Lester C. Hunt, Guy Judge and Yasushi Ninomiya INTRODUCTION This chapter analyses the problems of modelling the underlying energy demand trend (UEDT) when estimating energy demand models. In particular, it emphasizes the need to ensure that a ﬂexible approach is adopted so that the UEDT captures the important inﬂuences on energy demand, in addition to the conventional economic variables such as income and price. As Colin Robinson pointed out when writing in a book on energy demand: Most of the other chapters in this volume are concerned with the analysis of the past. That is a fascinating subject, but in practical terms, the main value of historical analysis lies in any guide it gives to what may happen in the future. That guidance is always imperfect and sometimes positively misleading. However, in the absence of direct information about the future, the past is the only indicator we have of possible future events. (Robinson, 1992, p. 215) Our approach is consistent with his view in that a ﬂexible approach to modelling the UEDT ensures that as much information as possible from the past is employed to fully understand the past and hence enhance future projections. Moreover, it emphasizes the importance of correctly specifying the demand function to ensure that the most accurate estimate of the price elasticity of energy demand is obtained. This is particularly important at a time when energy and environmental policy is focused on reducing emissions. If, as found in this study, the price elasticity of energy...
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