Energy Intensity of Production in World Economies: Role of Institutional Environment

Abstract: We assume that economic agents in the economies with strong economic institutions have higher incentives to implement energy conservation measures than those in the countries with weaker institutional environment. To test this, we, first, specify a Cournot type model of a production sector with explicit presentation of energy factor and model energy price shocks under different levels of transaction costs We show that inadequate institutional environment resulting in a high probability for a firm to be faced with adverse external conditions resulting in the high transaction cost brings about the lack of incentives to invest into energy saving. Further we present an econometric model for energy intensity coefficients based on cross country panel data. This model along with the climate and real energy price variables includes an interaction term being a combination of an energy price variable and an index of institutional strength. This method makes it possible to present energy price elasticities as functions of institutional quality indices. Analysis is based on 2002-2009 statistical data involving a large country sample. We apply OLS, IVLS, fixed effect panel, and dynamic panel estimators and show that interaction term we used is highly significant in all the models and at the same time elasticity coefficients specified for the CIS group is almost five times lower than those for the OECD economies.