N.M. Christodoulakis et al. r Energy Economics 22 2000 395]422 398
functions by sector of economic activity and type of energy, the whole model is used to forecast how these variables are likely to develop in the medium-term.
In a related macroeconomic study without including energy modelling, Christo- Ž
. doulakis and Kalyvitis 1998a analysed a number of scenarios for the growth
patterns of Greece for the period up to the year 2010. The same authors Ž
. Christodoulakis and Kalyvitis, 1997 analysed the macroeconomic aspects of CSF
II effects on energy demand in Greece, but without including the introduction of NG. The present paper extends this work, first, by explicitly including the penetra-
tion of NG, in conjunction with CSF effects in the energy system, second, by employing more powerful econometric modelling techniques to the key equations
of the energy model, third, by using an updated data set covering the period 1974]1994 and extending the time horizon to 2012 and, fourth, by computing
expected CO emissions in view of the energy demand forecasts.
2
In particular, the forecasting exercise takes place under alternative assumptions about the effects that CSF II is likely to have on the Greek economy. First, a
benchmark forecast presenting economic developments in the absence of CSF interventions and NG penetration in the energy system is examined. Next, a case is
examined based on the benchmark forecast but with the assumption that NG introduction satisfies additional electricity demand. Finally, two scenarios that take
into account the impact of total CSF actions without and with NG penetration, respectively, on energy consumption and CO emissions are examined.
2
In Section 2 of the paper, the structure of energy system and the estimation Ž
. equations are discussed and presented and are given analytically in Appendix A
together with the procedure for calculating the related CO emissions. In Section
2
3, the four scenarios for the derivation of forecasts of final energy demand and CO emissions in Greece until the year 2012 are described. In Section 4 we assess
2
the quantitative effects under these scenarios on energy consumption and CO
2
emissions, and, finally, in Section 5 the main conclusions are presented.
2. Modelling energy consumption in Greece
To capture the effects of energy on the productive side of the economy, we consider the demand for energy by each sector of the economy. The production
Ž . bloc consists of three aggregate sectors: a the tradable sector that includes
Ž . manufacturing and mining; b the non-tradable sector that includes transport and
Ž .
4
commercial activities; and c the aggregation of public and agricultural sectors. Ž
. Following the approach adopted by Christodoulakis and Kalyvitis 1997 , the
distinction is made in order to conform with the annual four-sector macroecono- Ž
. metric model for Greece described in Christodoulakis and Kalyvitis 1998a to
which the present demand system will be incorporated for forecasting and simula- tion analysis.
Ž As regards final energy demand by type of energy used Oil, Electricity and
. Coal the diversification is made through the three main sectors of economic
N.M. Christodoulakis et al. r Energy Economics 22 2000 395]422 399
activity for the period 1974]1994: the industrial sector, the transport sector and the housingrcommercial sector. Using this classification, the various types of energy
Ž . Ž
. are grouped in three main categories: i Oil liquid fuels including petrol
consumed by industry, gasoline, diesel and fuel oil consumed by the transport Ž .
sector and heating-oil used by the housing and commercial sectors; ii Electricity Ž .
consumed by industry, transport, housing and commercial sectors; and iii Coal Ž
. solid fuels that include all solid sources of energy consumed by industry.
Since data published for the commercial, housing and transport sectors include energy used aggregately by the non-tradable sector and the public and agricultural
sectors taken together, demand for energy in each of those categories is obtained proportionally to the output share of those sectors:
Ž
v
Energy demand by non-tradable sector s Total energy demand y Energy demand .
U
Ž Ž
by tradable sector Non-tradable sector output r Total output y Tradable sector
.. output
Ž
v
Energy demand by public and agricultural sectors s Total energy demand y Energy demand by tradable and non-tradable sectors
Ž .
Demand for solid fuel that amounts to approx. 5 of total energy consumption is not modelled behaviourally but serves as a residual between total energy
demanded by the three sectors and the demand for the two previously estimated types of energy. The residual equation is:
v
Demand for solid fuel s Energy demand in tradable, non-tradable, public and agricultural sectors y Demand for oil and electricity
Energy demanded by each production sector is a function of sectoral output and Ž .
the real price of energy in each sector where: i for the tradable sector, the real price of energy is the ratio of energy price in industry to tradable sector output
Ž . deflator; and ii for the non-tradable and public-agricultural sectors, the real price
of energy is defined as the ratio of an expenditure-weighted price index of energy in the transport, housing and commercial sectors relative to non-tradable sector
4
Annual energy data on quantities and prices are provided by the Ministry for Development for the period 1974]1994. Quantities of energy consumed by sector are divided in the following three
categories in accordance with the classification in the Annual Energy Balances, issued by the Ministry for Development: A. Industry: Consumption of the extractive industries, manufacturing and construc-
tion. B. Transportation: Consumption for transportation irrespective of transport means, excluding consumption for international sea transport and including energy consumption for all air-transport
activities. C. HousingrCommercial: Consumption of households, commercial establishments, services, agriculture, etc. Quantities by type of energy are divided in the following three categories in accordance
with the classification in the Annual Energy Balances, issued by the Ministry for Development: A. Solid
Ž .
Ž .
fuel : Brown coal lignite , brown coal briquettes, hard coal calorific value higher than 5700 kcalrkg
and coke-oven coke. B. Oil: Gasoline, aviation fuels, diesel, fuel oil, LPG, kerosene, naphtha, petroleum coke and refinery gas. C. Electricity: Production by the Greek Public Power Corporation and self-pro-
duction at the firm level.
N.M. Christodoulakis et al. r Energy Economics 22 2000 395]422 400
Table 1 Energy model: the structure of behavioural equations
Energy demand by sector Ž
. Tradable sector s f tradable sector output, real price of energy in the tradable sector
Ž .
Non-tradable sector s f non-tradable sector output, real price of energy in the non-tradable sector Ž
. Public-agricultural sector s f public-agriculture sector output
Energy demand by type Ž
. Oil s f total output, real price of oil
Ž .
Electricity s f total output, real price of electricity Energy prices
Ž .
Tradable sector s f price of oil, price of electricity, price of solid fuel Ž
. Non-tradable sector s f price of oil, price of electricity
Price linkages Ž
. Tradable sector deflator s f nominal unit labour cost, imports deflator, weighted energy price index
Ž .
Non-tradable sector deflator s f nominal unit labour cost, weighted energy price index Ž
. Wholesale price index s f nominal unit labour cost, imports deflator, weighted energy price index
output deflator.
5
Demand equations for the various types of energy are modelled as functions of the associated price indices relative to GDP deflator and using total
output as a measure of activity.
6
Own-price coefficients are expected to be negative while positive activity coefficients indicate a ‘luxury’ type of energy that rises with
output and negative ones characterise a ‘necessity’ type of energy. The structure of the behavioural equations of the energy model is given in Table 1.
7
Turning to the equations for sectoral demand of energy, one observes that the Ž
. long-run output elasticities reported in Table 2 are 0.76, 1.51 and 1.95 for the
tradable, non-tradable and public-agricultural sectors, respectively, while the corre- sponding short-run elasticities are 0.79, 1.27 and 0.64. As regards the price
elasticities, they are found to be y0.19 and y0.24 in the long-run for the tradable and non-tradable sectors, respectively, while in the short-run they are found to be
y
0.25 and y0.23, respectively. The demand for energy by the public-agricultural sector appears to be insensitive to changes in real prices, probably because of the
lower substitution possibilities with other production factors in these sectors of economic activity.
5
Ž .
This specification i.e. with real prices and sectoral output as independent variables could be derived by factor demand equations based on a production function with energy as an input. However,
given the complex non-linear relationships postulated by such a scheme, estimation via the error-correc- tion specification would be inappropriate, and thus, we opted for this } more flexible } functional
form.
6
Ž .
For a description of this approach see Boone et al. 1992 .
7
Ž Since all of the series at hand are found to be non-stationary see Christodoulakis and Kalyvitis,
. Ž
. 1998a all demand equations are obtained via the Engle and Granger 1987 two-stage error-correction
form. In each case, first, a long-run equation in levels and, second, a short-run equation in first differences } with the stationary residual of the long-run equation included as an independent variable
} are estimated.
N.M. Christodoulakis et al. r Energy Economics 22 2000 395]422 401
Table 2
a
Estimated elasticities of energy demand with respect to output and prices Energy demand
Output Price
Long-run Short-run
Long-run Short-run
Tradable sector 0.76
0.79 y
0.19 y
0.25 Non-tradable sector
1.51 1.27
y 0.24
y 0.23
Public-agricultural 1.95
0.64 ]
] sectors
Oil 1.00
0.78 y
0.22 y
0.16 Electricity
1.76 1.12
] y
0.14
a
Elasticities of sectoral energy demand are with respect to sectoral output and sectoral real prices while elasticities of type of energy demand are with respect to total output and total real prices.
The demand for oil has an output elasticity of 1.0 in the long-run, while the demand for electricity has a long-run output elasticity of 1.76. The short-run output
Ž .
elasticities are smaller 0.78 and 1.12, respectively . The own-price elasticities for Ž
. oil is rather small y0.22 and y0.16 in the long- and short-run, respectively while
the own-price elasticity for electricity is y0.14 in the short-run; the long-run elasticity is found statistically insignificant and is omitted from the long-run
equation. Finally, the demand for electricity adjusts slower to its long-run equilib-
Ž rium relationship the adjustment parameter is y0.23 while that of oil demand is
.
8
y 0.51 .
Energy prices are modelled with homogeneity of degree one imposed and accepted by the data. The domestic prices of energy components are modelled as
functions of the domestic unit labour cost and the price of imported oil, which is equal to the price of crude oil in USDrbarrel
9
multiplied by the DrachmarUSD exchange rate. To account for the effect of taxes on domestic oil prices, the latter
are adjusted by the average Value Added Tax rate.
10
The results show the serious dependence of domestic oil prices on the external component; the price of oil is found to depend by 40 on the foreign price of oil
Ž .
11
while the latter explains only a small fraction of the price of electricity 4 . The
aggregate price indices used for energy demand in the tradable and non-tradable
8
Ž .
The results are similar with findings by Donatos and Mergos 1989 who use data for the period 1963]1984 and estimate the demand for energy as a function of prices and income. The authors find
that ‘energy demand declines with an increase in unit prices and increases with income’ and that ‘energy demand is price inelastic while the demand for liquid fuels is income elastic’.
9
The oil price considered here was taken as the average crude price derived from spot crude oil prices for Dubai, UK Brent and Alaskan N. Slope reserves, which correspond to equal consumption of
medium light and heavy oil on a world-wide scale.
10
A dummy is included for the year 1986 in the price of oil equation when the international price of oil fell by 60, but the fall is not directly transmitted to domestic oil prices due to administrative
controls.
11
Note that the price of solid fuel is considered exogenous because solid fuel is determined residually and, therefore, its price does not affect directly the rest of the energy demand system.
N.M. Christodoulakis et al. r Energy Economics 22 2000 395]422 402
sectors are modelled as convex weighted averages of the corresponding prices of the three types.
Finally, we have to model the effects of energy prices on the price mechanism of the annual macroeconometric model. The basic price equations in the macro
model are modified so as to include an energy price composite index together with unit labour cost and the price of imports.
12
The composite price index is calculated as the sum of the products of the weights in final demand of each type of energy
and the corresponding price. These three prices drive the remaining prices in the model. The results suggest that the wholesale price index depends by 55 on
domestic unit labour cost, 18 on the price of imports, while the remaining 27 is due to the price of energy. The corresponding energy burden for the tradable and
non-tradable output deflators are only 13 and 16, respectively.
The system is interacting with a number of macroeconomic variables that are determined in the four-sector econometric model. The linkages operate mainly
through two channels: first, through sectoral output which affects the demand for energy in each sector and total output which affects the type of energy demand
and, second, through the price mechanism which is affected by energy prices and, in turn, transmits the change in prices in the economy through sectoral deflators
Ž .
and the wholesale price index see also Christodoulakis and Kalyvitis, 1997 .
3. Four scenarios for future energy consumption and its environmental impact
