Energy consumption and income in Chinese provinces: Heterogeneous panel causality analysis

Recently, energy production in China fell behind energy consumption. This poses important challenges for the rapidly growing Chinese economy. As a consequence, the causal relationship between energy consumption and GDP is an important empirical issue. This paper examines Granger causality between energy consumption and GDP in China using province-level data. The current paper extends the Granger causality analysis employed in previous studies by taking into account panel heterogeneity. Specifically, four different causal relationships are examined: homogeneous non-causality (HNC), homogeneous causality (HC), heterogeneous non-causality (HENC), and heterogeneous causality (HEC). HC and HNC hypotheses are rejected for causality in either direction, from GDP to energy or from energy to GDP, which implies that the panel made up of Chinese provinces is not homogeneous. Then, heterogeneous causality tests (HEC ad HENC) are conducted for each province. For the causality running from GDP to energy, 19 provinces exhibit HEC and 11 provinces exhibit HENC. For the causality running from energy to GDP, 14 provinces exhibit HEC and 16 provinces exhibit HENC. The results suggest that the Chinese government should incorporate a regional perspective while formulating and implementing energy policies.