Exploring the Relationship between Urbanization and Energy Consumption in Iran (Application of Vector Error Correction and Factor Decomposition Model)

Urbanization is a major feature of economic development, and involves many structural changes across the economic system which have important implications for energy consumption. This paper provides empirical evidence on urbanization and energy consumption in Iran over the period 1973–2006, using ARDL testing approach and factor decomposition model. The results of the bounds test show that there is a stable long-term relationship among total energy consumption, population, GDP (gross domestic product) and the level of urbanization. meanwhile, the results of the causality test using ECM (error correction model) to test short- and long-term dynamics of the relevant variables, indicate that there exists only a unidirectional Granger causality relationship between urbanization and total energy consumption in the short run. On the other hand, the results support the existence of a long-term, bidirectional causality relationship between urbanization and total energy consumption. Factor decomposition analysis indicates that technical progress, urbanization process, and economic development have respectively the greatest impacts on the energy consumption in Iran. At present, the share of urbanization in increasing energy consumption is smaller than the past, and the energy intensity is gradually on the fall.