Purchasing-Power-Parity (PPP) approach to energy-efficiency measurement: Implications for energy and environmental policy

The weaknesses of the traditional measure of national output are well known and, in recent years, efforts to find more appropriate alternatives have intensified. One such methodology is the PPP approach which may capture the real value of the GDP. In general, this approach raises the incomes of developing countries by a substantial amount, and this has serious implications for energy indicators on which policies are usually based. A further problem is that non-commercial energy is usually left out of energy-intensity calculations. We analyze the issue of energy-efficiency and carry out calculations based on three approaches: the traditional approach, the PPP-based income approach and an approach which includes non-commercial energy. The results confirm the limitations of using the PPP approach, as it results in a spuriously high energy-efficiency level suggesting high technological sophistication for developing countries. The inclusion of non-commercial energy gives a more complete picture. The main conclusion is that applying the PPP method in energy-intensity calculations may be misleading.