Energy intensity, growth and technical change

Abstract

World and U.S. energy intensities have declined over the past century, falling at an average rate of approximately 1.2–1.5 percent a year. The decline has persisted through periods of stagnating or even falling energy prices, suggesting the decline is driven in large part by autonomous factors, independent of price changes. In this paper, we use directed technical change theory to understand the autonomous decline in energy intensity and investigate whether the decline will continue. We show in an economy with no state-dependence, where existing knowledge does not make R&D more profitable, energy intensity continues to decline, albeit at a slower rate than output growth, due to energy-augmenting innovation. However, in an economy with extreme state-dependence, energy intensity eventually stops declining because labor-augmenting innovation crowds out energy-augmenting innovation. Our empirical analysis of energy intensity in 100 countries between 1970 and 2010 suggests a scenario without extreme state dependence where energy intensity continues to decline; in either case, energy intensity never declines faster than output grows, and so energy use always increases, as long as the extraction cost of energy stays constant.

Keywords: Energy, Directed Technological Change, Economic Growth

JEL Classification: O33, O41, Q43