Comprehensive measurement of energy market integration in East Asia: An application of dynamic principal component analysis

Abstract

The energy market integration (EMI) in East Asia has been carried out for over a decade. Despite the efforts exerted by countries in the region, little has been known about the EMI progress. This paper innovatively applies the dynamic principal component analysis to measure the EMI and its evolution in East Asia between 1995 and 2011. The EMI is measured by using information from all the five dimensions that have been identified in the literature: (1) energy trade liberalisation; (2) investment liberalisation; (3) development of energy infrastructure and its associated institutional arrangements; (4) domestic market openness; and (5) energy pricing reform. Results show that although significant progress has been made for EMI in East Asia, there are significant cross-country disparities in different aspects. Moreover, we show that further efforts towards EMI in general should focus on liberalising national markets first, then phasing out fossil fuel subsidies and finally, liberalising investment regime since national market liberalisation is the least developed dimensions. Certain countries that lag behind in EMI need to learn from either their past experiences or from other nations and focus their efforts on their relatively weak dimensions.