Energy and material flow management to improve EU productivity

Abstract

In this study, we consider EU 28 countries’ production process that generates the single output real GDP per capita by using three inputs: capital stock, number of persons engaged and per capita use of primary energy before its transformation to other end-use fuels. In this context we study the drivers of total factor productivity change (TFPCH) in decision making units (DMUs) (in our case EU 28 countries). Taking into consideration that production technology is assumed to be homogeneous across DMUs, we study the effects of multiple explanatory variables (fossil fuel energy consumption, renewable energy consumption, CO2 emissions, domestic material consumption and recycled municipal waste) on TFPCH and its first component — technical efficiency change (TEC)). Then, we assume variable returns to scale and adopt the output-oriented Farrell efficiency measure (TE) as the dependent variable in a second stage analysis. To interpret the results qualitatively and find the determinants of DMUs’ productivity, we examine the estimated mean marginal effects of the above multiple explanatory variables, on TE, by applying the Simar and Wilson's algorithms. Besides algorithm I and algorithm II, we also employ tobit and truncated regressions for comparison. A second stage empirical analysis reveals that fossil fuels (Jevons Paradox), renewable energy consumption, biomass and recycled municipal waste are positively related to the VRS efficiency scores of DMUs at the 10% level of significance, while CO2 emissions are negatively related. The overall picture is somewhat different according to the size of the country and therefore heterogeneity. © 2021 Economic Society of Australia, Queensland