The Relationship Between Energy Efficiency and Economic Growth

Abstract

Energy efficiency plays a crucial role in promoting sustainable economic development. One of the most significant contributions to the improvement of economic performance is the reduction of energy intensity. Energy efficiency measures usually involve a reduction in the quantity of energy services used, i.e. fuel consumption, and, as a result, help to decrease the demand for imported fossil fuels. The investment of savings in industry mostly leads to the modernization and the updating of production facilities. This, in turn, may foster either a speed-up of the capital accumulation process or a consistent innovation of production technologies, resulting in the improvement of the productivity of capital, and a stimulation of economic growth. Energy efficiency measures mainly contribute to the increase in resources available for consumption or investment, stimulating economic growth, by contouring the return on energy savings to the GDP growth. From an environmental point of view, the urgency to deal with the greenhouse effect requires the adoption of policies—which are consistent with and not in contrast to economic growth outlets—for the limitation of energy consumption and the reduction of CO2 emissions. In this framework, it is interesting to investigate by means of a new Keynesian growth model the interaction between the substitution of consumption and/or investment with energy services and the long-run trend of the economy. Consequently, the research design becomes of practical utility being policymakers able to pursue environmental targets without jeopardizing the growth performances of their economies . The findings show that, from a long-run perspective, there exists a trade-off between the most beneficial output growth rate and the improvement in the environmental quality. On the other hand, a favorable medium-run balance is detected between the increase in GDP and the reduction of carbon gas emissions. The vision, then, that pursued by a cost-benefit perspective is likely to vary depending on the analyzed horizon.

Keywords energy efficiency, economic growth, sustainable development, productivity, CO2 emissions, investment, fossil fuel reduction, policy implications