Does information substitute or complement energy? - A mediation analysis of their relationship in European economies

In its decarbonization efforts, the European Union aims to decrease energy consumption through technological advances. One of the most prominent advances is the increased extension and utilization of digital information and communication technologies. However, there is little understanding of how precisely digitalization and energy consumption are related. This study aims to empirically analyze the impact and transmission channels of digitalization on energy consumption in the European Union. We build our empirical analysis in two steps. First, we employ the two-step sys-GMM estimator to examine the direct impact of digitalization on energy consumption, controlling for the effects of the mediation variables. Second, we use the causal mediation approach to estimate the relative importance of each mediation variable through which digitalization affects energy consumption. We rely on a sample of 28 European countries from 2007 to 2019. The empirical results suggest that digitalization significantly reduces energy consumption. We find that a 10% increase in digitalization reduces energy consumption by 0.4%, on average. The causal mediation analysis reveals that digitalization has an indirect positive effect on energy consumption through GDP per capita and industrial structure and an indirect negative impact through financial development and human capital.