The impact of total factor productivity on energy consumption : theoretical framework and empirical validation

This study contributes to the literature on energy demand by developing a theoretical framework, in which energy demand is a function of total factor productivity (TFP) alongside traditional factors such as price and income. The proposed theoretical framework is examined using annual data on energy consumption, TFP, income, and energy price for 49 countries from 1990 to 2019. The empirical analysis includes 32 high-income countries, 12 upper-middle-income countries, and 5 lower-middle-income countries dictated by data availability. The results of the panel cointegration test and long-run estimates validate the proposed framework, i.e., TFP has a statistically significant negative effect on energy consumption, in addition to the theoretically predicted and statistically significant effects of income and price. The results of the individual country level analysis, as a complementary analysis to the panel, also show that TFP plays a role in shaping energy consumption. The suggested framework would be useful for policymaking to understand the role of TFP in energy demand. The key message of the study to the decisionmakers is that they should consider TFP in designing energy demand related policies. Because TFP can curb energy consumption without compromising economic growth, while helping to save energy resources and reduce environmental pollution, as it is a representative for technological progress and efficiency, and is driven by factors such as institutions, governance, infrastructure, human capital, learning by doing, macroeconomic stability - key elements of sustainable development. The proposed framework can also be used as a theoretical basis to link energy demand to the compositions and drivers of TFP, which opens up possibilities for future research.