Energy Productivity

2

What is Energy Productivity

and Why Does it Matter?

3

Global Climate Change and Attempts to Govern Emissions

Who is listening?

How do you

persuade them to

listen?

4

Priorities in Global Discussions

Energy Intensity vs

Carbon Intensity

Limited Access to

Energy

Limited Ability to

Emit GHGs

Energy Productivity

5

Energy: Efficiency vs Intensity vs Productivity

Energy

GDP

Energy

Steel

GDP

Energy

Steel

Energy

Macro

Level

Micro

Level

Energy

Intensity

Energy

Efficiency Energy

Productivity

Defined in

terms of

energy

Defined in

terms of

output

Energy

Productivity

6

A paradox: can negative cost abatement options exist?

Source: McKinsey, 2009 Pathways to a low carbon economy

7

Energy Productivity v. Energy Intensity

Energy intensity is more commonly used.

However, there are important reasons to believe that energy productivity

provides a better way forward.

Economic Development

Environmental Sustainability

Energy Security

Indicators such as energy efficiency, intensity and

productivity are increasingly used to address

three key, interrelated issues facing policymakers.

𝐄𝐧𝐞𝐫𝐠𝐲 𝐈𝐧𝐭𝐞𝐧𝐬𝐢𝐭𝐲 =𝐄𝐧𝐞𝐫𝐠𝐲 𝐂𝐨𝐧𝐬𝐮𝐦𝐩𝐭𝐢𝐨𝐧

𝐆𝐫𝐨𝐬𝐬 𝐃𝐨𝐦𝐞𝐬𝐭𝐢𝐜 𝐏𝐫𝐨𝐝𝐮𝐜𝐭

𝐄𝐧𝐞𝐫𝐠𝐲 𝐏𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐯𝐢𝐭𝐲 =𝐆𝐫𝐨𝐬𝐬 𝐃𝐨𝐦𝐞𝐬𝐭𝐢𝐜 𝐏𝐫𝐨𝐝𝐮𝐜𝐭

𝐄𝐧𝐞𝐫𝐠𝐲 𝐂𝐨𝐧𝐬𝐮𝐦𝐩𝐭𝐢𝐨𝐧

How can that be if energy productivity and energy

intensity are merely reciprocals?

8

The Case for Energy Productivity

Energy productivity has a number of advantages over energy intensity:

• ‘Productivity’ conveys a more positive quality than ‘intensity’.

• Psychology and behavioral economics research has found people react differently to choices based on how they are presented and framed.

Positive Connotation

• An improvement in energy productivity is represented by an increase in its value, whereas energy intensity improvements are decreases in value.

• Objects and choices described in positive terms are preferentially adopted or have higher performance compared to identical alternatives framed in negative terms.

Intuitive Framing

• Energy productivity is more closely aligned with the widely understood concept of energy efficiency, as both are measures of output divided by input.

• At a disaggregated, sector-specific or process-level basis, energy productivity becomes almost synonymous with energy efficiency.

Aligns with Efficiency

• Energy productivity is measured in dollars of GDP per unit of energy, which is more readily understood given the well-established frame of reference for monetary values.

• By contrast, energy intensity is measured in less intuitive energy consumption units like tons of oil equivalent.

Instinctive Understanding

9

The Case for Energy Productivity: It’s not Just Semantics

There are also mathematical advantages:

• The amplified dynamics of energy productivity targets can give them broader appeal, not only because they are framed as positive actions, but also because such targets appear more ambitious than the equivalent intensity target.

• A goal of reducing intensity by 50% can instead be framed as a 100% increase in productivity.

Portrayal of Grander Ambition

• GDP is generally increasing faster than changes in energy consumption, and since GDP is the denominator in energy intensity, changes over time exhibit a pattern of decay.

• This gives rise to the Energy Intensity Illusion, which clouds the gap of relative performance between countries.

The Energy Intensity Illusion

Energy Intensity

Countries with a high initial energy

intensity make large gains in both

absolute and relative terms.

While countries with lower initial

energy intensity do not appear to

make large gains.

Energy Productivity

Countries that appeared to lag in

energy intensity improvements

actually make larger energy

productivity gains in absolute terms.

10

The Energy Intensity Illusion

Energy Intensity

Energy

Productivity

EIA,0

EPA,0

EIA,1

EPA,1

For energy intensive

countries, like Country A, a

large reduction in energy

intensity yields a small energy

productivity improvement.

EIB,1

EPB,1

EIB,0

EPB,0

For countries with low a

energy intensity, like Country

B, a small intensity reduction

yields a large energy

productivity gain.

11

What Causes Changes in

Energy Productivity?

12

Investigating Improvements in Energy Productivity

Are energy productivity improvements occurring because countries are

becoming more energy efficient? Or is it because the structure of their

economies is shifting towards more energy productive sectors?

Decomposition Analysis

Economic Output

Energy Consumption

Structural economic

shifts

Energy Efficiency

Improvements

Energy Productivity

13

Decomposition Analysis Dataset – the World Input Output Database

Energy and gross output for 40 countries and 34 sectors, 1995-2009

Countries included account for 85% of global GDP and 80% of global

energy consumption

WIOD Sector Disaggregation

1. Agriculture, hunting, forestry and fishing

2. Mining and quarrying

3. Food, beverages and tobacco

4. Textiles and textile products

5. Leather, leather products and footwear

6. Wood and products of wood and cork

7. Pulp, paper, printing and publishing

8. Coke, refined petroleum and nuclear fuel

9. Chemicals and chemical products

10. Rubber and plastics

11. Other non-metallic mineral

12. Basic metals and fabricated metal

13. Machinery, nec

14. Electrical and optical equipment

15. Transport equipment

16. Manufacturing nec, recycling

17. Electricity, gas and water supply

18. Construction

19. Sale, maintenance and repair of motor vehicles

20. Wholesale trade and commission trade

21. Retail trade, except of motor vehicles & motorcycles

22. Hotels and restaurants

23. Inland transport

24. Water transport

25. Air transport

26. Supporting and auxiliary transport activities

27. Post and telecommunications

28. Financial intermediation

29. Real estate activities

30. Renting of machinery & equipment & other business

activities

31. Public administration and defense, social security

32. Education

33. Health and social work

34. Other community, social and personal services

= Nations

included in WIOD

14

Decomposition Analysis

Methodology: Fisher Ideal Index

The product of structural and efficiency indexes

Yields a perfect decomposition

Energy ProductivitytEnergy Productivity0

= FtStructural ∗ Ft

Efficiency

Structural index: how has the mix of an economy’s output changed over

time? Has the share of economic output shifted towards more energy

productive or energy intensive sectors?

Efficiency index: have sectors become more energy efficient over time?

Energy efficiency is represented as the energy productivity (gross output /

energy consumption) of sectors.

Findings:

Changes occurred primarily through the energy efficiency channel

Rapid and volatile changes in efficiency and gradual structural economic shifts

Efficiency gains since 1995

are responsible for 30 billion

tons of oil equivalent of

avoided energy consumption

– equivalent to 7 years of oil

consumption

15

Decomposition Analysis: United States and China

40% increase in energy productivity

Driven by efficiency gains, most notably

in:

Coke, refined petroleum and nuclear fuel

Wood and wood products

Mining and quarrying

Structural shift due largely to financial

intermediation sector

2.5 fold energy productivity improvement,

attributable to efficiency gains

Electricity, gas, and water supply

Chemicals and chemical products

Water transportation

China’s economy shifted towards more

energy intensive sectors at the expense of

the agricultural, forestry and fishing sector

0

0,5

1

1,5

2

2,5

3

3,5

1995 1997 1999 2001 2003 2005 2007 2009

Fis

her

Ind

ex (

1995 =

1)

China

Structural Efficiency Energy Productivity

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1995 1997 1999 2001 2003 2005 2007 2009

Fis

her

Ind

ex (

1995 =

1)

USA

Structural Efficiency Energy Productivity

16

Drivers of Embodied

Energy in Trade: The

Role of Specialization

17

What is embodied energy?

The embodied energy in a good or service is the energy that was

consumed in order to produce that good or service.

We can calculate the embodied energy in each country’s exports and

imports.

For example, 50 tonnes of oil equivalent (toe) might

have been consumed to produce this car.

If the embodied energy in exports is greater than the

embodied energy in imports, then a country is a net

exporter of embodied energy.

18

The embodied energy calculations generally show that:

Developed nations net importers of embodied energy

Developing nations net exporters of embodied energy

The embodied energy in a country’s trade

-300,0 -200,0 -100,0 0,0 100,0 200,0 300,0

USA

JPN

DEU

FRA

ITA

GBR

ESP

AUS

MEX

IND

BRA

ROU

BEL

HUN

POL

NLD

CZE

IDN

CAN

TWN

KOR

RUS

RoW

CHN

Embodied energy in net exports (Mtoe)

19

It is sometimes claimed that the “offshoring” of energy intensive industries

is causing these embodied energy flows.

For example, The Economist made the following comment on this strand

of research: “Rich countries are outsourcing carbon-dioxide emissions”.

This leads us to our research question:

Is offshoring really driving these embodied energy flows?

Is offshoring the cause?

vs

Developed countries

specialized in services

Developing countries

specialized in heavy industry

20

What factors can lead to net exports of embodied energy?

Suppose Exportistan and Importistan had the same efficiency and

specialization. If Exportistan has a positive trade balance with

Importistan, then:

∴ Exportistan is a net exporter of embodied energy because of trade

Suppose Inefficienstan and Efficienstan had the same specialization and

balanced trade. If Inefficienstan was less energy efficient, then:

∴ Inefficienstan is a net exporter of embodied energy because of inefficiency

Suppose Industan and Servistan had the same efficiency and balanced

trade. If Industan was more specialized in energy intensive exports, then:

∴ Industan is a net exporter of embodied energy because of specialization

21

The three drivers of embodied energy

There are three drivers, each of which can lead to net exports of

embodied energy by itself:

trade balance

energy efficiency

specialization

To determine the role each driver plays, it needs to be measured:

The trade balance can be easily measured using readily available data:

𝑛𝑒𝑡 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 = 𝑋 −𝑀 ($)

Energy efficiency at an aggregate level can be measured using intensity:

𝑒𝑛𝑒𝑟𝑔𝑦 𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 = 𝑒𝑛𝑒𝑟𝑔𝑦 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛 𝑔𝑟𝑜𝑠𝑠 𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 (𝑡𝑜𝑒 $)

But how to measure specialization?

𝑠𝑝𝑒𝑐𝑖𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 = ?

22

Measuring specialization

First, we measure the embodied energy in exports:

𝐸𝐸𝑋 = 𝑒𝑚𝑏𝑜𝑑𝑖𝑒𝑑 𝑒𝑛𝑒𝑟𝑔𝑦 𝑖𝑛 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 (𝑡𝑜𝑒)

𝑋 = 𝑚𝑜𝑛𝑒𝑡𝑎𝑟𝑦 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 ($)

We can then define the “intensity of exports”:

𝐸𝐸𝑋

𝑋= 𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 𝑜𝑓 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 𝑡𝑜𝑒 $

The intensity of exports can be compared to the overall energy intensity

of a nation. If this ratio is greater than one, then the country is specialized

in energy intensive industries.

𝐼𝐹 𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 𝑜𝑓 𝑒𝑥𝑝𝑜𝑟𝑡𝑠

𝑒𝑛𝑒𝑟𝑔𝑦 𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 > 1 , 𝑇𝐻𝐸𝑁 𝑠𝑝𝑒𝑐𝑖𝑎𝑙𝑖𝑧𝑒𝑑

23

Basic decomposition (using China as an example)

The embodied energy (EE) in China’s exports and imports:

𝐸𝐸 𝑖𝑛 𝑒𝑥𝑝𝑜𝑟𝑡𝑠 (𝑡𝑜𝑒) = 𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦𝑐ℎ𝑖𝑛𝑎 𝑡𝑜𝑒/$ × 𝑠𝑝𝑒𝑐𝑖𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛𝑐ℎ𝑖𝑛𝑎 × 𝑒𝑥𝑝𝑜𝑟𝑡𝑠𝑐ℎ𝑖𝑛𝑎 $

𝐸𝐸 𝑖𝑛 𝑖𝑚𝑝𝑜𝑟𝑡𝑠(𝑡𝑜𝑒) = 𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦𝑤𝑜𝑟𝑙𝑑 𝑡𝑜𝑒/$ × 𝑠𝑝𝑒𝑐𝑖𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛𝑤𝑜𝑟𝑙𝑑 × 𝑖𝑚𝑝𝑜𝑟𝑡𝑠𝑐ℎ𝑖𝑛𝑎 ($)

The EE in net exports can be additively decomposed into three effects:

𝐸𝐸 𝑖𝑛 𝑛𝑒𝑡 𝑒𝑥𝑝𝑜𝑟𝑡𝑠= 𝒓𝒆𝒍𝒂𝒕𝒊𝒗𝒆 𝒊𝒏𝒕𝒆𝒏𝒔𝒊𝒕𝒚 + 𝒓𝒆𝒍𝒂𝒕𝒊𝒗𝒆 𝒔𝒑𝒆𝒄𝒊𝒂𝒍𝒊𝒛𝒂𝒕𝒊𝒐𝒏 + 𝒕𝒓𝒂𝒅𝒆 𝒃𝒂𝒍𝒂𝒏𝒄𝒆

China

China

24

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

FRA

USA

ITA

GBR

GRC

ESP

AUS

MEX

AUT

JPN

IND

HUN

DEU

PRT

TUR

ROU

BEL

SWE

FIN

BRA

POL

NLD

IDN

ROW

TWN

CZE

KOR

CAN

CHN

RUS

Efficiency Effect Specialization Effect TB Effect

Which of the three drivers is most prominent?

The decomposition

analysis shows that:

1. Relative intensity

accounts for 36% of

embodied energy flows.

2. Relative specialization

accounts for 43%.

3. The trade balance

accounts for 21%.

All of these

bars add

up to 100%

25

Conclusions

Offshoring alone does not explain embodied energy flows:

Offshoring (as measured by relative specialization) accounts for 43% of the

global embodied energy flows—making it the most important driver.

Nevertheless, this is less than half of embodied energy in international trade.

Energy efficiency (as measured by relative intensity) and the trade balance

account for the remainder.

These insights can help ease climate change discussions, which tend to

be beleaguered by “finger-pointing” between countries.