Does energy efficiency enhance total factor productivity in case of India?

• Author: Aadil Ahmad Ganaie,Salman Haider
• Published date: 01 June 2017
• Date: 01 June 2017
• DOI: http://doi.org/10.1111/opec.12099

Does energy efficiency enhance total factor

productivity in case of India?

Salman Haider and Aadil Ahmad Ganaie

PhD Scholars, School of Economics, University of Hyderabad, Hyderabad, India.

Email: aadilganaie@uohyd.ac.in

Abstract

The aim of this study is to explore the dynamic linkage between energy efficiency and total factor

productivity (TFP) using carbon emission and trade openness as control variables for the period of

1971–2013. For this purpose, vector error correction mechanism (VECM) is employed to

determine the direction of causality. A popular and simple measure of energy efficiency, GDP per

unit of energy use and trade as a percentage of GDP are used for the proxy of trade openness. The

result shows negative impact of energy efficiency on TFP, in other way energy intensity has a

positive impact on the growth of TFP. Hence, the negative sign indicates a trade-off between

energy efficiency and TFP. There is a unidirectional causality running from energy efficiency to

TFP. Whenever energy intensity increases, the TFP level increases as well. So, in the long run, a

higher TFP implies higher energy consumption. Further, TFP and carbon emission Granger cause

trade openness, and there is unidirectional causality from TFP to CO

2

emission.

1. Introduction

Global warming has become the crucial environmental problem and impedes sustainable

development in the world. The problem is rooted in the increasing trend of greenhouse

gas (GHG) emission largely carbon dioxide, which is a by-product of fossil fuels.

Liberalisation and globalisation during last two decades necessitated a large amount of

energy consumption to foster economic growth. Because of this issue, a growing body of

literature has focused on enhancing energy efficiency, which is one of the crucial aspects

in reducing GHG emission. Energy input and pollution level are continuously rising

globally, especially in developing countries such as India, which became the fifth-largest

country regarding energy consumption and third largest carbon emitter in the world.

Energy demand in the Indian industrial sector is projected to increase rapidly, which

currently consume around 40 per cent total final consumption. India’s huge infrastructure

needs over the next decades drive the demand for energy-intensive materials, for which

India becomes an important manufacturing hub.

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