The Relationship Between Energy Efficiency and Economic Growth

Abstract

Improving energy efficiency can lead to economic growth. This familiar proposition is of great relevance when put in context of the pattern of energy consumption in modern economies. However, as evidence from various indicators shows, whatever policy efforts that have been made to improve energy efficiency has not been effective in the face of accelerating demands in recent years. It is thus crucial for developing economies to understand more about the relationship between energy efficiency improvement and economic growth in order to make their choices. The close relationship between energy use and economic growth makes it necessary to have a careful reading of the energy efficiency angle, including a transparent definition of energy efficiency, a clear account of measuring energy efficiency at an aggregate level, and a coherent explanation of the ambivalent arguments for and against energy efficiency improvement as a long-term growth strategy. By reviewing the evolutionary view on this issue, it is intended to shed light on the issue’s implications for the process of economic development, especially on the current issue of how better choices relate to existing technical progress. Preferences of technical choices will be considered the issue of improvements or diffusion of energy efficiency, because energy efficiency improvement depends on the relative prices between different grades of energy. The study is geared by a simple question: how efficient should the choices in physical capital and/or energy services be in terms of productivity and profitability along the development route and in the transition process? This question is inspired both by the background history of how mature economies have come to stand on the existing level of energy efficiency and by the current situation in the developing economies. Given the varying levels of aggregation at which the concepts of energy use, energy efficiency and output are measured, it seems desirable to present an integrated treatment of the relevant issues using a very simple model.

Keywords:  energy efficiency, economic growth, energy consumption, developing economies, technical progress, productivity, long-term strategy, policy effectiveness