Modeling International Trends in Energy Efficiency and Carbon Emissions

This study uses a stochastic production frontier to model trends in energy efficiency over time in a panel of 85 countries. No a priori structure is imposed on technological change over time though differences in the level of technology across countries are modeled as a stochastic function of explanatory variables. These variables are selected on the basis of a literature survey and theoretical model of the choice of energy efficiency technology. An improvement in a country’s energy efficiency is measured as a reduction in energy intensity while holding constant the input and output structure of that economy. The country using the least energy per unit output, ceteris paribus, is on the global best practice frontier. The model is used to derive decompositions of energy intensity and carbon emissions and to examine the whether there is a convergence across countries. I find that energy efficiency rises with increasing general total factor productivity but is also higher in countries with more undervalued exchange rates in PPP terms. Higher fossil fuel reserves are associated with lower energy efficiency. Energy efficiency converges over time across countries and technological change was the most important factor mitigating the global increase in energy use and carbon emissions due to economic growth.