Energy Efficiency and the Role of Financial Development, Trade Openness and Technological Innovation: Exploring the Dynamic Linkages for Pakistan

The study explores the dynamic linkages among financial development, trade openness, technological innovation and energy efficiency in Pakistan utilizing cointegration tests, Directed Acyclic Graphs (DAG) and Structural Vector Autoregression (SVAR) model for the period 1980-2017. The results of Johansen cointegration show that variables ae cointegrated. The robustness of cointegration relationship is confirmed by applying Gregory-Hansen structural break cointegration. The empirical findings imply that financial development and technological innovation positively and significantly stimulate energy efficiency while trade openness and economic growth negatively and significantly impact on energy efficiency in long-run. The DAG results explain the evidence of causality from financial development, trade openness, technological innovation and economic growth to energy efficiency. The results of forecast error variance decomposition from SVAR model describe that technological innovation has greater impact on energy efficiency in short-term but its impact gradually decreases with the extension of forecast period. On contrary, the promotion effect of financial development and trade openness on energy efficiency increase gradually over time and become highest in long-run. This finding underlines the relevance of technological innovation and trade openness to policy makers in order to achieve energy efficiency in Pakistan.


1-Introduction
Energy is an essential input in production and its availability and utilization is indispensable for socio-economic uplift and technological advancement of a nation. Nowadays, world economies main focus is to achieve energy efficiency in national output due to the importance of energy in everyday life and finite nature of primary energy resources. Efficient use of energy at national level can reduce energy imports, thereby reducing pressure on foreign reserves as well as ensuring the availability of energy scarce resources for future generation. At firm level, energy efficiency is indispensable for reducing operating cost and enhance profitability. Society as a whole can benefits from the increased energy efficiency because it is a key policy option to mitigate the adverse impact of environment (Rajbhandari and Zhang, 2017). In this regard, several ecological policy options have been formulated that major focus is to increase energy efficiency via technological advancement. Technological innovation has the tendency to generate solutions of enormous energy use through the discovery of energy efficient techniques that may have the potential to reduce energy intensities at industrial and household level (Saudi et al. 2019).
Financial development stimulates and promotes the financial activities in a country such as banking activity, stock market activity and foreign capital and investment flows, which increase economic efficiency and expand the level of output (Sadorsky, 2010 and. Trade is an essential factor in the progress of nations. Trade enables developing economies to import modern technologies that are helpful in reducing energy consumption in production (Nasreen and Anwar, 2014). Trade is only possible with the sufficient supply of energy because it is the key input in production and transportation of goods and services demand energy to fuel vehicles. No doubt, energy is an indispensable factor in the expansion of exports or imports, thereby any policy aims to reduce energy consumption such as energy saving polices may adversely impact the flow of international trade and hence reduces the advantage of trade liberalization ).
The main objective of current research is to explore the dynamic interaction among energy efficiency, financial development, trade openness and technological innovation in Pakistan. Our study is relevant given that the findings of current literature investigating the association between energy usage and macroeconomic variables are in general mixed and do not reach any definite conclusion (e.g. Sadorsky In the present research, we explore the dynamic causation among energy efficiency, financial development, trade openness and technological innovation in Pakistan. (ii) We apply DAG to study the contemporaneous causal flows among energy efficiency and selected macroeconomic variables in a multivariate framework. (iii) We investigate dynamic association among macroeconomic variables under consideration by using SVAR approach. (iv) Our study is unique in the sense that we could not find any previous research on energy that have applied abovementioned methodological approaches in Pakistan.
The organization of the paper is as follows. energy outlook in Pakistan is presented in Section 2, review of literature in Section 3, empirical methodology in Section 4, empirical results in Section 5, conclusion and policy implications in Section 6.

2-Energy Outlook in Pakistan
Pakistan is developing country and central position of energy in the economy as a whole is paramount. Fig.1 shows that periods of high growth rate of GDP are coincide with high growth rate of energy consumption and periods of lower GDP growth depicts lower energy consumption. Pakistan is heavily dependent on oil and gas to fulfill their energy demand. However, energy demand far exceeds its domestic supply which is fulfilled through imported crude oil and petroleum products. Oil and gas, primary energy mix, are contributing almost 80% of energy supplies during 2015 while share of coal and nuclear is approximately 7% and 2% respectively (see Fig.2). On average, the growth rate of primary energy supply is estimated as 1.4% for the last five years.   Fig. 3 show that the share of oil and gas is largest in total energy consumption. Sectoral distribution of energy consumption is presented in Fig.4. Industry is the largest energy intensive sector followed by transport and household, consuming 38%, 34% and 20% of total energy supply respectively. The consumption of energy in agriculture sector is 2% and commercial sector is 4%. The consumption mix of energy has changed over time in industry and services sector, electricity consumption increased and gas consumption decreased. In addition, the consumption of oil has been increased in both these sectors.
Energy efficiency of Pakistan's industries is among the lowest in the world and consuming enormous energy with as annual increase of 5% to 6% of electricity demand. Pakistan had the same level of energy efficiency as India in 1980. However, the improvement in energy efficiency in India (1.9% per annum) and Sri Lanka (1.5% per annum) is much faster than from Pakistan (1.3% per annum). Now, Pakistan is 15% less energy efficient than India. However, overall, the value of energy efficiency measured by energy intensity has been increased in Pakistan with the passage of time, 5.63% in 1999 to 4.27% in 2017 (see Fig.5).  Pakistan is one of the most energy inefficient countries and conversion rate to GDP. Despite this, Pakistan has substantial potential for energy saving from energy conservation and energy efficiency measures. 11 million TOE of energy saving can best be achieved by appropriate pricing and product subsidization policies, which enforce consumers to make appropriate changes in their life style and the usage of equipment. Furthermore, government intervention through strict rules and legislation is required to make a serious impact on the inefficient usage of energy.

3-Review of Literature
The findings of the current literature investigating the association between financial development, and energy consumption are mixed and in general are quite ambiguous which may be due to the It is clear from the above-mentioned empirical studies that evidence on the association between energy usage, financial development, international trade and technological innovation are mixed and demand for further analysis. In this paper, we look at the above associations and try to contribute to the discussion of causation. For further detail, one can see the summary of literature presented in Table 1.

4.1-Theoretical Framework
Energy play a key role in national output. The upward trend in energy usage especially nonrenewable energy causing a huge pressure on finite resources of energy. Thus, it has become an important area of research to explore the factors responsible for the huge usage of energy. In  Trade openness is considered to be a yardstick to measure the relative performance for an  can be specified as follows: The parameters 1

4.4-Research Methods
The foremost step in research methodology is the application of unit root tests. ADF 2 and PP 3 unit root tests are extensively used in empirical literature. However, one of the main shortcomings for these tests is that they do not take into account the endogenous structure breaks in the series. Thus, their outcomes provide misleading conclusion. To overcome this shortcoming, we have applied ZA 4 unit root test that accommodate structure break in the series.
The second step in research methodology is the application of cointegration technique. Johansen cointegration approach is more commonly used by energy economists and also suitable for present analysis. Our data covers the period of more than 30 years, there is possibility of structure breaks in cointegration relationship. Hence, Gregory and Hansen (1996)   In regression framework, impulse response function is generated by this SVAR. SVAR also help to calculate variance decomposition that shows how shocks reverberate in a system. Above mentioned research methods and steps are presented in Fig.   7.

5-Results and Discussions
The findings of ADF, PP and ZA unit root tests are reported in   Johansen test do not take into account the evidence of structural breaks in the long-run relationship.
This shortcoming demands the application of more robust and rigorous cointegration test that produce reliable estimates in the presence of structural break. As a consequence, we have applied a Gregory-Hansen cointegration test. This test allows endogenous structural breaks in cointegrating vector. The results depicted in Table 4 show that the evidence of cointegration can be clearly seen in third model (model C/S) while structural break exist in all three models. The evidence of breaks in the system suggest that we need to be taken care of structural breaks in the specification of energy-finance-trade-technology-growth relationship in Pakistan.   is connected with other variable is created (see Fig. 8(a)). Then, edges between variables are removed and contemporaneous causal flow is determined by applying PC algorithm (1997).   Tinnov and t Egr in Pakistan (see Table 6). For this purpose, we took 20 years and divide them into  Table 6 show that financial development is only influenced by energy efficiency and income growth in the first year of forecast period. But with the increase in forecast period, the influence of trade openness and technological innovation become significant.
Panel-c of Table 6 shows that technological invention is influenced by financial sector development and income growth to a greater extent while with energy efficiency and trade openness to a lesser extent at contemporaneous period. However, a substantial impact of trade openness and energy efficiency on technological innovation is seen in long time period. Panel-d of

6-Conclusion and Policy Implications
The importance of energy for economy and finite nature of primary energy resources turned the attention of international economies to achieve energy efficiency and to reduce energy usage in economic activities. Motivated by these facts, this study examines the dynamic linkages among energy efficiency, financial development, international trade and technological innovation by incorporating economic growth as an auxiliary variable using yearly data for the period 1980- Similarly, economic growth explains mix evidence with respect to energy efficiency, its effect increases in medium-term and decrease in long-term.
Finally, the policy implications based on empirical findings are summarized as follows: firstly, our results explain that financial development and technological innovation has positive impact on energy efficiency. In this regard, those policies may be formulated that encourage the efficient energy technologies and effective management practices on both demand side and supply side. As a consequences, there is need to (i) monitor energy efficiencies in major energy consuming industrial units to ensure the performance of operating parameters are energy efficient, (ii) change work practices such as at home or/ at work places, (iii) choose different modes of transport such as public transport instead of cars, rail instead of road for freight etc. (iv) use energy efficient equipment both at home and offices (v) more efficient energy generation system that minimize heat waste (vi) more efficient transmissions and distribution system for better routine data acquisition and analysis. Apart from these, financial organization may be encouraged to increase their financing in those projects that promote energy saving technologies in Pakistan. Secondly, our results demonstrate that economic growth and international trade has negative impact on energy efficiency. This is because, Pakistan is in the phase of transition, the demand for energy which is the key industrial input is increasing day by day. Energy efficient and energy conversation policies are critical to achieve sustainable development of Pakistan. Furthermore, trade policies that encourage the implant of innovative technologies in industries are need to be formulated.
Finally, government should introduce incentive and penalty mechanism to support improved energy efficiency, promote and facilitate international collaboration and corporation and raise awareness of energy usage and related aspect of energy efficiency among users.   Note: Lower triangular entries are presented in Table.