How significant is energy efficiency to mitigate CO2 emissions? Evidence from OECD countries

Abstract

This paper develops a two-step approach to investigate the effect of energy efficiency improvements on CO2 emissions at the macro level. We use the index decomposition analysis to derive the true energy efficiency by separating out the impact of structural shifts in economic activity on energy intensity. We then employ both STSM and LSDVC models to examine and quantify the impact of the energy efficiency on CO2 emissions accounting for non-economic factors such as consumers' lifestyle, attitudes and environmental awareness. The application for 30 OECD countries shows that at the group level, the decline in energy intensity predominately occurred due to improvements in energy efficiency while at the country level, there are mixed contributions from improvement in energy efficiency and structural shift to the decline in energy intensity. The econometric results show that income has the most significant positive impact on CO2 emissions but improving energy efficiency makes the biggest contribution to driving down CO2 emissions. The method further enables the separate assessment of non-economic behavioural effects, which are found to exert a non-trivial influence on CO2 emissions in parallel with changes in energy efficiency. We conclude that energy efficiency remains a key option but that there is also a need for additional policies aiming for behavioural and other non-economic changes.