# **1 Introduction**

Energy efficiency is commonly seen as a key policy option for climate change mitigation. It also has recently been promoted as an industrial policy to boost economic competitiveness. For example, the European Union’s 2030 Energy Strategy describes energy efficiency as fundamental in the transition toward a more competitive, secure, and sustainable energy system.<sup>1</sup> And the U.S. government has acknowledged energy efficiency as a key part of its strategy to support trade competitiveness.<sup>2</sup> There are several potential channels through which energy efficiency policies could spur competitiveness and growth (Deichmann and Zhang, 2013). First, they could encourage innovation and technology development. When firms become more productive by using less energy per unit of output, they could become more cost-competitive in export markets. Second, these policies could create new demand and new markets for energy efficient technologies and products. The ensuing investment could bring new jobs and growth. Third, by enabling government to reduce energy-related expenditures, especially in energy-importing countries, they could allow greater spending in other priority areas that would benefit growth in the long run, such as health and education. Finally, by producing energy savings for households, they could boost disposable income and encourage growth-promoting consumption.

Despite many anecdotal accounts of the relationship between energy efficiency and economic growth, empirical evidence on a causal link is thin. Existing analysis takes a deep dive into specific industries to explore productivity benefits of energy efficiency measures, such as in iron and steel manufacturing (Worrell et al., 2003), paper and steel manufacturing (DOE, 1997), and the glass industry (Boyd and Pang, 2000), At the macro level, numerous studies have investigated the causal relationship between total energy consumption and economic growth (for example Kraft and Kraft 1978 and Costantini and Martini 2010; see also Ozturk 2010 for a detailed review). But there has been no broader examination of the macroeconomic effect of energy efficiency policies.

In this paper, we explore the causal relationship between energy efficiency and GDP growth based on a panel dataset of 56 countries spanning the period from 1978 to 2012. Causality here is confined to Granger causality, in which a variable is said to “Grangercause” another variable if it serves as a useful predictor of future values of that variable after controlling for several lags. Energy efficiency is proxied by energy intensity, defined as energy use per unit of economic output. Because changes in energy intensity can be driven by both efficiency effects (resulted in lower energy use to produce the same amount of a good) and structural effects (resulted in the tendency of energy intensity to first rise as a country moves from agriculture to industry and then fall as it shifts from industry to services), we

> 1 European Commission. “Energy Efficiency and its contribution to energy security and the 2030 Framework for climate and energy policy”

> 2 http://trade.gov/press/publications/newsletters/ita ~~1~~ 009/energy ~~1~~ 009.asp

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