Environmental Losses and the Lessons that Can Be Learnt from Energy Demand Elasticities: The Resultant Policy Implications

Abstract

Environmental sustainability is deeply linked with household energy consumption decisions. Greater inclination towards cheap and pollution creating fuels can prove to be a major obstacle in having a clean environment. The governance decisions can make path towards cleaner and sustainable environment easier. Hence, this work has been executed to elucidate the impact of energy demand elasticities on the households living in rural as well as urban areas of Pakistan using a pool of four Pakistan Social and Living Standards Measurement Survey (PSLMs) data sets to estimate a Quadratic Almost Ideal Demand System (QUAIDS) and obtain the prices as well as expenditure elasticities. The first step probit estimates demonstrate the existence of fuel stacking in Pakistan. The results of estimated price elasticities show that electricity is least elastic with respect to own price for overall Pakistan as well as for rural-urban divide. Expenditure Elasticities for gas, firewood, kerosine oil and other fuels like coal and cow-dung etc. are higher in rural areas compared to urban ones. This might indicate a rising share of these more pollution creating goods in rural household budget. Inflation in prices of cleaner energy goods can be detrimental for environmental sustainability due to substitution with pollution creating energy goods. The results of this study are lucrative for effective policy formulations with respect to environment, taxation, and subsidies provision.