Energy 34 (2009) 1846–1854

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Energy
journal homepage: www.elsevier.com/locate/energy

Exploring the relationship between urbanization and energy consumption

in China using ARDL (autoregressive distributed lag) and FDM
(factor decomposition model)
Yaobin Liu*
Research Center of the Central China Economic Development, Nanchang University, Nanchang 330047, China

a r t i c l e i n f o a b s t r a c t

Article history: The paper develops a function of energy consumption, population growth, economic growth and
Received 24 January 2009 urbanization process, and provides fresh empirical evidences for urbanization and energy consumption
Received in revised form for China over the period 1978–2008 through the use of ARDL testing approach and factor decomposition
17 July 2009
model. The results of the bounds test show that there is a stable long run relationship amongst total
Accepted 24 July 2009
energy consumption, population, GDP (Gross domestic product) and urbanization level when total
Available online 15 August 2009
energy consumption is the dependent variable in China. The results of the causality test with ECM (error
correction model) specification, the short run and long run dynamics of the interested variables are
Keywords:
Energy consumption tested, indicating that there exists only a unidirectional Granger causality running from urbanization to
Urbanization total energy consumption both in the long run and in the short run. At present, the contribution share
ARDL testing approach which urbanization drags the energy consumption is smaller than that in the past, and the intensity
Granger causality holds a downward trend. Therefore, together with enhancing energy efficiency, accelerating the
Factor decomposition model urbanization process that can cut reliance on resource and energy dependent industries is a fundamental
strategy to solve the sustainable development dilemma between energy consumption and urbanization.
Ó 2009 Elsevier Ltd. All rights reserved.

1. Introduction agricultural population of over one million, had increased from 31 to

China has experienced fast-paced economic growth and has
been in a stage of rapidly urbanizing development since the
country’s reforming and opening up in the late 1970s. It attracted
global attention and was called a ‘‘growth miracle’’ [1]. The coun-
try’s average annual GDP growth rate for the period between 1979
and 2008 was approximately 10%. As a result, massive numbers of
people have been migrating to cities and towns across China. From
1978 to 2008, the number of cities increased from 193 to 661,
simultaneously, the number of towns with administrative systems
increased from 2,173 to 19,369, when the total urban population
jumped from 170 million to 606 million during the period. This
migration creates increasing pressure for urban development and
urban renewal in urban areas.
Fig. 1 shows the urbanization rate in China went up from 17.92% in
1978 to 45.68% in 2008. Rapid urbanization occurred at the beginning
of the 1990s.The number of cities at prefecture level had increased
from 188 to 286 between 1990 and 2008, and major cities with a non-
* Tel.: þ86 791 3163385; fax: þ86 791 8304401.
E-mail address: liuyaobin2003@163.com
45. The average annual increase in the urbanization rate between
1990 and 2008 was 1.07%. The rate rose from 36.22% in 2000 to 45.68%
in 2008, roughly an increase of 1.18% annually. It is predicted that the
urbanization rate will continue increasing by 1% in each of the next
seven years, reaching 55% by 2015 [2].
Urbanization is one of the key issues in China’s economic
development. Rapid urbanization is often the cause of enormous
pressure on rural and natural environments [3]. Urbanizing pop-
ulation growth, industrialization particularly contributed to the oil
industry, vehicles utilization and other anthropogenic activities
have increased the amount of energy consumption such as coal,
natural gas, crude oil, petroleum oil and electricity. Along with
rapid industrialization, the industrial sector would have a greater
share of energy consumption. The aggregate energy consumption
of China went up from 57.14 million tons sce (standard coal
equivalent) in 1978 to 285.42 million tons sce in 2008.
However, from the perspective of energy economics, the
growing energy consumption in China poses an academic puzzle as
well as a practical challenge [4]. Aggregate energy demand of China
has increased at an average annual rate of 5.6% annually from 1980
to 2008 and showed almost no increase from 1996 to 2000. With
urbanization rate growing in the 1.44%, one might anticipate that

0360-5442/$ – see front matter Ó 2009 Elsevier Ltd. All rights reserved.
doi:10.1016/j.energy.2009.07.029
 Y. Liu / Energy 34 (2009) 1846–1854
Fig. 1. The change of urbanization rate and total energy consumption in China (1978–
2008).
China’s energy demand would rise more rapidly than that it has.
Concerning the trend of energy consumption, many authors have
explained this phenomenon and a number of explanations have
been criticized [5,6]. In our opinion, the phenomenon should be
judged carefully.
In addition to all these, considering the dynamic urbanization
process of China, there is an urgent need for investigations that
study the relationship between urbanization and energy
consumption for guiding the long term energy policies to be
developed by China. On the other hand, in order to determine the
changes in the direction of the relationship between urbanization
and energy consumption that occurs in the process, current studies
that comprise of timely data are necessary.
There are some studies that deal with the relationship between
urbanization and energy consumption for China. Zhang and Zhao
[7] examined the effects of national resource allocation on China’s
urbanization and concluded that the orientation of national
resource inputs had seriously distorted the association between
industrialization and urbanization. Wei et al. [8] used a framework
based on the neo-classical one-sector aggregate production tech-
nology to analyze the relationships among them. The results
showed, on the one hand, the process of urbanization had led to the
promotion of economic growth and the improvement of people’s
living standards, thereby increasing the amount of energy
consumption; on the other hand, due to the urbanization process,
all kinds of resources had been utilized so adequately that it leaded
to a downward trend for energy consumption. Shen et al. [9] con-
structed a model depicting the trend of China’s urbanization and
explored the relationships both between urbanization and the
supply and demand of major energy. The conclusion was that China
would inevitably face a long shortage of resources if future
urbanization was faster than that predicted. Lin et al. [10] analyzed
the effect of population, urbanization level, GDP per capita,
industrialization level and energy intensity on the country’s envi-
ronmental impact using the STIRPAT model with data for
1978–2006. The analysis showed that population had the largest
potential effect on energy consumption, followed by urbanization
level, industrialization level, GDP per capita.
Thus, it can be said that different results from the studies that
deal with urbanization and energy consumption in China could be
due to the transformations experienced in urbanization process of
China during the periods studied. The paper provides a good
rationale to revisit the function of energy consumption, population
growth, economic growth and urbanization process, and provides
fresh empirical evidences for urbanization and energy consump-
tion in China over the period 1978–2008 through the use of the
autoregressive distributed lag (ARDL) testing approach and factor
decomposition model. The studied period is important in that it can
show that effects of the reforming and opening up on the causality
relationship and that it can yield beneficial data that can be used to
form the new energy policies of China.
1847
The present paper differs from the existing studies on the
energy consumption in China in three different ways. Firstly, the
results from the bounds cointegration approach are considered to
be more robust than that of multivariate cointegration in the case of
small samples. Secondly, the previous studies on the relationship
between urbanization and energy consumption relating to China
data investigate causality analysis in terms of bivariate relationship
whilst this study provides a multivariate causality framework.
Finally, this study attempts first time to decompose the factors
running energy consumption for China.
2. Literature review
There is an extensive literature examining the relationship
between energy demand and urbanization in the context of
developing and developed countries using the single and multi-
variate cointegration techniques of the 1980s and 1990s. Dahl and
Erdogan [11] briefly discussed the level of urbanization and
industrialization in explaining energy (oil) demand in developing
countries. Burney [12] in a single year cross-section (by country)
study of total energy (electricity) consumption had found that
urbanization effects vary by country after controlling for per capita
income and the share of industry in GDP. Lenzen et al. [13]
compared the effects among the countries including Australia,
Brazil, Denmark, India and Japan, and found the impacts of
urbanization on energy consumption were dissimilar across the
countries in a period.
Although lots of studies show that higher urbanization rate
might lead to higher energy use [14–18], a strongly negative
correlation between automotive fuel use and urbanity exists in
many cities, as documented in the well known studies by Newman
and Kenworthy [19], Kenworthy and Laube [20] and Ewing and
Rong [21]. Lariviere and Lafrance [22] found in Canada that more
urbanized areas had lower per capita energy consumption. In
particular, Pachauri and Jiang [23] compared the household energy
transitions between India and China through the analysis of both
aggregate statistics and nationally representative household
surveys, and found total energy consumption in rural households
exceeded that in urban households, because of a continued
dependence on inefficient solid fuels, which contributed to over
85% of rural household energy needs in both countries.
Some studies of the determinants of energy demand used
urbanization as an explanatory variable has been used once before
in the energy-GDP Granger causality literature, and the similar
topics in the time series approach have been widely discussed. The
second set of competing hypotheses concerns the relationship
between energy consumption and urbanization in a period. One
hypothesis is that urbanization Granger causes energy consump-
tion. Holtedahl and Joutz [24] gave two possible reasons why
higher urbanization might lead to higher energy use. Firstly,
urbanization implies greater access to electricity, since households
can be more readily connected to the grid. Secondly, households
who already had access to electricity in rural areas are likely to
increase their consumption in urban areas because of increased use
of existing appliances and purchase of new ones. Mishra et al. [25]
tested for Granger causality and provides long run structural esti-
mates for the relationship between energy consumption, GDP and
urbanization for a panel of Pacific Island countries, revealed that
there was short run panel Granger causality running from urbani-
zation to energy consumption. Meanwhile, there was long run
Granger causality running from electricity consumption and
urbanization to GDP and from GDP and urbanization to electricity
consumption. Another competing hypothesis is that energy
consumption Granger causes urbanization. One avenue through
which increased energy consumption could generate higher rates
1848 Y. Liu / Energy 34 (2009) 1846–1854

of urbanization is indirectly through higher energy consumption
generating higher GDP. Halicioglu [26] is the only study by using
ARDL testing approach, of which we are aware, that tests for
Granger causality between energy consumption, energy prices,
GDP and urbanization in a single country study for Turkey over the
period 1968–2005. The main findings from that study were that in
the long run Granger causality runs from GDP, prices and urbani-
zation to energy consumption, but in the short run the Granger
causality tests were inconclusive.
The results and implications of these studies clearly depend on
the underlying variables, the econometric methods, data frequency,
and the development stage of a country. So far, the empirical
findings on the causal relationship between urbanization and
energy consumption have been mixed, and there has been
a proliferation of such studies using different techniques, time
periods and different sample of countries as seen in Table 1.
3. The model and methodology
3.1. The general model
Generally, there are three major parameters that could signifi-
cantly influence energy consumption namely population growth,
high urbanization and economic growth [27]. As a rule of thumb,
economic growth is closely related to growth in energy consump-
tion because the more energy is used, the higher the economic
growth. However, it is possible to decouple energy consumption
and economic growth to some extent. More efficient use of energy
may entail economic growth and reduction in energy use.
Population as an important factor, rapid population growth
aroused the coal-fired industrial revolution and intensified large-
scale oil and gas discoveries. Fossil fuel energy, by enabling modern
agriculture, transport and manufacturing, has also enabled rapid
population growth, which in turn, with growing per capita
consumption, increased demand for energy. With this growing
dependency on fossil fuels by constantly increasing numbers of
people, efforts to substitute green energy sources for fossil fuels
have been consistently undermined. Rising per capita consumption
by rising numbers of consumers has propelled demand for all forms
of primary energy, including fossil fuels, and has been exacerbated
by rapid globalization and urbanization as people have migrated
from less developed regions to more developed regions with high-
energy consumption lifestyles [28].
Urbanization is a major characteristic of economic development,
and involves structural changes throughout the economy that has
important implications for energy use [14]. Urbanization concen-
trates populations and economic activities. It involves the transfer
of work force from agriculture to industry and services, and within
industry, from low-energy intensity processing of primary products
to more energy intensive metals and chemical products. Changes in
energy use resulting from the introduction of new production
activities and relative decline of old ones properly are assigned to
urbanization. However, the modernization of production tech-
nology brings forth other changes which have implications for
energy economizing. One explanation is that high density cities use
less gasoline than low density cities because the distances travelled
are smaller and inhabitants are more likely to use public transport.
A second explanation is that the electricity need for street lighting
seems to be largely invariant to city density so larger cities reduce
electricity consumption per capita [22]. Thus, there is considerable
two-way causation between urbanization and energy consump-
tion, which notes that urbanization might increase or decrease
energy use. Therefore, the discussion of the relationship between
urbanization and energy consumption should also be tightened and
given more focus.
Based on the above statement, a general model for energy
demand for this empirical study is set as follows [24–26]:
TEt ¼ f ðPOPt ; GDPt ; ULt Þ (1)
where the dependent variable TE is total energy consumption; POP
is total population; GDP is real GDP; UL is urbanization level. The
subscript t denotes the time period. Taking the differential of Eq. (1)
and dividing through by TEt we have:
   
TEt ¼ b1 POPt þ b2 GDPt þ b3ULt (2)
where a dot on the top of a variable means that the variable is now
in a growth rate form. The constant parametersb1 , b2 and b3 are the
elasticities of energy consumption with respect to population, GDP
and urbanization level, respectively. The relationship between
energy consumption and population, GDP and urbanization

Table 1
Overview of selected studies.

Authors Estimation method Period Countries Results

Short run Long run

Jone (1989)
Burney (1995)
Lariviere and Lafrance (1999)
Ewing and Rong (2008)
Parikh and Shukla (1995)
Imai (1997)
Holtedahl and Joutz (2004)
Lenzen et al. (2006)
Halicioglu (2007)
Mishra et al. (2009)
Multivariate regression model 1980 59 developing countries Urbanization / Energy (þ) –
Random coefficient (RC) 1990 93 developing and developed Urbanization / Energy (þ)
estimation technique countries
Multiple first-order linear 1991 Canada Urbanization / Energy () –
model
Ordinary least squares 1940–2000 the United States Urbanization / Energy () –
regression analysis
A double logarithmic regression 1965–1987 78 developed and developing Urbanization / Energy (þ) –
model countries
Regression model 1980–1993 Thailand, China, India, Iran, Urbanization / Energy (þ) –
Japan, Turkey, USA, Germany
Cointegration testing, Error 1955–1995 Taiwan Urbanization / Energy (þ) Urbanization / Energy (þ)
correction model
Multivariate regression model 1993–1999 Australia, Brazil, Denmark, Urbanization / Energy () –
India, Japan
Autoregressive distributed lag, 1968–2005 Turkey Neutrality Urbanization 4 Energy (þ)
Error correction model
Panel cointegration and Panel 1980–2005 Fiji, French Polynesia, Kiribati, Urbanization / Energy () Urbanization 4 Energy (þ)
Granger causality New Caledonia, Papua New
Guinea, Samoa, Solomon
Islands, Tonga and Vanuatu
 Y. Liu / Energy 34 (2009) 1846–1854 1849

described in Eq. (1) suggests that their long run movements may be will be misleading. The Granger causality model used in the current
related. Furthermore, if we allow for short run dynamics in factor- study is based on the following model [36,37].
relative behavior, the analysis above would also suggest that past
n
X n
X n
X
changes in population, GDP and urbanization could contain useful
DTEt ¼ a0 þ a1i DTEti þ a2i DPOPti þ a3i DGDPti
information for predicting the future changes of energy
i¼1 i¼0 i¼0
consumption. These implications can be easily examined using n
X
tests for multivariate cointegration and Granger causality [29]. þ a4i DULti þ l1 ECMt1 þ e1t ð5Þ
i¼0
3.2. Cointegration and Granger causality approach
n
X n
X n
X
We employ the autoregressive distributed lag (ARDL) approach DULt ¼ a0 þ a1i DULti þ a2i DTEti þ a3i DPOPti
of Pesaran and Shin [30] and Pesaran et al. [31] to test for existence i¼1 i¼0 i¼0
n
X
of a relationship between the energy data, urbanization, and pop-
þ a4i DGDPti þ l2 ECTt1 þ e2t ð6Þ
ulation in levels. As noted, the ARDL cointegration approach is
i¼0
suitable even if the sample size is small while other cointegration
techniques are sensitive to the size of the sample [32]. This test can where ECMt  1 is the lagged error correction term obtained from
identify the long run relationship between urbanization process the long run equilibrium relationship, and l1 and l2 are the speeds
and energy consumption, and it involves in estimating the of adjustment parameter. Although the existence of a long run
following unrestricted error correction model (UECM) [33]: relationship between the variables suggests that there must be
Granger causality in at least one direction, it does not indicate the
n
X n
X n
X direction of temporal causality between the variables. The direction
DTEt ¼ a0 þ a1i DTEti þ a2i DPOPti þ a3i DGDPti
of the causality in this case can only be determined by the F-
i¼1 i¼0 i¼0
n
statistic and the lagged error correction term. While the t-statistic
X
þ a4i DULti þ s1 TEt1 þ s2 POPt1 þ s3 GDPt1 on the coefficient of the lagged error correction term represents the
i¼0 long run causal relationship, the F-statistic on the explanatory
variables represents the short run causal effect [38]. It should,
þ s4 ULt1 þ m1t (3)
however, be noted that even though the error correction term has
been incorporated in all equations (5)–(6), only equations where
n
X n
X n
X the null hypothesis of no cointegration is rejected will be estimated
DULt ¼ a0 þ a1i DULti þ a2i DTEti þ a3i DPOPti
i¼1 i¼0 i¼0
with an error correction term [39].
n
X
þ a4i DGDPti þ 61 ULt1 þ 62 TEt1 þ 63 POPt1 3.3. Factor decomposition model
i¼0
þ 64 GDPt1 þ m2t (4) The objective of the paper is to try to explain the changes in total
energy consumption (direct and indirect) through its own key
where the bounds testing procedure is based on the joint F-statistic
elements, connected both to urbanization characteristics and to
(or Wald c2 statistic) for cointegration analysis, the asymptotic
efficiency in consumption. In the following pages, based on the
distribution of the F-statistics is non-standard under the null
structural decomposition analysis (SDA) an alternative factor
hypothesis of no cointegration between examined variables. The
decomposition model (FDM) is proposed for the comparative study
null hypothesis of no cointegration among the variables in Eq. (3) is
of the energy consumption in China. FDM has been widely applied
ðH0 : s1 ¼ s2 ¼ s3 ¼ s4 ¼ 0Þ against the alternative hypothesis
during the last three decades [36]; the first formal derivation is
ðH1 : s1 ss2 ss3 ss4 s0Þ. In Eq. (4), the null hypothesis of no
attributed to Leontief and Ford [40]. FDM is used to explain the
cointegration is ðH0 : 61 ¼ 62 ¼ 63 ¼ 64 ¼ 0Þ against the alterna-
changes that occur in any variables over time or space. This tech-
tive hypothesis ðH1 : 61 s62 s63 s64 s0Þ. Pesaran et al. [31] and
nique has frequently been utilized to tackle topics related to the
Narayan [34] individually report two sets of critical values for
energy. Although the habitual practice is to use the methodology of
a given significance level. One set of critical values assumes that all
FDM to explain temporary changes in energy consumption (or, in
variables included in the ARDL model are I(0), while the other is
general, in any factor), its own logic would equally allow us to
calculated on the assumption that the variables are I(1). If the
analyze distinct patterns of energy consumption or energy inten-
computed test statistic exceeds the upper critical bounds value,
sity that might have their origins in differences in one or another of
then the H0 hypothesis is rejected. If the F-statistic falls into the
these components [41].
bounds then the cointegration test becomes inconclusive. If the F-
Let total energy consumption, total output and total energy
statistic is lower than the lower bounds value, then the null
consumption with unit GDP in period t be Qt, qt and pt respectively.
hypothesis of no cointegration cannot be rejected. Two sets of
Therefore, in period t the total energy used by the economy can be
critical values (CVs) are reported in Narayan [34] for sample sizes
written as follows:
ranging from 30 observations to 80 observations. Given the rela-
tively small sample size in the present study (31 observations), we Qt ¼ pt qt (7)
extract appropriate CVs from Narayan [34].
If we do not find any evidence for cointegration among the Then the changes between two points in time, i.e. DQt ¼ Qt  Qt1 ,
variables then the specification of the Granger causality test will be Dp ¼ pt  pt1 and Dq ¼ qt  qt1 can be decomposed as follows:
a vector autoregression (VAR) in first difference form. However, if
we find evidence for cointegration then we need to augment the DQt ¼ Qt  Qt1 ¼ pt qt  pt1 qt1
Granger-type causality test model with a one period lagged error ¼ ðpt qt  pt1 qt Þ þ ðpt1 qt  pt1 qt1 Þ (8)
correction term. This is an important step because Engel and where DQt stands for the change of total energy consumption,
Granger [35] caution that if the series are integrated of order one, in which can be positive or negative; Qt and Qt1 are respectively the
the presence of cointegration VAR estimation in first differences energy consumption in t time and in t  1 time; pt ,pt1 individually
1850 Y. Liu / Energy 34 (2009) 1846–1854
stands for the total energy consumption with unit GDP in t time and
in t  1 time; qt and qt1 are respectively the real GDP in t time and
in t  1 time. Given Eq. (8), the additive form decomposes the
difference of total energy consumption between time t and t  1
into two part of determinant effects, i.e. one part ðpt qt  pt1 qt Þ,
induced by technological progress; and the other part
ðpt1 qt  pt1 qt1 Þs, caused by economic growth.
Most of the previous studies have proved that other factors may
also lead to energy consumption with urbanization process [42,43].
Although various factors such as industrial structure, industriali-
zation and urbanization, and inhabitant consumption structure and
marketization level, have been used to explore the inherently
causes resulting in changes of energy consumption, unfortunately,
it is still difficult to reveal the energy structural conversion using
only specific parameters. To investigate the significant impact of
urbanization on energy consumption, the variables of urbanization
level is introduced into Eq. (8), and we can have Eq. (9):
Qt ¼ pt qt ut
where u stands for urbanization level; Qt, pt, qt respectively denote
the same meaning as in Eq. (8). Thus, the decomposition of total
energy consumption is in the following factors:
DQt ¼ Qt  Qt1 ¼ pt qt ut  pt1 qt1 ut1
¼ ðpt qt ut  pt1 qt ut Þ þ ðpt1 qt ut  pt1 qt1 ut Þ
þ ðpt1 qt1 ut  pt1 qt1 ut1 Þ
where ðpt qt ut  pt1 qt ut Þ stands for the alterable total energy
consumption caused by technical progress; ðpt1 qt ut  pt1 qt1 ut Þ
is the alterable total energy consumption caused by economic
growth; ðpt1 qt1 ut  pt1 qt1 ut1 Þ is the alterable total energy
consumption caused by urbanization process. Hence, the changes
of energy consumption may result from the three parts, i.e. tech-
nical progress, economic development and urbanization process.
Accordingly, the contribution share of technological progress (WT),
economic growth (WG) and urbanization process (WU) can be
expressed as ðpt qt ut  pt1 qt ut Þ=ðpt qt ut  pt1 qt1 ut1 Þ, ðpt1 qt ut 
pt1 qt1 ut Þ=ðpt qt ut  pt1 qt1 ut1 Þ and ððpt1 qt1 ut  pt1 qt1
ut1 Þ=ðpt qt ut  pt1 qt1 ut1 ÞÞðt ¼ 1; 2; .; nÞ, respectively.
Given Eq. (10), we can figure out the value of WT, WG and WU in
the periods, indicating the driving forces on the changes of energy
consumption come from technological progress, economic growth
and urbanization process. Accordingly, the share can demonstrate
that the corresponding proportion of the above three factors in the
changeable total energy consumption during the years. When
the share is positive, it suggests that the influencing force from the
factor share the consistent direction with the changing trend of
total energy consumption. If it is negative, then the factor impacts
the total energy consumption in an opposite direction.
4. Empirical test
4.1. Variables and data discussion
We use aggregate energy consumption (104 tons sce), pop-
ulation, real GDP (1978 Yuan) and the percentage of urban pop-
ulation in total population to stand for total energy consumption,
total population, GDP and urbanization level and denote them as
TE, TP, TG and UL during1978–2008. We did not use the data before
1978, when China’s economic environment, in which China held
a closed economy and the impact of political events were relatively
large, was of greater distinction as to that after 1978. It is particu-
larly worth noting that there are two major percentages to measure
urbanization level as follows: one is the percentage of non-
agricultural population in total population; the other is the
percentage of urban population in total population. It did not create
a significant contradiction that different adoptions of indicators to
measure urbanization level are not unified at home and abroad, as
the following reasons indicate. Firstly, for most countries the
transferring trends of the industrial structure intrinsically linked
with that in the employment structure. Secondly, to a certain
degree, the changes in the percentage of the urban population and
non-agricultural employment are much consistent. It is well known
that the main performances of China’s urbanization dominantly
relate to the process of population congregating into urban areas
and rural areas turning into urban areas after the implementation
of the reform and opening up policy. Based on such consideration,
in the following analysis we measure China’s urbanization level
with the explicit indicator, i.e. the percentage of urban population
in total population.
The data of the study are collected and sourced from China
Statistical Yearbook [44]. Note that all variables are in natural
(9) logarithms so that their first differences approximate their growth
rates. We use L in front of each variable to indicate the natural
logarithm and D in front of each variable to indicate the first
difference of them.
4.2. Unit root test
(10) Although the bounds test for cointegration does not require that
all variables be integrated of order 1 [I(1)], it is important to
conduct the stationarity tests in order to ensure that the variables
are not integrated of order 2 [I(2)]. In fact, the F-test would be
spurious in the presence of I(2) because both the critical values of
the F-statistics computed by Pesaran et al. [31] and Narayan [34] are
based on the assumption that the variables are I(0) or I(1).
In order to have robust results, we conducted six different unit
root tests, namely augmented Dickey–Fuller (ADF), Elliot–Rothen-
berg–Stock Dickey–Fuller GLS detrended (DFGLS), Phillips–Perron
(PP), Kwiatkowski–Phillips–Schmidt–Shin (KPSS), Elliott–Rothen-
berg–Stock-Point-Optimal (ERS) and Ng–Perron Mza (NP). We do
not discuss the details of the unit root tests here to conserve space
(see Maddala and Kim [45] for excellent treatment of ADF, DFGLS,
PP and KPSS; Elliot et al. [46] and Ng and Perron [47] for ERS and
NP).
ADF and PP tests are often criticized due to their low power
properties [48], but we included them in our analysis because most
of the studies in the literature still use them. It is also well known
that the unit root tests are also sensitive to different lag structures.
Hence, we employed two lag selection information criteria often
employed in the literature, namely the Akaike Information Crite-
rion (AIC) and Schwarz Information Criterion (SIC). All unit root
tests (except the KPSS) employed in our study have a null
hypothesis that the series in question has a unit root against the
alternative of stationarity. The null of KPSS, on the other hand,
states that the variable is stationary. In the literature, KPSS is
sometimes used to verify the results of commonly used ADF and PP
tests although it also suffers from the same low power problems
[46].
The result of unit root tests is presented in Table 2. All null
hypotheses except KPSS are unit root; whereas, in KPSS null is
stationarity. The result reveals that all the six tests almost unani-
mously indicate that all the variables are non-stationary in their
level data (with or without trend). However, the stationarity
property is found in the first difference of the variables (with or
without trend) in 5% or stricter 1% critical level. Although some
conflicting results on the stationarity property in the first difference
are found for the series between KPSS, ERS and other tests, in
 Y. Liu / Energy 34 (2009) 1846–1854 1851

Table 2
Unit root test results of all variables in the study.

ADF DF-GLS PP KPSS ERS NP (Mza)

Panel A: level
Intercept LTE 0.64 (2, AIC, SIC) 0.05 (1, AIC, SIC) 0.15 0.72a 229.78 0.51 (1, SIC)
LTP 0.92 (0, AIC, SIC) 0.12 (0, AIC, SIC) 0.93 0.70a 66.31 0.48 (0, SIC)
LTG 0.89 (4, AIC, SIC) 0.19 (1, AIC, SIC) 0.05 0.73a 3998.79 18.72 (3, SIC)
LUL 0.29 (1, AIC, SIC) 0.47 (1, AIC, SIC) 0.79 0.73a 987.55 0.36 (1, SIC)
Intercept and trend LTE 2.95 (3, AIC, SIC) 2.96 (1, AIC, SIC)c 1.42 0.09a 3.93 286 4268 (3, SIC)a
LTP 2.09 (0, SIC)d 2.21 (0, AIC, SIC) 2.29 0.08a 11.26a 7.66 (0, SIC)
LTG 3.22 (1, AIC, SIC)b 3.29 (1, AIC, SIC) 2.01 0.10 a 4.11 22.15 (1, SIC)
LUL 3.03 (2, AIC, SIC) 3.00 (3, AIC, SIC)c 2.01 0.09 a 1.56 58.61 (2, SIC)a
Panel B: first difference
Intercept LTE 2.77 (1, AIC, SIC)c 2.71 (1, AIC, SIC)a 2.38b 0.20a 1.90a 13.96 (2, SIC)b
LTP 5.25 (1, SIC)a,d 5.34 (1, AIC, SIC)a 4.24a 0.07 1.59a 15.01 (2, SIC)a,d
LTG 3.55 (3, AIC, SIC)b 3.21 (3, AIC, SIC)a 2.61 0.08b 0.00a 47 414.1 (3, SIC)a
LUL 3.87 (3, AIC, SIC)a 3.05 (0, AIC, SIC)a 4.04a 0.11a 5.19a 8.16 (3, SIC)a
Intercept and trend LTE 2.93 (1, AIC, SIC)c 3.04 (3, AIC, SIC)c 2.49c 0.08 4.84a 16.73 (3, SIC)c
LTP 5.16 (0, SIC)a,d 5.36 (0, AIC, SIC)a 5.16a 0.06 5.86a 15.01 (0, SIC)d
LTG 3.59 (3, AIC, SIC)c 3.33 (3, AIC, SIC)b 2.55c 0.08 0.02a 10 196.1 (3, SIC)
LUL 3.79 (0, AIC, SIC)b 3.53 (0, AIC, SIC)b 3.97b 0.09 9.13a 10.11 (3, SIC)a

Insignificance by Schwarz Information Criterion (SIC) but significant by modified Akaike Information Criterion (AIC) at 1% critical level.
a
Significance at 1% critical level.
b
Significance at 5% critical level.
c
Significance at 10% critical level.
d
Insignificance by SIC, but significance by modified AIC at 5% critical level. Lag lengths are in parentheses, along with lag selection criteria as AIC and SIC.ADF, PP, and DFGLS
(intercept only) critical values are sourced from MacKinnon (1991). KPSS and ERS critical values are from Kwiatkowski et al. (1992) and Elliott–Rothenberg–Stock (1996), and
MZa critical values are from Ng and Perron (2001). DFGLS and ERS test with intercept and trend critical values are for 50 observations and may not be appropriate for our
sample size of 31.

general it seems to indicate that all variables are integrated of order
1, i.e. I(1).
4.3. Cointegration test
The next aim is to investigate whether or not total energy
consumption, population, GDP and urbanization level share
common long run relationship(s). To achieve this, as explained
earlier, we test for the presence of long run relationships in Eqs.
(3)–(4). Before we proceed to calculating the F-test statistic, an
important step is to establish the optimal lag length to be used in
the cointegration analysis. In search of finding the optimal length of
the variables, several lag selection criteria such as the adjusted
~ 2 Þ, Akaike Information Criterion (AIC), Schwarz Bayesian
R2 ðR
Criterion (SBC) and Hannan–Quinn Criterion (HQC) were utilized at
this stage. The long run results of Eqs. (3)–(4) based on several lag
criteria are reported in Panel A of Table 3 along with their
appropriate ARDL models. Using SBC, we find that 2 lags are the
optimal for this exercise. We find that there is a long run rela-
tionship amongst the variables when TE is the dependent variable
because its F-statistic, which turns out to be 6.79, is higher than the
upper bound critical value of 6.76 at the 1% level of significance.
This implies that the null hypothesis of no cointegration among the
variables in Eq. (3) cannot be accepted. The diagnostic test results of
Eq. (3) for short run estimations are also displayed in the respective
columns of each selection criterion in Panel B of Table 3. As can be
seen from Table 3, the long run results are quite similar with regard
to coefficient magnitudes and statistical significance. In fact the
results from R ~ 2 , AIC and HQC criteria are exactly the same.
However, when urbanization level (UL) in Eq. (4) are used as
dependent variables, the calculated F-statistics several lag selection
criteria are all lower than the lower bound critical values at the 10%
level, which implies the null hypothesis of no cointegration among
the variables in Eq. (4) is accepted for all F-statistics.

Table 3
Bounds test for cointegration.

Panel A: the long run results

Dependent variable Equation F-test statistic

~ 2 ARDL
R AIC ARDL SBC ARDL HQC ARDL
DLTE Eq. (3) 5.11** (2,1,1,0) 5.66** (2,0,1,0) 6.79*** (1,1,2,0) 6.18** (1,1,2,2)
DLUL Eq. (4) 2.91 (2,0,0,2) 2.91 (2,0,0,2) 2.87 (2,0,0,0) 2.91 (2,0,0,2)
Panel B: Diagnostic test statistics for Eq. (3)
c2sc ð1Þ ¼ 0:01 c2sc ð1Þ ¼ 0:08 c2sc ð1Þ ¼ 4:31 c2sc ð1Þ ¼ 1:33(
c2Fc ð1Þ ¼ 0:05 c2Fc ð1Þ ¼ 0:08 c2Fc ð1Þ ¼ 0:22 c2Fc ð1Þ ¼ 0:67
c2N ð2Þ ¼ 5:04 c2N ð2Þ ¼ 4:58 c2N ð1Þ ¼ 7:32 c2N ð1Þ ¼ 5:03
c2H ð1Þ ¼ 0:24 c2H ð1Þ ¼ 0:15 c2H ð1Þ ¼ 0:32 c2H ð1Þ ¼ 0:47
Panel C: asymptotic critical values
1% 5% 10%
I(0) I(1) I(0) I(1) I(0) I(1)
6.027 6.760 4.090 4.663 3.303 3.797

Notes for Panel A: (1) ***, ** and * denote statistical significance at the 1%, 5% and 10% levels, respectively. (2) The optimal lag in the parentheses
Notes for Panel B: (1)c2sc ,c2Fc ,c2N and c2H are Lagrange multiplier statistics for tests of residual correlation, functional form mis-specification, non-normal errors and hetero-
scedasticity, respectively. (2) These statistics are distributed as Chi-squared variates with degrees of freedom in the parentheses.
Notes for Panel C: asymptotic critical value bounds are obtained from Narayan (2005), p.1987.
1852 Y. Liu / Energy 34 (2009) 1846–1854

This implies that there is a unique cointegration vector in Eq. (3), changes in the explanatory variables before converging to its
which indicates that in China total energy consumption is heavily equilibrium level, the coefficient of 0.16 suggests that conver-
dependent on urbanization process, population growth as well as gence to equilibrium after a shock to total energy consumption in
economic growth. In particular, China’s urbanization poses China takes slightly over one and half years (see Table 4). Thus, the
a significant role in the total energy consumption. long run causality from population, GDP and urbanization to total
energy consumption is supported by the coefficient of the lagged
error correction term in Eq. (5), which indicates there is long run
4.4. Granger causality analysis
Granger causality running from urbanization to total energy
consumption.
The existence of a cointegrating relationship among total energy
consumption, population, GDP and urbanization level suggests that
5. Factors decomposition analysis
there must be Granger causality in at least one direction, but it does
not indicate the direction of temporal causality between the vari-
The above analysis indicates that there is only unidirectional
ables. We examine both short run and long run Granger causality in
Granger causality running from China’s urbanization to total energy
this section. The short run causal effects can be obtained by the F-
consumption in the short run, as well as the cointegration rela-
test of the lagged explanatory variables, while the t-statistics on the
tionships between them in the long run. However, the situation in
coefficient of the lagged error correction term in Eq. (4) indicates
the short term is distinguished from that in the balanced long term,
the significance of the long run causal effect. In search of finding the
namely, energy consumption varied greatly in different stages of
short run dynamics of the above models, their error correction
urbanization. In order to find out the contribution share of urban-
representations are estimated as auxiliary models. The estimation
ization on the energy consumption in different periods, we use
results with some selected diagnostics using SBC are displayed in
factors decomposition model (FDM) to decompose the factors
Table 4.
running energy consumption.
Beginning with the short run effects, both population and total
In accordance with Eq. (10), we obtain the values of WT, WG and
energy consumption are insignificant at the 5% level in Eq. (6) (see
WU on the China mainland during 1979–2008 (see Table 5). From
Table 4). This implies that both population growth and energy
Table 5, it can be seem that the factors from technological progress,
consumption do not Granger cause urbanization in the short run. In
economic growth and urbanization process in China are playing
Eq. (5), only total population is statistically insignificant, implying
vital roles in influence of the changes of total energy consumption,
total population do not Granger cause total energy consumption in
but the influent magnitudes are significantly different one by one.
the short run. However, in Eq. (5), GDP and urbanization are
Except for a few years, technological progress has always been
statistically significant at the 1% and 5% level, respectively. This
being a major factor for dragging China’s energy consumption, yet
suggests that there is only unidirectional Granger causality running
the other two factors leaded to the increasing of energy
from urbanization to total energy consumption in the short run, but
consumption. The rapid growth of China’s macroeconomy in the
not vice versa.
later twenty-nine years is the main driving force for the increase of
Turning to the long run results, the coefficient on the lagged
energy consumption.
error correction term is significant with the correct sign in Eq. (5) at
Compared to the contribution share of economic growth,
the 5% level, which confirms the results from the bounds test for
urbanization process has posed much smaller contribution share
cointegration. The coefficient on the lagged error correction term
on China’s energy demand. On one hand, China’s energy
measures the speed of adjustment to obtain equilibrium in the
consumption mainly comes from cities and towns, where the per
event of shock(s) to the system. The result suggests that changes in
capita energy consumption is far higher than that in rural areas, so
total energy consumption are a function of disequilibrium in the
the rapid aggregations of urban population would inevitably bring
cointegrating relationship. That the lagged error correction term is
about a corresponding energy consumption growth. Taking the
negative and significant implies that the series is non-explosive and
data in 2008 as an example, energy consumption for households in
that long run equilibrium is attainable. Because the ECTt  1
China’s urban areas (606.63 million people) amounted to 197.23
measures the speed at which the endogenous variable adjusts to
million tons sce, while the energy consumption in rural areas
(721.38 million people) amounted 88.20 million tons sce, namely,
Table 4 per capita energy consumption in the former is three times larger
Granger causality test results. than that of the latter. Energy consumption for households in urban
Panel A: long run causality results (t-test on ECM) areas indeed accounts for 69.13% in the total energy consumption
for households. In addition, the rapid urbanization process
Regressor Coefficient Standard error T-ratio [Prob]
continuously promotes the improvement of city’s infrastructure
DLTEt  1 0.52 0.16 3.28 (0.003)
and services system, especially the development of modern urban
DLPt 0.003 0.18 0.018 (0.99)
DLGt 0.51 0.22 2.32 (0.03) transportation system has been leading to the more demand for
DLULt 0.53 0.44 1.20 (0.24) energy consumption. During the last 18 years, rapid development
Constant 0.94 2.04 0.46 (0.65) of the city transportation system and modern communications
ECMt  1 0.16 0.08 1.99 (0.04) industry has particularly promoted the growth of energy demand.
~2
R 0.73
F-statistics 11.41
The energy consumption in national transport, storage and postal
DW-statistics 1.95 communications sector have increased from 45.41 million tons sce
RSS 0.01 in 1990 to 208.42 million tons sce in 2008, accounting for
Panel B: short run causality results (F-statistics) percentages of the total energy consumption from 4.64% to 7.83%.
DLTE DLTP DLTG DLUL
However, while the macroeconomic factor has been an increasing
DLTE – 1.20 4.08a 1.33b
DLUL 0.82 0.33 1.18b – effect on energy consumption, the influencing force of urbanization
is smaller and smaller with a decline from 0.69 in 1979 to 0.16 in
Notes for Panel A: the absolute values of t-ratios are in parentheses. RSS stands for
residual sum of squares.
2008, dues to the urbanization’s optimized effect on the improve-
a
Statistical significance at 1% level. ment of industrial structure, technological structure, productive
b
Statistical significance 5% level. ability and other aspects. In this way these structures could be more
 Y. Liu / Energy 34 (2009) 1846–1854 1853

Table 5
Decomposed results of total energy consumption (1979–2008).

Year 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990
WT 0.51 1.29 8.66 0.32 0.21 1.22 0.69 1.04 1.86 1.68 0.97 5.24
WG 0.20 1.85 8.10 0.81 0.95 1.77 1.42 1.66 2.55 2.47 1.71 5.95
WU 0.69 0.44 1.57 0.51 0.26 0.45 0.26 0.38 0.30 0.21 0.26 0.29
Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
WT 1.87 1.90 2.24 4.18 1.80 1.29 3.52 47.91 4.38 2.68 0.91 0.05
WG 2.59 2.63 3.01 4.94 2.59 1.84 3.29 32.68 3.76 2.71 1.39 0.68
WU 0.28 0.27 0.23 0.24 0.21 0.44 1.23 16.23 1.63 0.97 0.52 0.27
Year 2003 2004 2005 2006 2007 2008
WT 0.12 0.05 0.22 0.14 0.12 0.11
WG 0.69 0.79 1.04 0.82 0.91 0.89
WU 0.19 0.16 0.18 0.16 0.17 0.16

reasonable with various configurations further optimized, and all
kinds of resources could be more rationally used, accordingly, the
urbanization process has been placing a less reliance on the energy
consumption.
6. Conclusions and policy implications
The causal relationships between energy consumption and
urbanization process have been a well-studied topic in China. The
impact of industrialization and urbanization is also an important
factor to affect the change of total energy consumption in China,
apart from other factors such as macroeconomic, population,
income, industrial structure, inhabitant consumption structure,
the degree of opening to the outside world and marketization
level. In fact, rapid urbanization process could induce more energy
consumption. Facing the goal of emission reduction set by Kyoto
protocol to mitigate global warming, energy policies for China
have more or less been impacted by the protocol. Hence, the
impact of corresponding changes in energy policy and energy
consumption during urbanization process in China deserves more
careful studies. This study centered on the relationships between
the total energy consumption and urbanization process and
empirically investigated the contribution share of China’s urbani-
zation on the total energy consumption in time series.
Different from previous studies, this study develops a function
of energy consumption, population growth, economic growth and
urbanization level, and employs ARDL testing cointegration test in
addition to ECM to examine Granger causality both in the short
run and long run from urbanization to total energy consumption
and vice versa in China. Additionally, a factors decomposition
model is used for quantitative measurement the impact of
urbanization on energy consumption. The bounds cointegration
tests suggest the existence of a cointegrating vector driving the
series with a common stochastic trends in the data, in which
a long term equilibrium relationship exists among total energy
consumption, total population, GDP and urbanization level, and
the self-adjustment ability in the short term is significant. With
the ECMt  1 for the Granger causality test, results indicate that
there exists only a unidirectional Granger causality running from
urbanization to total energy consumption both in the long run and
the short run. Granger causality test suggests that China’s urban-
ization process is the Granger cause for the changing of energy
consumption, while China’s energy consumption growth is not the
direct causality to the enhancement of urbanization level in the
short run. Thus, taking steps to accelerate the urbanization process
and establishing a model with resource-economized can be
practical measures for relieving the pressure from China’s energy
consumption.
Due to the topical importance of the relationship between
energy consumption and urbanization and the lack of uniformity
in empirical findings, we are caution that urbanization process in
China needs to be extra careful in implementing relevant energy
policies, and the policies should be based on sound factors
decomposition analysis. In this regard, our study represents one
step closer to the truth by using factors decomposition model, but
further studies utilizing newer samples and newer methodologies
are clearly warranted. The energy consumption intensity reflects
the efficiency of energy use. The energy consumption intensity
always holds a downward trend because of the significant advance
in the efficiency of energy use. However, in a new stage of China’s
rapid economic growth and urbanization process, the economic
growth and urbanization process have great demand for energy,
which has been precisely proved by factor decomposition model.
Compared to the contribution share of the economic growth, the
urbanization process pulls much smaller contribution share on
China’s energy demand, and the latter also demonstrates
a downward trend year by year which shows that urbanization has
played a role in promoting China’s industrial structure, technical
structure and productive ability, therefore, the urbanization
process is placing less reliance on the energy consumption.
However, there is no doubt that the rapid urbanization from rural
populations will inevitably bring about a corresponding energy
consumption growth, which may result from two reasons: one is
that cities and towns as the main consuming body urgently need
more energy supply, and the other one is modern urban trans-
portation system associated with rapid urbanization in China leads
to more energy being consumed. But in the long term, the
urbanization process in China attributes to the advance of the
energy efficiency.
According to the above analysis, considering the higher
growth rate of energy consumption, the nexus between energy
consumption and urbanization process poses an important chal-
lenges to Chinese policy makers. In light of the close nexus
between energy consumption and urbanization, how can China
realize sustainable development and cut down total energy
consumption? Since the energy consumption mainly result from
rapid economic growth and urbanization process, reducing the
economic growth rate and enhancing the urbanization level seem
to be the direct way on handling the energy consumption
problem. However, due to the negative impact on energy
consumption from economic growth, direct measure to reduce
energy consumption is not viable in China. On the other hand, in
China pure economic growth itself may not be a solution to the
sustainable development. Hence, an optimized industrial struc-
ture owing to boosting urbanization is an important part of
building up China’s resource-conserving society. With the
improvement of urbanization quality in China, it is bound to lead
to further enhancement of energy efficiency, and the economic
and social developments will place a less reliance on the energy
consumption.
1854 Y. Liu / Energy 34 (2009) 1846–1854
Acknowledgements
This work is supported by National Social Science Foundation of
China (No: 07CJL031) and ‘‘The Research Fund for the Human
Science of Higher Education’’ sponsored by the Ministry of Educa-
tion of China (No: 06JA790049).
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