other independent variables at the 1% level. In this case, only fixed effects specification reported in column (2) yields consistent estimators, and is the preferred estimate.

Controlling for country and year fixed effects, the parameter estimates suggest that all independent variables reported in Table 3 are strong predictors of a country’s manufacturing energy intensity. A one percent increase in per capita GDP is associated with a 1.3 percentage point decrease in energy intensity. A one percent increase in industrial electricity price is associated with a 0.26 percentage point decrease in energy intensity. Both results are statistically significant at the 1 percent level.

The estimates of capital-labor ratio show that manufacturing energy intensity first increases then decreases with the increase of capital intensity with the turning point slightly below the sample mean. This inverted-U relationship suggests that diminishing returns to capital may partially explain energy-productivity convergences across countries.<sup>12</sup> Another interesting finding that emerged from the results is that energy intensity slightly increases with the increase of the share of exports in total manufacturing, lending support for the hypothesis that trade induces specialization on more energy intensive industries. This result is not entirely surprising. As demonstrated in the model in Krugman (1987), comparative advantage leads to specialization in the tradable-goods sectors. Because the region has abundant energy resources and relatively low energy prices, many of the region’s countries are net carbon exporters. In fact, Ukraine, Russia, and Kazakhstan are the first, third, and fourth most carbon(and energy-) intensive exporters in the world (Davis and Caldera 2010). EU enlargement also offers access to a larger market and opportunities for specialization. Some new EU member states including Hungary, Bulgaria, Estonia, Romania and Latvia have the most specialized industrial structures. For example, Hungary is highly specialized in refined petroleum products, while Bulgaria shows high specialization in mining and quarrying (European Commission, 2011). This specialization effect dominates other, potentially positive effects of trade on energy productivity, such as technological spillover and increased competition.

One concern with the above analysis is that the causal effect between economic growth and energy intensity is likely to be two-way. Energy efficient technologies can improve productivity (Cleveland et al, 2000); Reductions in energy demand could also free up capital required for energy requirement and cut expenses. Both effects can spur economic growth. It is also likely that non-residential energy prices are affected by the amount of energy consumed in the industry - that is energy price may be endogenously determined by energy intensity. Furthermore, the above analysis assumes an instant response of energy intensity to income and energy price

> 12 This is consistent with findings of Metcalf (2008) based on US data. However, to be noted, there has been no consensus about the sign of the elasticities of substitution between energy and capital. Some authors suggest the need to disaggregate capital inputs into working capital and physical capital, and find that energy is generally complement to physical capital and a substitute for working capital (Field and Grebenstein, 1980).  Solow (1987) demonstrates either relationship is possible when using aggregated capital data.

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