Hysteresis and Energy Demand: the Announcement Effects and the effects of the UK Climate Change Levy

TitleHysteresis and Energy Demand: the Announcement Effects and the effects of the UK Climate Change Levy
Publication TypeTyndall Working Paper
SeriesTyndall Centre Working Papers
Tyndall Consortium Institution

Cambridge

Secondary TitleTyndall Centre Working Paper 51
AuthorsAgnolucci, P., T. Barker, and P. Ekins
Year of Publication2004
Abstract

This paper presents an empirical analysis of the announcement effects of the United Kingdom's Climate Change Levy, which was announced in March 1999 and introduced in April 2001. The existence and nature of the effects are estimated by dummy variables within time-series regressions on quarterly and annual data 1973-2003 for UK energy demand by using sectors. The demands are explained by output and relative energy prices for the sector and outside temperatures in a cointegrating framework. A number of methodological issues and potential problems are discussed in some detail, including seasonality, temperature effects, the relationship between sectoral and total energy demand, demand rigidity (resulting in long lags for adjustment) and hysteresis (adjustments made when energy prices rise may not be reversed when they fall). >The estimations show that the announcement and following implementation of the CCL has caused a permanent reduction of energy demand in the Commercial and Other Final Users Sector, due to the Announcement Effect, implying path dependency or hysteresis in their energy demand. Thus the announcement of the CCL did not just bring forward an adjustment to new relative prices arising from the CCL but it permanently reduced energy demand to a much greater extent that would be expected from the estimated price responses on their own. >Analyses not presented here show that the null hypothesis of the absence of an AE could not be rejected in the case of the Whole Economy and Industrial Sector. Of course, the lack of an AE in these sectors does not imply an absence of an environmental effect of the CCL. One would still expect a price effect when the tax was actually imposed, reducing energy consumption, due to the negative relation between the level of energy demand and energy price. >However, the presence of an AE says that some firms changed their behaviour before the levy was introduced in April 2001. In environmental terms, this is a positive result as it shows that a credible Government policy of pre-announcing new taxes can lead to early action by firms. This study has shown that this change is found to be permanent and not transitory. Finally, while the lack of an AE for total energy demand is likely to be due to the relatively small share of energy taxed by the CCL, in the case of the Industrial Sector one can wonder if the successful lobbying of the Confederation of British Industry against the levy prevented industrial firms from responding to the tax. It is worth noting that no major lobbying occurred in the case of the Commercial and Other Final Users Sector.

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