Institutional quality and its spatial spillover effects on energy efficiency

https://doi.org/10.1016/j.seps.2021.101023Get rights and content

Highlights

  • We examine the spillover effects government institutions on energy efficiency.

  • We adopt the stochastic frontier approach and spatial econometric model.

  • The result confirms the presence of spatial correlations in energy efficiency across countries.

  • Being close to countries with good institutions has a positive effect on energy efficiency.

  • Long-term policies with increased technological progress can address energy issue.

Abstract

Several studies have studied the determinants of energy efficiency. However, the influence of government institutions was mostly ignored as only few studies have provided evidence on the role of institutions in enhancing domestic energy efficiency. In this paper, we extend the previous literature by asking whether neighboring country's institutions could also have an impact on domestic energy efficiency. Thus, with the stochastic frontier approach and spatial econometric model, we investigate the spatial effect of institutional quality on energy efficiency in a panel of 99 countries (economies) for the period 1995–2016. Our results, first confirm the presence of spatial correlations in energy efficiency across countries. Secondly, we discover that the direct positive effect of institutional quality on energy efficiency is such that it overcomes the insignificant indirect negative effect, which suggests a total positive and significant effect. Our results, therefore, indicate that institutional quality matters in energy efficiency improvement and being close to countries with good institutional framework has a positive effect on domestic energy efficiency. Finally, the energy efficiency estimates demonstrate that global energy issue can only be addressed with long-term policies that increases technological progress.

Introduction

The neoclassic economies once considered capital and labor as the engine of economic growth. But, in recent times, energy has become one of the fundamental building blocks of economic growth. Thus, a country's economic growth somehow depends on growth in its energy inputs [1]. But, the use of energy and the emission of greenhouse gases (GHG) are often two terms that are interlinked [[2], [3], [4], [5]]. According to a report by the International Energy Agency, around 67% of total CO2 emissions are generated in energy sector, suggesting that mitigating energy pollution will contribute enormously in meeting the global climate target. Thus, in attempt to reduce emissions from energy use, several studies have advocated for the adoption of renewable energy technology [[6], [7], [8], [9]]. However, efficient use of energy is considered the best and cost effective means of mitigating pollution from energy consumption [10]. For instance Ref. [11], claim that fostering energy efficiency in the industrial sector offers the best tool in terms of cost efficiency for reducing GHG emissions from energy sources. Therefore, energy efficiency is viewed as one of the major GHG emission reduction policy strategies and it is often considered as “low-hanging fruit” for climate mitigation [12].

In the view of the above, many governments have strategically included in their national agenda several cost-effective energy-efficiency policies [13], for instance, policy to commercialize use of energy technologies [14], policies to drive the diffusion of renewable energy [15,16], policies to respond to high-energy intensities [[17], [18], [19]] and policies to drive energy transition [20,21]. But, effective implementation of such policies depends on the institutions mandated to enforce them. According to Ref. [22], energy policies effectively enforced by government institutions to encourage energy efficiency can later affect citizens' energy consumption behavior. This shows that promoting energy efficiency is an institutional problem. Recent empirical and theoretical studies on this subject highlighted the importance of having good institutions [[23], [24], [25], [26], [27], [28], [29], [30]]. This strand of literature argues that the quality of institutions for example, control of corruption, respect for democratic principles, promoting freedom international trade and respect for the laws and the legislative authority are all important in environmental and energy efficiency improvements. Indeed, it is interesting to note that the results of these studies, examining the effects of institutional quality on energy efficiency, are mostly mixed. The lack of consensus in the existing literature may have emanated from the differences in the institutional proxy used or the small set of institutional variables selected. Though, previous studies have provided evidence on the effects of institutional quality on energy efficiency, they have mainly focused on limited number of basic institutional factors such as judiciary independence, government size democracy, and corruption on energy intensity. Besides, in most cases, the energy efficiency used in the previous studies is the conventional energy efficiency measures such as energy intensity which regard energy as the single input that produces GDP and neglect other key inputs like capital and labor.

In an effort to contribute to the existing knowledge: First, we consider new set of satisfactory institutional measures. Therefore, we consider a larger set of institutional variables which include political and economic institutional variables such as corruption, law and order, democracy, the legal system, property rights, sound money, freedom to trade internationally, regulation of credit, labor, and business, government stability and size.

Second, instead of using the conventional energy efficiency measures such as energy intensity (as done in the previous studies) which regard energy as the single input that produces GDP and neglect other key inputs like capital and labor, we adopt a multi-factor energy efficiency assessment model, because it provides better estimates than the traditional partial energy intensity measure [31]. In most cases, the energy intensity indicator is frequently assumed to be synonymous to energy efficiency. But, there are many disadvantages to the use of the energy intensity measure to calculate energy efficiency. First, according to the Ref. [32], the use of energy intensity indicators as energy efficiency measures may not be entirely accurate, as it requires strong assumptions about factors related to efficiency. For example, if the level of technology, economic structure, demographics, lifestyles, and weather conditions differ between countries, the energy intensity would not adequately capture such variations between countries in its measurement [33]. Since efficiency is affected by variations and factors that are not connected to energy, the application of energy intensity as calculation of energy efficiency may be misleading because it does not eliminate or even take into account all the behavioral and structural factors required for actual energy efficiency measurement. Second, the energy intensity measure does not reveal precisely what is inefficient. It may implicitly point to an industry or an economy's general state of affairs, but it provides no basis for concrete recommendations on improving energy efficiency [34]. Third, energy intensity provides no estimates of to what degree the energy efficiency of a given technology or product can be enhanced [35]. Due to these limitations, policy and decision-makers are liable to have an incorrect estimate of the true energy efficiency which will result in poor policy decisions.

Third, we extend the nexus between institutional quality and energy efficiency by examining the spatial effects of institutional quality on energy efficiency. In other words, we are interested in finding out if the geography of institutions matters in understanding cross-country energy efficiency differences. The idea of spatial relationships is not new in environmental or energy economics [[36], [37], [38], [39], [40], [41], [42], [43], [44], [45], [46], [47], [48]]. As governments and citizens learn from each other, institutions and policies can spread across countries in a number of ways. For example, in the quest for regional markets, multinational companies may engage in policy reforms in order to bring local laws into conformity with common principles. Governments, in the hope to take advantage of external opportunities, such as the opportunity to supply to the foreign markets and attract foreign investments, may adopt policies of other countries [49]. Imperialist nations impose their institutions and policies on neighboring nations, be it by peaceful or violent means [49,50]. Countries may imitate each other's institutions because of their proven attractiveness, as showed by Ref. [51] for sub-Saharan African countries.

Ref. [50] empirically observe such institutional spillover effects across neighboring countries. Ref. [39] finds evidence of spatial spillover of explanatory variables in environmental Kuznets curves models for series of anthropogenic greenhouse gas emissions and mentions that it is unclear whether spatial spillover occurs because governments are mimicking each other's environmental policy or whether these are purely incidental effects caused by the geographic diffusion of technology and lifestyles. Ref. [52] finds that because of cross-border copying of environmental policy or institutions, countries are able to influence positively the environmental policies of their neighbors. In other words, the environmental policies in neighboring countries are important for a country's environmental efficiency. Ref. [53] argues that environmental quality of countries spreads spatially to their neighbors through the spillover of the institutional quality of countries in recent decades. Ref. [54] finds that a policy change to increase foreign investment in one country, increases the polices favoring foreign investment in another country.

To achieve the above objectives, we asked the following questions. We ask, whether differences in energy efficiency performance depend on the institutional differences across countries. Does improved institutional arrangement help in improving energy efficiency? Does spatial spillover effect of institutional quality exist? In other words, do institutions of country i matter for the energy efficiency performance of country j? If they do, how much can they explain differences energy efficiency level across countries? How efficient are countries in energy use? What are the sources of efficiency in energy use?

By providing answers to these questions, the main subjects of this study are as follows:

  • (1)

    The energy efficiency performance of countries is first of all established by means of stochastic frontier analysis (SFA).

  • (2)

    Next, along with other environmental factors, we investigate the spillover effects of neighboring country's institution on one's domestic energy efficiency. In other words, we account for spatial dependence between energy efficiency and institutional quality.

Section snippets

Energy efficiency - institutions nexus

In an attempt to tackle the increasing dangers of climate change, scholars are trying to identify ways to reduce greenhouse gas emissions. Two mitigation methods are often mentioned in the literature, i.e.: (i) use of renewable energy; and (ii) efficient use of energy resources. Nevertheless, other researchers are emphasizing the role of governments in reducing CO2 emissions and maintaine that improvement in the energy consumption behavior of countries depends on energy policies successfully

Theory and methods of energy efficiency estimation

The standard economic theory posits a production function that assumes that economic agents such as individuals, households, and firms are rational enough to produce output efficiently, that maximize output given existing technology and inputs in place or combine inputs in an ideal manner with regards to available prices and technology to minimize the cost of production or finally to maximize the profit given the current technology as well as the input and output prices. Even though these are

Discussion of results for energy efficiency

The 1995–2016 annual average persistent, transient and total energy efficiency index for all 99 countries are summarized in Table 2. For total energy efficiency, as can be seen, there is a significant difference in the level of energy efficiency across countries. The average total energy efficiency score is 53%, which varies from 11% to 86%. Of the 99 countries understudied, 53 of them lie above the mean score while 46 are below. Countries like the United States, Saudi Arabia, Turkey, Egypt,

Conclusions, policy implications and limitations

There have been studies on the effect of institutional quality on energy efficiency, but, the understanding of the relationship between government institutions and energy efficiency is still limited especially in this era of rapid globalization, where countries interact more frequently with each other. To offer more insight on the effects of institutional quality on energy efficiency, we examine its spillover effects on energy efficiency, using both SFA and spatial panel model.

In general, the

Acknowledgments

This study is funded by National Natural Science Foundation of China (Nos. 71774071, 72074186, 71673230), Social Science Foundation of Jiangsu (No. 20ZLA007).

Huaping Sun, Born in 1979 in Jining, Shandong Province, is a Ph.D. in Economics, professor and doctoral supervisor in the School of Finance and Economics/Institute of Industrial Economics, Jiangsu University. His main research field is industrial low-carbon economics and global value chain innovation, energy economy and environmental governance. He has published more than 30 SCI/SSCI papers including Energy, Energy Policy, Journal of Cleaner Production, etc.

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  • Cited by (0)

    Huaping Sun, Born in 1979 in Jining, Shandong Province, is a Ph.D. in Economics, professor and doctoral supervisor in the School of Finance and Economics/Institute of Industrial Economics, Jiangsu University. His main research field is industrial low-carbon economics and global value chain innovation, energy economy and environmental governance. He has published more than 30 SCI/SSCI papers including Energy, Energy Policy, Journal of Cleaner Production, etc.

    Bless Kofi Edziah, is a Ph.D. candidate in the School of Finance and Economics, Institute of Industrial Economics, Jiangsu University. His main research field is low-carbon economics. He has published 2 SCI/SSCI papers including Energy Policy, ESPR.

    Chuanwang Sun is a visiting scholar, Department of economics, Cornell University, USA. He is now professor and doctoral supervisor of China Energy Economy Research Center, School of economics, Xiamen University. The main research fields are energy economy, environmental policy, carbon emission and economic growth. He has published more than 30 SCI/SSCI papers including Energy Policy, etc.

    Anthony Kwaku Kporsu: is a Ph.D. candidate in the School of Finance and Economics, Institute of Industrial Economics, Jiangsu University. His main research field is low-carbon economics. He has published 1 SCI/SSCI paper in Energy Policy.

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