Assessing the role of economic globalization on energy efficiency: Evidence from a global perspective

Abstract

There has been concern that economic globalization will increase energy consumption and reduce energy efficiency. A slew of studies investigating this assertion have used trade, foreign investment, or both as indicators of economic globalization, with mixed findings. A number of concerns challenge the empirical literature including measurement issues, infrequent temporal variations in the data, business cycle effects and heterogeneity bias, which affect the causal ability of economic globalization. This study used global data of 141 countries to assess the effects of economic globalization on energy efficiency. Our identification strategies involved using more refined measures of economic globalization and energy efficiency, addressing infrequent temporal variations as well as business cycle effects and concerns of heterogeneity bias. Largely, economic globalization positively drives energy efficiency, but this effect suffers from upward bias without controls. We note that infrequent temporal variations in the data and business cycle effects and heterogeneity bias drive the result. Concerning the latter, the result has shown that economic globalization improves energy efficiency only in upper-middle and lower-middle income countries and not in high and lower-income countries. Our results raise serious caution about the causal abilities of existing studies. And we discuss the policy implications.