Reaching (Beyond) the Frontier: Energy Efficiency in Europe

IMF Working Papers, September 22, 2023

Source details

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—have an opportunity to achieve net zero emissions by 2050 and to strengthen economic prospects by increasing energy efficiency and changing the energy mix from fossil fuels to renewables.
The paper assesses energy efficiency (or intensity) in a panel of 38 European countries over the period 1980–2021 using stochastic frontier analysis.

Sample: panel of 38 European countries.
Time period: 1980–2021.
Empirical approach: stochastic frontier analysis (noted also as "stochastis frontier analysis" in keywords).
Results reported as statistically significant and intuitive, and robust to alternative specifications and methods.

Price signals are critical for energy efficiency:
- Introduction of a carbon tax and removal of fossil fuel subsidies improve energy efficiency because consumers respond to changes in energy prices.
Stronger environmental policies and institutions generate unambiguous improvements in energy efficiency:
- These policies induce investment in energy efficient equipment and buildings and nudge consumers toward energy conservation.
Implication: Higher energy efficiency can contribute to green growth.

Use price-based instruments to strengthen energy efficiency outcomes:
- Implement carbon taxation.
- Remove fossil fuel subsidies.
Strengthen environmental policies and institutions to:
- Induce investment in energy efficient equipment and buildings.
- Encourage consumer behavior changes toward energy conservation.
Combine price signals and institutional reforms to support a transition to renewables and progress toward net zero by 2050.