Convergence of Energy Efficiency in OECD Countries: Consideration of Sharp and Smooth Breaks

Introduction

For decades, scientists and governments have been interested in the energy efficiency concept since economies may use less energy to generate the same quantity of goods and services when energy efficiency improves. Also, international initiatives have shown a particular interest in the energy efficiency issue. The United Nations' Sustainable Development Goals of Agenda 2030, for example, aim to double the worldwide rate of increase in energy efficiency by 2030 (United Nations, 2015).

Practitioners have analyzed the convergence behavior of energy variables such as energy consumption, energy productivity, and energy intensity for a few decades. However, most of the studies have failed to examine the convergence of energy efficiency. Investigating the convergence behavior of the energy efficiency index can provide some policy implications to policymakers. They can determine whether common (or differentiated) energy policies are proper for their countries, or not. Also, the convergent behavior of the energy efficiency index across OECD countries indicates that common energy policies are efficient and there is no need for reexamination of current policies (Yilanci et al., 2022), while the non-convergence behavior reveals that policymakers should design differentiated energy policies. In countries that have lower energy efficiency, policymakers should direct economic agents toward energy-saving innovations, while in countries that have higher energy efficiency, they should lead international technological cooperation (Yan et al., 2017). So, governments can design and implement proper energy policies based on the convergence results.

There are only a few studies considering the convergence of energy efficiency in the empirical literature; Menegaki and Tiwari (2019) for 35 European countries during 1995-2014 and Qi et al. (2019) for 60 Belt and Road Initiative (BRI) countries during 1995-2015. As seen, the examined time spans in these studies are very short. We believe that considering longer datasets can provide more reliable results regarding the convergence pattern of the series. Also, this is the first study that explores the convergence pattern of the energy efficiency index for OECD countries. Besides, the methods examined in the above studies fail to detect smooth structural breaks; Menegaki and Tiwari’s (2019) study takes into account only sharp breaks. However, Leybourne et al. (1998) argued that series do not always display sharp breaks; structural shifts can take the form of gradual and smooth patterns in some cases.

In this study, there are two primary aims: a) calculating the energy efficiency index via the decomposition method for 27 OECD countries covering 1971-2018, and b) detecting the stochastic convergence behavior of the energy efficiency index through recent panel data techniques that consider both sharp and smooth breaks. In this study, we chose the abovementioned economies as a sample because most of them lack rich energy resources. Thus, it would be rational to investigate their energy efficiency index levels and determine their convergence behavior.

This study employs Fisher’s Ideal index to construct the energy efficiency index for the period examined. Since Fisher’s Ideal index provides perfect decomposition and zero-value robustness, we employ this methodology in the study. Then, this study investigates the stochastic convergence behavior of the energy efficiency index through the panel stationarity test with sharp and smooth breaks introduced by Bahmani-Oskooee et al. (2014). The panel stationarity test with sharp and smooth breaks has two fundamental advantages compared to the conventional panel unit root tests such as LLC (Levin-Lin-Chu), IPS (Im-Pesaran-Shin), and Fisher-type tests. First, the methodology considers the cross-sectional dependency in the series; therefore, the empirical findings become more reliable. Second, the test combines both sharp and smooth structural breaks in the series.

This investigation is composed of six main sections. Section 2 overviews the energy structure in OECD countries, while Section 3 summarizes the empirical literature on the convergence of energy intensity, energy productivity, and energy efficiency, respectively. Section 4 introduces the dataset and the empirical methods utilized. Section 5 presents and discusses the empirical results, while Section 6 concludes this study.