nuclear sources as a share of total

Brief literature review

There is now a vast literature that deals with the relationship between energy consumption and economic growth (Chontanawat et al., 2008, Payne, 2009a, Payne, 2009b, Lee et al., 2008, Payne, 2010, Ozturk, 2010). Yet, there seems to be no consensus regarding the direction of causality between energy consumption and economic growth. There is ample evidence to support all the four competing hypotheses. For some countries there is a bi-directional causality while for others there is no causality at

Methodology

Despite the fact that nuclear energy is considered to be an important source of energy for many countries, there are only few studies that have employed modern advances in times series econometrics of cointegration and causality to test the causal relationship between nuclear energy consumption and economic growth (see, Apergis and Payne, 2010, Heo et al., in press, Payne and Taylor, in press, Yoo and Jung, 2005, Yoo and Ku, 2009; Wolde-Rufael, 2010, Wolde-Rufael, forthcoming). Yoo and Ku (2009)

Empirical evidence

Before conducting any causality testing it is important to determine the order of integration of the series (dmax) and the optimal lag length k, in order to avoid spurious causality or spurious absence of causality (Clarke and Mirza, 2006). As there are many controversies surrounding the unit root testing (see Madalla and Kim, 1998), our strategy is to compare results obtained from several of these tests and examine whether the preponderance of the evidence makes a convincing case for

Concluding remarks

The aim of this paper was to test the causal relationship between nuclear energy consumption and real GDP for nine developed countries for the period 1971-2005 within a vector autoregressive (VAR) framework by including capital and labour as additional variables to the nuclear energy-economic growth nexus. To do so, we applied two methodologies. First, we used a modified version of the Granger causality test, which is valid regardless of whether a series is I(0), I(1) or I(2), non-cointegrated

Acknowledgement

We are grateful to the anonymous referee of this Journal for her/his constructive comments. We are also grateful to Professor James E Payne for sending us copies of his forthcoming papers. We are also grateful for the Editor of the Journal, Richard SJ Tol for his encouragement. The usual caveats apply.

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