Energy intensity and economic structure

June 11, 2024

In the last 80 years, the product per capita worldwide has increased almost fivefold. But unfortunately, greenhouse gas (GHG) emissions have increased sevenfold. In other words, development has meant more emissions.

This process is unsustainable. At current emissions rates, there are just over 28 years left to limit the temperature increase to 2 degrees Celsius (°C) compared to the pre-industrial era. The sustainability of the planet then requires an energy transition that contributes to reducing emissions. For Latin America and the Caribbean, the future also requires closing the per capita income gap with respect to the developed world, as well as reducing the inequality and poverty that still persist.

The viability of achieving vigorous growth with reduced emissions, a process called decoupling, depends on a host of environmental, technological, regulatory, economic and cultural factors. A condition that favors this decoupling is the reduction of energy intensity, defined as the energy consumed per unit of product generated. Usually, energy intensity has been associated with the concept of energy efficiency; a factor that is undoubtedly of the first order.  However, changes in energy intensity can also come from changes in the economic structure.

First of all, sectors differ in energy intensity. Chart 1 (top panel).  shows the energy intensity constructed from the basis of the Global Trade Analysis Project (GTAP) in its 2017 version. It can be seen that, on average, the primary and tertiary sectors are the ones with the lowest energy intensity and the secondary sector, that of the elderly. However, within these large sectors there are also important differences; Furthermore, within the tertiary sector, three transport subsectors stand out—air (bar 48 in the graph), maritime (bar 47) and others (bar 46)—among the group of those with the greatest energy intensity in the economy.

In second place, the economic structure changes over time. Figure 1 (Lower Panel) shows the ratio between the relative importance of each sector between 2017 and 2011, again using the GTAP. A number greater than 1 implies that the sector increased its participation in the total value added; between 2011 and 2017, while a number less than 1 indicates that it lost importance. Broadly speaking, the graph suggests a reduction in the importance of most primary sector industries, and significant growth in transportation industries.

How can the contribution of energy efficiency be separated from that of economic structure to explain changes in energy intensity?

In the 2024 EDR we apply a decomposition, inspired by productivity literature, in which the change in the energy intensity of a region or country is separated into three components. The first, change in energy inefficiency, reflects what the change in aggregate energy intensity would have been if there had been no changes in the economic structure. The second component, change in structure, includes the change in aggregate energy intensity if no sector had experienced variations in its energy intensity. The last component, interaction term, is the change in the energy intensity of the region or country that is not attributable exclusively to changes in sectoral energy intensity or to changes in the economic structure, but to the interaction of both forces (for more details see RED 2024).

In GTAP data, between 2011 and 2017, there was a drop in energy intensity in Latin America and the Caribbean of approximately 7%, and in the OECD, of approximately 9%. However, for both regions, the reduction in the inefficiency term is considerably greater than the drop in aggregate energy intensity, while the effect of the change in the economic structure is positive. This means that the efficiency gains between 2011 and 2017 in both regions were partially offset by changes in the economic structure.

Indeed, according to decomposition calculations, if the economic structure had not changed, the drop in energy intensity would have been 20% in Latin America and the Caribbean, more than double that experienced. This role played by the change in the economic structure is consistent with the reduction in the importance of primary sector industries (typically low energy intensity), combined with the growth of sectors such as transportation, with high energy intensity mentioned previously.

Although the results obtained from the decompositions are specific to the period of time studied, they allow us to conclude that the study of energy intensity and, therefore, of the energy transition in general, should not be done with its back to the phenomenon of structural transformation of economies. Changes in the economic structure affect the evolution of energy intensity, and, therefore, the viability of decoupling and mitigation success. This result is of interest in the context of a potential process of powershoring, according to which the region, by virtue of its energy potential, could attract energy-intensive activities; which would impact the energy intensity of their economies.

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Lian Allub
Lian Allub

Economista Principal, Dirección de Investigaciones Socioeconómicas, CAF -banco de desarrollo de América Latina-