ICT and the Demand for Energy: Evidence from OECD Countries

Abstract

Information and communication technology (ICT) has been ascribed a crucial role for raising resource and energy efficiency and thereby contributing to environmental abatement. We investigate this conjecture by providing evidence on the relationship between ICT and energy demand. Using a cross-country cross-industry panel data set covering 13 years, 10 OECD countries, and 27 industries, our results show that ICT is associated with a significant reduction in total energy demand. This relationship differs with regard to different types of energy. ICT is negatively related to the demand for non-electric energy, but is not associated with a significant change in the demand for electric energy. Quantitatively, the effect of ICT on energy demand is greater than that on labor demand. The results survive several robustness checks which allow for various forms of heterogeneity and tackle the potential endogeneity of ICT capital.

Appendix

1.1 Appendix 1

Table 6 Total energy: sample splits

Table 7 Electric and non-electric energy: sample splits

Table 8 Total energy: sectoral split

Table 9 Electric and non-electric energy: sectoral split

Table 10 Total energy: R&D, skills, and trade

Table 11 Electric and non-electric energy: R&D, skills, and trade

1.2 Appendix 2

Based on the parameters of the cost share equations one can derive corresponding factor demand elasticities. Following the approach used by Welsch and Ochsen (2005) or Kratena (2007), one can make use of the fact that factor demand $j$ is equal to $(\frac{VC}{P_{j}})S_{j}$ and derive the elasticity of factor demand with respect to a change in the quasi-fixed ICT capital input $\epsilon _{jK_{ICT}}$:

$$\begin{aligned} \epsilon _{jK_{ICT}}=\frac{\partial \ln j}{\partial \ln K_{ICT}}&= \frac{\partial \ln \frac{S_{j}VC}{P_{j}}}{\partial \ln K_{ICT}} = \frac{\partial \ln S_{j}}{\partial \ln K_{ICT}} + \frac{\partial \ln VC}{\partial \ln K_{ICT}} - \frac{\partial \ln P_{j}}{\partial \ln K_{ICT}}. \end{aligned}$$

Assuming exogenous prices (which implies $\frac{\partial \ln P_{j}}{\partial \ln K_{ICT}}=0$) and using the parameters of the cost share equation, the previous equation equals:

$$\begin{aligned} \epsilon _{jK_{ICT}}=\frac{\beta _{jK_{ICT}}}{S_{j}} + \frac{\partial \ln VC}{\partial \ln K_{ICT}} - 0 = \frac{\beta _{jK_{ICT}}}{S_{j}} + \frac{\partial VC}{\partial K_{ICT}}\frac{K_{ICT}}{VC}, \end{aligned}$$

where $-\frac{\partial VC}{\partial K_{ICT}}$ represents the potential reduction in variable costs through increasing ICT capital by one unit and holding output, variable input prices, and the remaining fixed inputs constant and can be denoted as the shadow value of fixed ICT capital ($R_{K_{ICT}}$). Either one assumes that this reduction is negligible and assumes $-\frac{\partial VC}{\partial K_{ICT}}=0$ (see e.g. Hijzen et al. 2005 or Foster et al. 2013) or one takes this reduction into account. If one takes this reduction into account, the elasticity equals:

$$\begin{aligned} \epsilon _{jK_{ICT}}=\frac{\beta _{jK_{ICT}}}{S_{j}} - \frac{R_{K_{ICT}}K_{ICT}}{VC}. \end{aligned}$$

Since $\frac{R_{K_{ICT}}K_{ICT}}{VC}$ and $S_{j}$ are larger than zero by definition, $\beta _{jK_{ICT}} < 0$ is a sufficient condition for $\epsilon _{jK_{ICT}}$ being negative. Thus, $\beta _{jK_{ICT}}<0$ implies not only a negative impact on the respective factor cost share (or on the relative demand for the respective factor) but, given output, also on the (absolute) demand for this factor. Following Berndt and Hesse (1986) or Kratena (2007), one can additionally assume that the ex post rate of return for capital equals the shadow price of capital input. Information on the ex post rate of return is typically available in the data. Combining it with the estimated $\beta _{K_{ICT}}$ coefficient, the observed values of the factor cost shares, the capital input quantities and variable costs, then allows to compute the respective elasticities. They equal:

$$\begin{aligned} \epsilon _{jK_{ICT}}=\frac{\beta _{jK_{ICT}}}{S_{j}} - S_{K_{ICT}}, \end{aligned}$$

where $S_{K_{ICT}} = \frac{P_{K_{ICT}}K_{ICT}}{VC}$. This elasticity of demand for factor $j$ with respect to ICT capital describes by how much the respective demand for factor $j$ changes if ICT capital increases by 1 %, holding output, the remaining fixed inputs and factor prices constant. Holding output constant implies that this elasticity is also equal to the elasticity describing the impact on the factor intensity ($j/Y$) and equal to the elasticity describing the impact on the factor productivity ($Y/j$) multiplied by minus one:

$$\begin{aligned} \epsilon _{jK_{ICT}}=\frac{\beta _{jK_{ICT}}}{S_{j}} - S_{K_{ICT}}=\frac{\partial \ln (j/Y)}{\partial \ln K_{ICT}}=-\frac{\partial \ln (Y/j)}{\partial \ln K_{ICT}}. \end{aligned}$$

These elasticities hold for all variable input demands $j$, that is, in our case, for labor and energy, or labor, electric and non-electric energy.