Decomposing energy intensity change: A combination of index decomposition analysis and production-theoretical decomposition analysis

Abstract

What drives energy intensity change has been a hot topic in energy economics. This paper presents a comprehensive framework combining index decomposition analysis (IDA) and production-theoretical decomposition analysis (PDA) for investigating the mechanisms of change of energy intensity. The proposed approach extends IDA to account for sectoral energy intensity change and overcomes the weaknesses of PDA in terms of quantifying effects of changes in industrial structure and energy composition. The combination of IDA and PDA also possesses all the three properties such as factor-reversal, time-reversal and zero value robust. More importantly, the decomposed effects are mutually exclusive as well. We apply the proposed approach to identify and quantify the driving forces of changes of energy intensity across China’s provinces between 2005 and 2010. Results show that technological change and capital-energy substitution are the major drivers of the declining energy intensity.