Boosting Australia’s energy productivity

Climate change Power resources Economics Australia

This report argues that Australia’s poor investment in energy efficiency is costing the nation tens of billions of dollars in economic growth.


Energy efficiency is both the single most costeffective way of lowering greenhouse gas emissions, and an essential component of any strategy to reach long-term emission reduction goals. Under a limited global carbon budget, the right to produce emissions becomes a scarce and valuable resource. In this carbon-constrained world, prosperity depends on maximising ‘carbon productivity’: generating maximum value for each tonne of carbon emitted. The two main drivers of greater carbon productivity are reducing the emission intensity of energy production, and improving the efficiency of energy use.

However, energy efficiency has many other benefits. Many countries are pursuing energy efficiency to achieve goals other than emissions reduction. These include boosting economic productivity, improving energy security, reducing expenditure on fuels and energy infrastructure, reducing health-damaging air pollution and developing the energy services industry.

Energy efficiency is an important element of energy productivity: reducing the amount of energy required per unit of output lowers the production cost per unit. (Other factors driving energy productivity are energy prices and economic composition; see Box 1. Definitions, p. 4.) Energy efficiency is about producing the same set of products and outputs with less energy; energy productivity is about producing more outputs and products with the same amount of energy. In the face of a long-term rise in fuel and carbon prices, cutting input costs through more efficient energy use can become an important source of productivity and competitive advantage for companies. Similar benefits accrue to national economies: energy efficiency decreases spending on fuel and energy infrastructure, can suppress energy prices and stimulates economic growth.

New research by Vivid Economics has found that a 1 per cent increase in the level of a country’s energy efficiency causes a 0.1 percentage point increase in the rate of economic growth per person in that year. This relationship was quantified using statistical analysis of energy and economic data from 28 diverse countries over a 30-year time period, controlled for sectoral composition, country and time-specific factors, and using energy prices and their relationship with energy efficiency. Applying this energy efficiency effect to forward projections of GDP growth for most of the sampled countries, an annual 1 per cent increase in energy efficiency would increase their combined projected 2030 GDP by 1.8 per cent over the business-as-usual forecast, resulting in approximately $US 600 billion additional GDP.

These findings complement recent research by the International Energy Agency (IEA), which used a bottom-up approach to identify the costs and benefits of globally implementing economically viable energy efficiency improvements. The IEA found that investment of $11 trillion would boost world economic output by around US$18 trillion to 2035, avoid $US 7 trillion of investment in coal, oil and gas extraction, new power stations and energy transmission networks, and save nearly $17 trillion in fuel costs.

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