Energy intensity determinants based on structure-oriented cointegration by embedding a knowledge box in a time series model: evidence from Iran

Abstract

Energy intensity reduction is an exigent issue for Iran, where energy consumption is so high. Therefore, finding effective policies to reduce energy intensity is important. With this in mind, the impact of financial development, government investment, oil revenues, and trade openness on energy intensity is assessed in this study. We combined Structural Vector Error Correction Model (SVECM) and Directed Acyclic Graphs (DAG) technique to examine the relationships between study variables. The results of DAG prove that financial development, government investment, oil revenues, and trade openness influence the intensity of energy. Besides, the significant and long-run relationships among variables allowed us to apply SVECM. Impulse response functions and variance decomposition analysis indicate that government investment, oil revenues, and trade openness are negatively associated with the intensity of energy. Also, financial development positively influences energy intensity. Meanwhile, the impact of government investment is greater than oil revenues, trade openness, and financial development impacts. So, Government investment is the most effective policy regarding optimizing the consumption of energy and reducing energy intensity.We also advise policymakers to use oil revenues to increase government investment, enhancing the level of trade openness, and tax to the private sector to improve the level of energy intensity.