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Measurement of Energy Efficiency: A New Economic Indicator

This paper discusses the development of a new economic indicator for measuring energy efficiency. It examines the limitations of current indicators and proposes a new indicator that incorporates both technical efficiency and allocative efficiency. The paper also explores the linkages between the new indicator and environmental policy instruments.

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Measurement of Energy Efficiency: A New Economic Indicator

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  1. 2009 International Energy Workshop 17-19 June 2009, Venice, Italy Measurement of Energy Efficiency: A New Economic Indicator Chung-Huang Huang School of Transportation and Tourism, Kainan University, and Department of Economics, National Tsing Hua University, Taiwan Pei-Ling Shan Tax Specialist, Taxation and Tariff Committee, Ministry of Finance, Taiwan Chin-Wen Yang Ph.D. candidate, Institute of Industrial Economics, National Central University, Taiwan. 2009 IEW, Venice

  2. Outlines • Motivations • Objectives • Problems with current indicators • A new indicator • Energy efficiency and its linkage to environmental policy instruments • Concluding remarks 2009 IEW, Venice

  3. Motivations • 2002 World Summit on Sustainable Development • UNFCCC and Kyoto Protocol • One of the six national policy goals in Taiwan • Framework on Sustainable Development Strategy in ROC • Implementation Plan for Sustainable Development, Executive Yuan • Framework on Sustainable Energy Policy • National Energy Conference in 1998, 2005, 2009 (April) • Taiwan Sustainable Development Conference (April 2006) • Taiwan Economic Sustainable Development (July 2006) and • the 8th National Conference on Science and Technology (January 2009) 2009 IEW, Venice

  4. Motivations • Energy efficiency improvement is considered one of the key strategies to mitigate the following pressures: • Global Competitiveness Index (GCI) has been deteriorating in the past few years • GDP growth performance is much worse than expected • Economic impact of global financial crisis is enormous 2009 IEW, Venice

  5. On GDP per capita Global Competitiveness Index (GCI) in Selected Countries GDP Growth Rate in Selected Countries Source: Huang (2009). Results from TAIGEM-III. 2009 IEW, Venice

  6. Objectives • Critically review the meanings and problems with existing energy efficiency indicators • Energy productivity • Technical and allocative efficiency • Conditional input demand approach (Feijoo et al. 2002) • Propose a new indicator • Highlight the linkage between the new indicator and environmental policy instruments 2009 IEW, Venice

  7. 1/2 Problems with current indicators • Energy productivity • Volatility not justifiable • Good only for energy cost effectiveness • Inconsistent with average profit of energy • Econometric modeling between GDP and energy use warranted 2009 IEW, Venice

  8. 2/2 Inconsistent with average profit of energy Real GDP Iso profit curve: slope = w  B C   A    E 0 E’ E* E” 2009 IEW, Venice

  9. 1/3 Measurement of technical efficiency and allocative efficiency TEG = B0/G0 = CB/CA AEG = N0/B0 = CE/CB EEG = N0/G0 = TE  AE= CE/CA K G ‧ Is the firm using energy inefficiently or capital excessively? CA B ‧ Iso-cost curve ‧ KN N CB ‧ K* CD F Production frontier f(E*, K*) = Q CE E EB EN E* D 0 2009 IEW, Venice

  10. 2/3 Measurement of TE and AE • TE and AE • Good ONLY for overall resource allocation efficiency • Might inconsistent with cost efficiency • Estimation complicated and results sensitive 2009 IEW, Venice

  11. 3/3 Estimates of TE and AE under alternative energy demand frontiers 2009 IEW, Venice

  12. Conditional input demand (Feijoo et al. 2002) • Conditional input demand • EEG = FE*/GE* < EEM = • EEA = EEM • CostA < CostM K G ‧ A ‧ ‧ M CA KA B ‧ ‧ KN N CB ‧ K* CD F f(E*, K*) = Q CE E EN EA E* D 0 2009 IEW, Venice

  13. Define the real profit loss (RPL): 1/2 A new indicator = allocation loss (AL) + technical loss (TL) • ALD =∆BDA，TLD = ∆ADwEL • ALG =∆BHC，TLG = ∆CGNM • ALF = 0，TLF =∆BFMwE 2009 IEW, Venice

  14. 2/2 Properties of the new indicator • Easy to understand • Incorporates both TE and AE • Consistent with cost efficiency • Adds no extra complication to empirical works • Allows for inter-comparison and aggregation • Links to environmental policy instruments 2009 IEW, Venice

  15. 1/2 Linkages to environmental policy instruments VMPE $ wE+ c’(ac) Emission Cap: wE+ c’(ae) ‧ d e ‧ k c Cap & trade: ‧ f h ‧ g wE ‧ ‧ b q z n m ‧ r a TLa E 0 Ec Ee E* Eo 2009 IEW, Venice

  16. VMPE 2/2 $ wE+ c’(ac) wE+ c’(ae) ‧ d e ‧ • Proper design of instruments may induce more efficiency. k c ‧ f h ‧ g wE ‧ ‧ b q z n m ‧ r a E 0 Ec Ee E* Eo TELo A B Le Loss curve Lc C RPL* RPLe RPL RPLc 2009 IEW, Venice

  17. Concluding remarks • Some limitations to existing indicators • Environmental policy regime does matter for energy efficiency improvement • More econometric works needed for stability checking • Future works on dynamic efficiency indicator warranted 2009 IEW, Venice

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