Reaching (Beyond) the Frontier: Energy Efficiency in Europe

The world is not decarbonizing fast enough, with global warming on track to reach as much as 4°C over the next century absent a global green transition. Policymakers in Europe—and beyond—still have an opportunity both to achieve net zero emissions by 2050 and to strengthen economic prospects by increasing energy efficiency, along with changing the energy mix from fossil fuels to renewables. In this paper, we assess energy efficiency (or intensity) in a panel of 38 European countries over the period 1980–2021 by using the stochastic frontier analysis and obtain statistically significant and intuitive results. We have two key findings. First, price signals, including through the introduction of a carbon tax and the removal of fossil fuel subsidies, are critical for energy efficiency, as consumers respond to changes in energy prices. Second, stronger environmental policies and institutions generate unambiguous improvements in energy efficiency by inducing investment in energy efficient equipment and buildings and nudging consumers for energy conservation. These results—robust to alternative specifications and methods—have important policy implications for green growth with higher energy efficiency.