A marginal measure of energy efficiency: The shadow value

- The energy shadow value is developed as a marginal economic measure of energy efficiency.
- The energy shadow value is decomposed to study factors impacting energy efficiency.
- The energy shadow value provides allocative information on optimal energy use against average measure of energy productivity.
- The advantages of the shadow value as a marginal measure of energy efficiency is evaluated within and between countries.
- Social energy shadow value addresses energy consumption externality and tax policies impact in measuring energy efficiency.

Economists are well aware of the importance of marginal versus average measures of energy efficiency. Yet in the energy literature, there is no consensus on the appropriate method for defining and measuring energy efficiency. This paper sets out the shadow value of energy as a proper and meaningful marginal energy efficiency index. A restricted profit function is used to model the shadow value. We explore four scenarios to characterize and evaluate the shadow value of energy; a within country comparison of different production processes with different energy requirements, a comparison of different countries with different resource endowment, a government policy to impose a tax to alter the shadow value to address environmental issues and a within country comparison of externalities arising from two sources of energy. A comparative static analysis is carried out to sign the functional arguments defined for the shadow value.