Moving from final to useful stage in energy-economy analysis: A critical assessment

Abstract

Given the climate change emergency, reducing energy consumption, which is responsible for most greenhouse gases emissions worldwide, is a priority. However, the strong historical link between energy consumption and economic growth questions whether continued economic growth is compatible with energy conservation targets. Conventional final energy analysis (common analysis methods applied at the final energy stage) has provided limited insights to this nexus. In response, this paper explores the extent to which useful stage analysis provides additional insights using three common methods: aggregate energy-economy analysis (growth rates, energy intensities, and Index Decomposition Analysis), energy-GDP causality testing, and Aggregate Production Function modelling, using Spain (1960–2016) as empirical case study.The results reveal that of the three methods investigated, aggregate energy-economy analysis provides the greatest insights, including that Spain is far from achieving absolute energy-GDP decoupling. Further, moving to the useful stage indicates that the extent of decoupling is even less than suggested at the final energy stage, and that increasing final energy consumption has historically fully offset efficiency gains. In contrast, whether applied at the final energy or useful stage, energy-GDP causality testing and Aggregate Production Function modelling reveal little about the energy-economy nexus — the results even suggest that these tools are not appropriate and may mislead. Thus, useful stage analysis is necessary but not sufficient for delivering further energy-economy insights; there is also a need for exploring alternative, reliable, energy-economy analysis methods. Indeed, the lack of robustness of Aggregate Production Function modelling and energy-GDP causality testing is worrisome.