Navigating the Path to Sustainable Energy Consumption: A Second-Generation Panel Cointegration Approach to Measuring Price and Income Elasticity of Energy Demand in Europe

Abstract

Achieving United Nations Sustainable Development Goals of affordable and clean energy and climate action requires a deep understanding of energy consumption patterns and their responsiveness to various macroeconomic variables. This study investigates the long-run price and income elasticities of electricity and natural gas demand across European Union member states, disaggregating consumption into household and non-household sectors. Employing second-generation panel cointegration techniques, including Common Correlated Effects Mean Group (CCEMG) estimators, we address cross-sectional dependence and unobserved common factors to provide robust elasticity estimates. Our findings reveal that energy product prices exhibit negative but rather inelastic effects on demand, with household sectors showing greater sensitivity than non-household sectors. Sectoral income, however, plays a more dominant role, significantly influencing long-term energy consumption trends across both the sectors. These results underscore the necessity of differentiated policy approaches, where price-based incentives enhance household energy efficiency, while income-driven strategies support sustainable industrial growth. The study contributes to the literature on energy demand modeling and provides policymakers with actionable insights for designing effective energy pricing and sustainability policies. Future research should explore the impact of technological advancements and regulatory interventions on energy consumption elasticity in the context of evolving energy markets.