What drives the change in UK household energy expenditure and associated CO2 emissions? Implication and forecast to 2020

Given the amount of direct and indirect CO2 emissions attributable to UK households, policy makers need a good understanding of the structure of household energy expenditure and the impact of both economic and non-economic factors when considering policies to reduce future emissions. To help achieve this, the structural time series model is used here to estimate UK ‘transport’ and ‘housing’ energy expenditure equations for 1964–2009. This allows for the estimation of a stochastic trend to measure the underlying energy expenditure trend and hence capture the non-trivial impact of ‘non-economic factors’ on household ‘transport’ and ‘housing’ energy expenditure; as well as the impact of the traditional ‘economic factors’ of income and price. The estimated equations are used to show that given current expectations, CO2 attributable to ‘transport’ and ‘housing’ expenditures will not fall by 29% (or 40%) in 2020 compared to 1990, and is therefore not consistent with the latest UK total CO2 reduction target. Hence, the message for policy makers is that in addition to economic incentives such as taxes, which might be needed to help restrain future energy expenditure, other policies that attempt to influence lifestyles and behaviours also need to be considered.

► Inelastic ‘transport’ and ‘housing’ price elasticities in short run and long run.
► Stochastic Underlying Energy Expenditure Trend (UEET).
► Relative importance of Exogenous Non-Economic Factors (Ex-Nef).
► Inconsistency of projected CO2 for UK ‘transport’ and ‘housing’ with 2020 target.