The evolution and implications of national energy cost shares

Energy cost share is a key indicator to assess the importance of energy in an economy, to highlight the potential exposure of energy-importing countries to international price shocks, and to understand the implications from introducing carbon pricing or energy subsidies reforms. We construct a global dataset to study the evolution of national energy cost shares over time and their relationship with energy prices. On these data we estimate a theoretically grounded econometric model and we obtain a wide set of findings that have important implications for policy. The main findings are that economies have a strong capacity to adapt to higher energy prices through technological innovation, but the time for this adjustment can be very long; the ability to reduce energy intensity in response to higher energy prices has improved over time; both energy efficiency policies and certain macroeconomic characteristics can help in facilitating the adjustment avoiding an excessive increase in energy cost share.