HOW DOES ENERGY EFFICIENCY AFFECT THE GROWTH IN THE REAL SECTOR? EVIDENCE FROM UKRAINIAN REGIONS
BorysDodonov, Ph.D. in Economics, University of Houston,
Senior Economist, Bureau of Economic and Social Technologies, Kyiv, 01025, Ukraine, +380995018320,
Overview
Energy prices raised drastically over the last decade. Now energy efficiency becomes a precondition for industrial competitiveness in the modern world. Unfortunately, the empirical evidence on the link between energy efficiency and growth in the real sector is still rather limited. This study aims at partially filling this gap for manufacturing industries.
Some industries are more energy intensive than the others due to technological reasons. Thus, I expect that energy efficiency positively affects industrial growth and the effect increases with energy intensity of the industry. To test this hypothesis and avoid endogeneity bias I employ difference-in-difference approach described in Rajan and Zingales(1998).
The impact of energy efficiency on industrial growth is studied using a four-year panel dataset containing information on 26 regions and 10 manufacturing industries. I find statistically signifficant positive effect of energy efficiency on growth, the magnitude of which depends on energy intensity of the industry. The results are robust to different model specifications.
Methodology
I employ the difference-in-difference approach proposed by Rajan and Zingales(1998)who studied the effect of financial development on industrial growth. This approach allows avoiding the typical for growth regressions omitted variable and model specification biases and determining the impact of the independent variable on growth based on its exogenous variation.[1]
Following their approach I rank the industry by energy intensity (using the data for the average intensity in the EU that is exogenous to Ukraine) and then study the growth of industries depending on their energy efficiency in the region and energy intensity. The regional and industry characteristics are captured by dummy variables for each region and industry. The primary variable of interest is the interaction between industry's energy efficiency in each region of Ukraine and its energy intensity in the EU. Although energy efficiency is likely to be endogenous due to omitted variable bias, its interaction with the average intensity in the EU is exogenous. The only additional explanatory variables included that vary both with industry and region are the industry's share in manufacturing and capital expenditures in 2007. Thus, the model we need to estimate is then
+
where subscripts i and j denote region and industry respectively. Growthitis the growth rate of industry's real value added or real capital expenditures, Efficiency is the energy efficiency of the industry j in the particular region i of Ukraine and Intensity is the index of energy intensity of industryj in the EU.
Data on value added and capital expenditures for each region and industry in International Standard Industry Classification (ISIC) are obtained from State Statistical Service of Ukraine. Energy intensities of EU manufacturing industries were taken from ODYSSEE database. The energy efficiency of manufacturing industries were taken from Dodonov et al. (2012).[2]
Results
Columns 1 and 2 of the Table 1 report the estimates of the basic specification (1). The coefficient estimate for the interaction term is positive and statistically significant at conventional 5% level.[3]Thus, we might conclude that energy efficiency positively affects the real sector growth and the effect grows for industries that are energy intensive due to the technological characteristics. In order to get the sense of its magnitude consider two biggest regions in Ukraine (Donentsk and Dnipropetrovsk) and two biggest industries in terms of value added (primary metals and food). The primary metals is the most energy intensive industry in the EU with an energy intensity index equal to one. The correspondent figure for food industry is only 0.13. The energy efficiency of primary metals and food industry are 47% and 53% from the EU level in Donetsk and 36% and 40% in Dnipropetrovsk region respectively. The coefficient estimate then predict that primary metals will grow 5.2% faster in Donetsk than in Dnipropetrosk region but food industry will grow only 0.8% faster despite bigger difference in energy efficiency. The difference in growth rates of capital expenditures attributed to differences in energy efficiency is substantially larger than for growth rates of value added (18.6% and 2.8% for primary metals and food respectively). Columns 3 and 4 in Table 1 contains the estimates of the model on the annual growth data. The coefficient estimates for interaction term are statistically significant at conventional level of significance, they are larger in absolute values but standard errors are larger as well.
TABLE 1: ENERGY EFFICIENCY AND MANUFACTURING GROWTH AT REGIONAL LEVELAVERAGE GROWTH RATES / ANNUAL GROWTH RATES
(1) / (2) / (3) / (4)
Industry'sjshareofmanufacturing / 0.1799 / 0.5681 / 0.9198*** / 0.6596*
inregioniin 2007 / (0.137) / (0.364) / (0.183) / (0.353)
Efficiency*Intensity / 0.4594** / 1.6503** / 0.8660*** / 1.0457*
(0.227) / (0.705) / (0.308) / (0.617)
Regionfixedeffects / YES / YES / YES / YES
Industryfixedeffects / YES / YES / YES / YES
R2Adj / 0.212 / 0.129 / 0.083 / -0.013
Number of observations / 219 / 170 / 615 / 482
ThedependentvariablesarethegrowthrateofrealvalueaddedinColumns 1&3 andthegrowthrateofrealcapitalexpendituresinColumns 2&4 (logarithmicchange) foreach ISIC manufacturingindustryineachregion.Notes: ***, ** and *denotestatistical significance at the 1% level, 5% level and 10% level respectively, s.e. corrected for heteroscedasticity are presented in parenthesis.
Conclusions
I find that energy efficiency has strong effect on real sector output growth. The increase in energy efficiency has a positive impact on value added and capital expenditures growth in manufacturing industries and affects energy intensive industries the most (steel, cement and chemical industries). These results are in line with expectations that energy efficiency became an important factor for industries competitiveness after the energy price hike in last decade and provide additional evidence on the link between energy sector and real economic activity.
References
Angrist, JoshuaandAlanKrueger, “EmpiricalStrategiesinLaborEconomics,”inOrleyAshenfelterandDavid E. Card, eds., HandbookofLaborEconomics, Vol. 3,NewYork: Elsevier, 1999, pp. 1277-1366.
Bertrand, Marianne, EstherDufflo, andSendhilMullainathan, “HowMuchShouldWeTrustDifferences-in-DifferencesEstimates?,”QuarterlyJournalofEconomics, 2004, 119 (1), 249-275.
Dodonov, Borys, ValeriyGladkiy, Yuriy Gladkyy, and Ganna Tsarenko, EnergyEfficiencyRankingsoftheRegionsofUkraine, Donetsk, Ukraine: SystemCapitalManagement, 2012.
Rajan, Raghuram G. andLuigiZingales, “FinancialDependenceandGrowth,” AmericanEconomicReview, 1998, 88 (3), 559-586.
[1]SeeAngristandKrueger (1999) andBertrandetal. (2004) fordetaileddifference-in-differencemethod
review.
[2]Energy efficiency at industry level is calculated according to International Energy Agency (IEA) method of final energy consumption decomposition, the average EU intensities in 2007 are taken as a benchmark for the efficient energy consumption in Ukraine. See Dodonov et al. (2012) for details.
[3]The robust to heteroskedasticity standard errors are reported in the parenthesis.