Energy intensity and the energy mix: What works for the environment?

In the absence of carbon sequestration, mitigating carbon emissions can be achieved through a mix of two broad policy approaches: (i) reducing energy intensity by improving energy efficiency and conservation, and (ii) changing the fuel mix. This paper investigates the long-run relationship between energy intensity, the energy mix, and per capita carbon emissions; while controlling for the level of economic activity, the economic structure measured by the relative size of the manufacturing sector, and the differences in institutional qualities across countries. We aim to answer two particularly important policy questions. First, to what extent these policy approaches are effective in mitigating emissions in the long-run? Second, which institutional qualities significantly contribute to better long-run environmental performance? We use historical data for 131 countries in a heterogeneous panel framework for the period 1972-2010. We find that less dependence on fossil fuel and lower energy intensity reduce emissions in the long run. A goal of 10% reduction in CO₂ levels in the long-run requires reducing the share of fossil fuel in total energy use by 11%, or reducing energy intensity by 13%. In addition, specific institutional qualities such as better corruption control and judiciary independence contribute to mitigating levels of emissions.