Energy Intensity and Convergence in Swedish Industry: A Combined Econometric and Decomposition Analysis

Abstract

This paper analyzes the determinants of energy intensity and tests for convergence across 14 Swedish industrial sectors. The analysis builds on a non-parametric regression analysis of an intensity index constructed at the industry sector level as well as indexes constructed from a decomposition of this index. The latter isolates two key determinants of changes in energy intensity and convergence patterns: energy efficiency improvements and changes in economic output (activity). The empirical analysis relies on a detailed sectorial dataset covering the period 1990-2008. The findings indicate that input prices, including the price of energy, have been significant determinants of energy intensity in the Swedish industrial sectors. This effect can primarily be attributed to the efficiency channel and with a less profound influence from the activity channel. These results suggest that a well-designed tax system could be effective in delivering significant energy efficiency improvements in Swedish industry. We also find evidence of energy intensity convergence among the industrial sectors, and this primarily stems from the activity channel rather than from the efficiency channel. The above implies that during the studied time period Swedish industry shifted away from more to less energy-intensive production, in part perhaps driven by moving energy-intensive manufacturing abroad.

Keywords: energy intensity, convergence, index numbers, decomposition, industrial sectors

JEL Classification: C14, O13, O47, Q43