The Effect of Energy Efficiency Enhancement on Innovation and Competitiveness

Our results lend support to the Porter Hypothesis and provide a clue to the underlying mechanism. We try to get at the causal effect of energy prices on TFP using a set of observations made annually on a large number of manufacturing industries located in OECD countries. We find that (i) rising energy prices have the potential to reduce TFP at the industry level, but (ii) when combined with the amount of R&D spending, rising energy prices increase TFP at the industry level, which means that sectors that spend more on R&D are those that take advantage of higher energy prices. When both channels – direct and mediated by R&D spending – are taken into account, higher energy prices raise productivity in most industries.