‘Underlying Energy Efficiency’ in the US

Abstract

The promotion of US energy efficiency policy is seen as a very important activity. Generally, the level of energy efficiency of a country or state is approximated by energy intensity, commonly calculated as the ratio of energy use to GDP. However, energy intensity is not an accurate proxy for energy efficiency given that changes in energy intensity are a function of changes in several factors including the structure of the economy, climate, efficiency in the use of resources, behaviour, and technical change. The aim of this paper is to measure persistent and transient underlying energy efficiency for the whole economy of 49 states in the US using a stochastic frontier energy demand approach. A total US energy demand frontier function is estimated using panel data for 49 states over the period 1995 to 2009 using two panel data models: the Mundlak version of the random effects model (which estimates the persistent part of the underlying energy efficiency) and the true random effects model (which estimates the transient part of the underlying energy efficiency). The analysis confirms that energy intensity is not a good indicator of underlying energy efficiency whereas, by controlling for a range of economic and other factors, the measure of persistent underlying energy efficiency obtained via the approach adopted here is. Moreover, the estimates show that although for some states EI might give a reasonable indication of a state’s relative UEE this is not the case for all states, California being a prime example.