Does energy productivity boost total factor productivity?

Abstract

Decarbonising our economies and energy systems requires a more productive use of energy resources. Improving energy efficiency or, similarly, reducing energy intensity and increasing energy productivity are considered critical factors to achieve economic growth and reduce environmental impacts. In particular, energy productivity (EP), defined as the amount of economic output that is produced per unit of gross available energy, could have positive effects on green growth and competitiveness. However, the impact of EP on Total Factor Productivity (TFP), which is regarded as an important driver of changes in living standards, has not received much attention in the past. This paper fills this gap. Its aim is to analyse the impact of EP on TFP in 29 European countries between 2000 and 2022. The econometric analyses show that the effects are positive in both the short and long terms. Our findings lend credence to the Porter Hypothesis. They show that strict energy efficiency targets which enhance EP do not have a negative impact on economic performance in the long run. However, the less positive short-term effects compared to the long-term effects suggest that governments should consider mechanisms to cushion the immediate economic impacts of the transition towards more energy-efficient economic systems.