Climate change continues to pose one of the most significant challenges of our time, driving us to seek effective strategies to combat its adverse effects. Among these strategies, energy efficiency is a powerful weapon in our fight against carbon emissions. This blog article presents a comprehensive literature review on the recent studies of energy efficiency and showcases the multifaceted nature of energy efficiency and green innovation in the battle against climate change.
Energy Efficiency and Energy Intensity
The concept of energy efficiency pertains to a technical gauge, normally defined as a ratio between input and output quantities. On the other hand, energy intensity encompasses the amount of energy consumed in relation to the value generated through production. Two widely used methods for gauging energy efficiency are Data Envelope Analysis (DEA) and Stochastic Frontier Analysis (SFA). As a nonparametric approach, DEA doesn’t enforce particular functional structures on the link between inputs and outputs. It’s suitable for modest datasets but tends to exclude randomness. On the other hand, SFA is a parametric method, necessitating the definition of a functional structure and integrating randomness. In scenarios involving panel data, SFA can assist in mitigating the influence of unobserved heterogeneity bias.
The Role of Energy Efficiency in Emission Reduction
The International Energy Agency (IEA) emphasizes energy efficiency’s significance in mitigating carbon emissions. Energy efficiency plays a crucial role in reducing our carbon footprint by curbing both direct emissions from fossil fuel consumption and indirect emissions from electricity generation (IEA, 2019). Moreover, it is vital in decoupling energy-based carbon emissions from economic growth, ultimately reducing energy consumption (IEA, 2021).
Nevertheless, even though enhancements in energy efficiency have the capacity to lower energy consumption and thus potentially lessen CO2 emissions, we must take into account the repercussions of Jevon’s paradox. This phenomenon highlights that advancements in technology that amplify coal efficiency historically resulted in heightened coal usage across a broad spectrum of industries. For example, Cansino et al., (2019) highlight how improvements in energy efficiency might inadvertently lead to increased energy consumption due to enhanced affordability and accessibility.
As the world grapples with the effects of climate change, it becomes evident that the measures implemented since the Paris Agreement have not been sufficient to limit the long-term increase in global temperatures to 1.5˚C. Consequently, more ambitious targets have been set, including achieving net-zero emissions by 2050. This necessitates additional actions, especially in critical sectors like energy, which accounts for a significant portion of global greenhouse gas emissions (IEA, 2021).
Energy Efficiency Gains in OECD and Non-OECD Countries
Research examining energy efficiency gains across different countries sheds light on the global energy landscape. Liddle and Sadorsky (2021) report a need for energy efficiency improvement worldwide, with non-OECD countries showcasing more progress in this area. Longer-term studies also reveal the positive impact of energy efficiency on reducing CO2 emissions in both OECD and non-OECD countries (Tajudeen et al., 2018; Mirza et al., 2022).
Green Innovation: Empowering Energy Efficiency
As we pursue sustainable energy solutions, green innovation and technologies emerge as pivotal catalysts. Several studies demonstrate the positive relationship between energy intensity (efficiency) and green innovation, showing how green innovation leads to a decline in energy intensity across various sectors (Wurlod & Noailly, 2018; Paramati et al., 2022; Sun et al., 2019). Green technologies and innovations have proven instrumental in improving energy efficiency and reducing carbon emissions.
The Indirect Role of Institutional Quality
Recent research has also highlighted the indirect influence of institutional quality on driving green innovation and energy efficiency. Studies reveal a positive association between the quality of government institutions and innovation capacity (Rodríguez-Pose & Di Cataldo, 2015; Tebaldi & Elmslie, 2013; Boudreaux, 2017). Institutional quality has also been instrumental in advancing green innovation and facilitating the deployment of green technologies, including renewable energy (Bhattacharya et al., 2017; Uzar, 2020). Chen et al. (2021) found that countries with better democratic institutions channel more economic resources for renewable energy deployment compared to countries with non-democratic institutions.
Energy Intensity Decomposition
Economic and population growth play significant roles in influencing energy intensity. While economic growth can lead to higher energy-intensive consumption, it can also drive dematerialization and lower energy intensity in specific sectors (Mendonça et al., 2020; Dargahi & Khameneh, 2019). The composition and growth of economic sectors during expansion and recession periods are also crucial factors in determining energy efficiency improvements (Román-Collado & Colinet, 2018).
Environmental Policy Measures, Energy Prices and Urbanization
Environmental policy measures such as regulations, taxes, subsidies, and tax credits can promote energy efficiency investments (García-Quevedo & Jové-Llopis, 2021). Additionally, policymakers often employ energy efficiency and renewable energy promotion schemes in their climate policies. While there is little evidence of the direct impact of renewable energy sources promotion on energy efficiency, the inverse relationship holds true. Energy efficiency remains a pivotal factor in attaining the renewable energy objectives set forth in the EU. (Del Río, 2010).
The relationship between energy prices and intensity can vary across regions and contexts. Existing studies show that energy prices are generally negatively associated with energy intensity (Dong et al., 2018; Petrović et al., 2018). However, some studies demonstrate positive effects, depending on geographic regions and specific energy sources (Samargandi, 2019; Antonietti & Fontini, 2019).
The Nonlinear Relationship
Researchers have recently explored the intricate relationships between green innovation, energy efficiency, and institutional quality. Chen et al. (2023) emphasize the nonlinear relationship between green innovation and energy efficiency, particularly in the context of strong institutional quality. They highlight how robust institutions protect property rights, enabling green innovation to promote energy efficiency effectively.
As discussed above, recent literature on energy efficiency delves into the critical role of energy efficiency in reducing greenhouse gas emissions, its contribution to sustainable development, and the transformative impact of green innovation in this endeavour. As we move forward, the insights gained from these studies will guide policymakers, industries, and societies toward a greener and more sustainable future. By prioritizing energy efficiency and fostering green innovation, we can pave the way for a world that thrives on clean energy, reduced carbon emissions, and resilient environmental practices. Together, we can overcome the challenges of climate change and build a brighter future for future generations.
Chaoyi Chen
References:
Antonietti, R., Fontini, F. (2019). Does energy price affect energy efficiency? Cross-country panel evidence. Energy Policy, 129, 896-906.
Bhattacharya, M., Awaworyi Churchill, S., Paramati, S.R., (2017). The dynamic impact of renewable energy and institutions on economic output and CO2 emissions across regions. Renewable Energy, 111, 157-167.
Boudreaux, C.J. (2017). Institutional quality and innovation: some cross-country evidence. Journal of Entrepreneurship and Public Policy, 6(1), 26-40.
Cansino J.M., Román-Collado R., Merchán J. (2019). Do Spanish energy efficiency actions trigger JEVON’S paradox?, Energy, 181, 760-770, 0360-5442.
Chen, C., Pinar, M., Stengos, T. (2021). Determinants of renewable energy consumption: Importance of democratic institutions. Renewable Energy, 179, 75-83.
Chen, C., Pinar, M., Román-Collado, R. (2023). Green innovation and energy efficiency: Moderating effect of institutional quality based on the threshold model. Mimeo.
Dargahi H., Khameneh K.B. (2019). Energy intensity determinants in an energy-exporting developing economy: Case of Iran, Energy, 168, 1031-1044.
Del Río, P. (2010). Analysing the interactions between renewable energy promotion and energy efficiency support schemes: The impact of different instruments and design elements, Energy Policy, 38, Issue 9, 4978-4989.
Dong, K., Sun, R., Hochman, G., Li, H. (2018). Energy intensity and energy conservation potential in China: A regional comparison perspective. Energy, 155, 782-795.
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IEA (2019), Multiple Benefits of Energy Efficiency, IEA, Paris https://www.iea.org/reports/multiple-benefits-of-energy-efficiency
IEA (2021), Net Zero by 2050, IEA, Paris https://www.iea.org/reports/net-zero-by-2050
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Mendonça A.K., Conradi Barni G., Moro M.F., Bornia A.C., Kupek E., Fernandes L., 2020. Hierarchical modeling of the 50 largest economies to verify the impact of GDP, population and renewable energy generation in CO2 emissions, Sustainable Production and Consumption, 22, 58-67.
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Samargandi, N. (2019). Energy intensity and its determinants in OPEC countries. Energy, 186, 115803.
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Tebaldi, E., Elmslie, B. (2013). Does institutional quality impact innovation? Evidence from cross-country patent grant data. Applied Economics, 45(7), 887-900.
Wurlod, J.-D., Noailly, J. (2018). The impact of green innovation on energy intensity: An empirical analysis for 14 industrial sectors in OECD countries. Energy Economics, 71, 47-61.
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