Energy policy and productivity growth: Evidence from Chilean manufacturers 2001~2007

Limiting energy use while improving productivity is a key challenge for ensuring environmentally sustainable future growth. Economists have thus studied the relationship between energy policy and productivity for decades, and energy policies, particularly those promoting energy efficiency, have become commonly accepted ways to improve manufacturers’ productivity. Energy efficiency, normally interpreted as the amount of production increase per additional unit of energy used, is closely associated with productivity. Energy intensity is another crucial area for policymaking and analysis. Generally defined as the energy-output ratio, energy intensity is usually considered negatively related to productivity. Reducing energy intensity is thus one key driving force for increasing productivity, and productivity improvements can help reduce use of energy and other inputs. Studies of diverse manufacturing industries within multiple countries have concluded that improvements in energy efficiency can help lower energy usage and intensity, lessen environmental damages, and enhance productivity growth. 

However, different types of energy usage correspond to different manufacturing technologies. This paper finds that high intensity of a certain type of energy does not necessarily imply low productivity. The micro-level data used in this analysis are taken from ENIA (Encuesta Nacional Industrial Anual), an annual nation-wide industrial survey conducted by the National Statistics Institute of Chile (INE, Instituto Nacional de Estadisticas Chile). The dataset contains comprehensive information on Chilean manufacturing firms from 2001 to 2007. The INE includes those firms that began operating during that year while excluding those that stopped for any reason; each firm is given with a specific identification number, which allows me to track its activities over time. To account for the simultaneity embedded in the choice of production inputs and unobservable productivity shocks, the Olley–Pakes (OP) methodology is used. Analysis focuses on the four most commonly used types of energy: electricity, fuel (petroleum and diesel), coal, and gasoline. Results show that lower electricity value-added tax rates and higher electricity intensity can significantly improve manufacturing productivity, as can higher fuel value-added tax rates and lower fuel intensity. Increasing coal and gasoline value-added tax rates can also lead to productivity increases, but effects will be less significant and robust.