Energy efficiency in the manufacturing sector of the OECD: Analysis of price elasticities

- We examine the role prices have on energy efficiency in the OECD manufacturing sector between 1980 and 2009.
- We decompose manufacturing energy intensity change into two driving effects-technological efficiency and structural change.
- Index number decomposition support existing findings that the technological efficiency effect is the major driver for observed reduction in energy intensity since 1980.
- Further, the second stage results indicate that rising prices improves efficiency; importantly, these effects vary across countries.

We examine the role prices have on energy efficiency in the OECD manufacturing sector between 1980 and 2009. We employ a two-step procedure; first, we decompose manufacturing energy intensity change into two driving effects-efficiency and structural change. The second step uses panel time series regression techniques to estimate the impacts of prices on the effects driving manufacturing energy intensity. The advantage of using these techniques is that they account for heterogeneity and cross-section dependence in the data, something recent energy intensity research has emphasised. The results from this decomposition support existing findings that efficiency is the major driver for observed reduction in energy intensity. Further, the second stage results indicate that rising prices improve efficiency; importantly these effects vary across countries.