Energy consumption and GDP: analysis of relation in market and transitional economies

Differences in energy consumption in market and transition economies explained by climatic and institutional variations

This paper is devoted to problems in the use of energy in the production sphere. It presents problems of energy consumption in market and transitional economies and attempts to explain low energy productivity observed in transition countries.

The methodology used is a cross-country analysis of factors affecting the levels of the energy intensity of production in both market and transitional economies. Climatic conditions, variables of institutional environment, production structure variations and evaluations of unofficial economy shares are taken into consideration.

The authors find that the level of energy use in the former socialist countries is visibly higher than in market economies. According to the authors, this situation is mainly caused by two factors: more severe climate and bad institutional conditions.

The findings indicate that the CIS producers’ sensitivity to the change in energy prices is four times lower than in OECD countries. The authors see the lack of incentives for energy savings and lack of proper management of excessively large firms as the reasons behind this situation. At the same time the authors argue that there is no more capacity to intensify the energy saving process by means of raising energy prices.

The authors conclude that reform of the electricity sector conducted in a large number of countries could result in a reduction of both fuel consumption and waste of energy during its transportation and distribution.

The key policy recommendations to strengthen the energy saving tendency are to:

stop subsidising energy consumers
improve the general investment climate
subsidise energy saving projects
standardise energy equipment
assist the development of the energy saving technologies market
harden environmental legislation.

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Energy consumption and GDP: analysis of relation in market and transitional economies