The underlying drivers of economy-wide energy efficiency and asymmetric energy price responses

Abstract

A good understanding of energy efficiency trend and its potential underlying drivers is required when considering policies for energy conservation and environmental sustainability. In light of this, we estimate energy efficiency trends using index decomposition analysis, data envelopment analysis and stochastic frontier analysis as robust methods. The driving factors (including asymmetric price responses) are examined using a dynamic panel model estimated by Arellano and Bond (1991) GMM estimator. The application for 32 OECD countries found that none of the three methods leads to a consistent ranking between energy efficiency estimates and energy intensity – corroborating the criticism that energy intensity is not a good proxy for energy efficiency. The panel-data regressions using the energy efficiency estimates from the three methods show similarities in the impacts of the drivers (including energy price, foreign direct inflows, trade openness, population growth, temperature etc.) on energy efficiency. Although the results of asymmetric price responses of energy efficiency estimates vary slightly, we found insignificant evidence of asymmetric effects of total energy price but there are asymmetric responses with energy-specific prices. Thus, using energy-specific prices as well as allowing for asymmetric price effects in analysing drivers of energy efficiency is apt and informative in formulating energy policies.