Does Climate Change Influence Energy Demand

Over the past several decades, a large research effort has focused on the effects of greenhouse gas (GHG) emissions – particularly CO2 emissions on climate change. A relatively small literature, however, examines the reverse pathway, the potential effects of climate change on energy demand. Climate change is expected to affect energy markets in various ways, both directly and indirectly. Directly, energy demand will be affected by extreme temperature changes, because higher temperatures imply less energy for heating and more demand for cooling, in addition to variations in the demand for energy as a production factor. This study employs a two-step estimation and model procedure. The first step estimates U.S. regional and state demand energy demand with time series data from 1970 to 2014 with Trans-log cost functions from the transportation, industry, residential and commercial in seemingly unrelated regressions. The cost share of these sectors are regressed over prices, short-run and long-run means and standard deviations of temperature and precipitation; and technology to capture trends over the years. In the second step, we compute the substitution price elasticities, and together with elasticities of the temperature and precipitation variables, we predict the trend of the future energy demand in these sectors by region. The results indicate a positive trend for future energy demand among all sectors in the U.S. nine climatic regions. As expected, technology has negative impacts on energy demand in industry (three) residential (four); and in transportation (three); out of the nine Regions.