Author: Koji Nomura, Faculty Fellow, RIETI

Ever since the oil crises, promoting energy conservation has become a standard policy goal, and nearly half a century has passed since energy conservation started to be integrated into the work of governments around the world. Over the past 20 years in particular, the fight against global warming has become the focus of attention. While the cost burden is growing on the supply side due to the expansion of non-fossil power sources, such as nuclear and renewable energy, demand-side policy is becoming more and more restrictive.

However, if energy conservation standards become more rigorous at a time when the potential for spreading low-cost energy conservation technology further has been exhausted, that could only promote transfer of domestic production of energy-intensive products to other countries. In industries for which it is difficult to transfer production to other countries, it is inevitable that capital productivity will decline due to the need to procure high-cost, energy-efficient equipment or renovate existing facilities. This burden will offset the positive economic effects of EPI, undermining the overall economic efficiency (total factor productivity).

The experience of the Japanese economy suggests that the risk of the pursuit of EPI itself causing weakening growth potential is increasing. However, structural changes that may misrepresent EPI are statistically very difficult to identify, and this situation poses a high risk of inducing a misguided policy.

Read the entire article on the RIETI website or in Japanese here.