Structural change in energy use

Energy Policy 33 (2005) 429–437

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Structural change in energy use

Andreas Sch.afer*

Department of Architecture, Martin Centre for Architectural and Urban Planning, University of Cambridge, 6 Chaucer Road,

Cambridge CB2 2EB, UK

Abstract

Structural change in the economy, from agriculture to industry to services, causes similar sector shifts in final energy use. This

paper illustrates such energy sector shifts for 11 world regions from 1971 through 1998 and discusses their impact on the decline in

energy intensity.

r 2003 Elsevier Ltd. All rights reserved.

Keywords: Structural change; Decomposition; Long-term trends

1. Introduction

In light of the growing literature on the decline inenergy intensity and the relative contribution of the twounderlying factors, i.e., energy efficiency improvementsand economic structural change, surprisingly littleattention has been dedicated to structural change inenergy use itself. One body of literature, decompositionanalyses of energy economies, separates out the long-itudinal (few decades) development of major deter-minants of the energy system in countries at (typically)similar levels of economic development. However, theserather technical analyses generally interpret changingsector shares as mere ‘‘weighting factors,’’ and thusnecessarily overlook the systematic nature of structuralchange in the energy system (see Ang and Zhang (2000)for a comprehensive overview of existing studies andmethodologies).Only very few studies have dedicated more attention

to the systematic nature of sector shifts in energy useand qualitatively described their dependence on eco-nomic development. Among those, the 1998 IIASA/WEC study (Nakicenovic et al., 1998, p. 92) suggeststhat ‘‘changes in final energy patterns reflect the changesin economic structureyAs income increases, the shareof transport and residential/commercial applicationsalso increases.’’ Similarly, Smil (2000, p. 34) portraysthese sector shifts as ‘‘initial rise, and later decline, ofenergy for shares used in industrial production; gradual

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ss: [email protected] (A. Sch.afer).

front matter r 2003 Elsevier Ltd. All rights reserved.

ol.2003.09.002

rise of energy for services; steady growth of energy useddirectly by households, first for essential needs, later fordiscretionary uses; and, a trend closely connected torising affluence, and increasing share claimed bytransportation’’.While these illustrated sequences in sector change are

broadly correct, no data set has been presented thatwould allow a more careful examination of these trends.Ideally, such a data set needs to cover the developmentof total energy use (including non-commercial biomass)over several decades for a large number of countries atvarious stages of economic development. To respond tothat need, this paper discusses structural change in finalenergy use based upon the historical development(1971–1998) of the entire energy system in 11 worldregions, together composing the world. After discussingthe historical trends of structural change in final energyuse, this paper examines the associated impact on finalenergy intensity.

2. The data set

The employed data set consists of quantities (energybalances) and values (data describing the structure ofthe macroeconomy).

2.1. Energy balances

The primary reference describing energy use are theenergy balances compiled by the International EnergyAgency (IEA, 2001). While that data set is the

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1Partly because the decline in the agriculture sector’s share in value

added, the three sectors are increasingly interconnected. In modern

economies, agricultural goods are processed by the industry sector and

distributed by the service sector.2Here, private transportation is included in the service sector, albeit

it could also be part of the residential sector. The rationale being that

private transportation—as all transportation—is an enabler of a wide

range of services. The allocation of private transportation to services is

also for convenience, as the IEA data set reports transport energy use

by only infrastructure (road, rail, water, air) and fuel.

A. Sch .afer / Energy Policy 33 (2005) 429–437430

most complete and easily accessible longitudinal andcross-sectional database of primary, secondary, andfinal energy use by sector and fuel, it also containsshortcomings. The latter can be both fuel- and sector-specific.The most severe fuel-specific shortcoming is the

incomplete reporting of end-use level (direct) biomassconsumption. Lack of such data is especially critical fordeveloping countries where biomass can account formore than half of total energy use. As per capitabiomass consumption is higher in rural areas, whereincome is lower, biomass more easily accessible, andcommercial fuels more costly to distribute, it wasestimated as the average of plausible figures from avariety of sources in a given year and scaled with ruralpopulation. These sources include IEA (1998), IEA(2001), Hall (1991), Hall (1993), FAO (n.d.), FAO(1997), TERI (1992), World Energy Council (1993),Hernandez (1998), and Sarmah et al. (2002).Sector-specific data problems result from the incon-

sistent allocation of fuel use to specific end-users. Forseveral countries, energy use in the residential, commer-cial, and agriculture sector or a sub-set of these sectorsare reported as an aggregate number, in some caseswithin in a ‘‘Non-specific Other’’ energy use sector.Sector-specific data problems also include sudden zeroentries in some end-use sectors. However, all problemscould be largely resolved through plausibility checks andadditional references.Table 1 exemplarily reports final energy use by fuel

and sector for seven representative world regions for1971 and 1998; these regions are identical to thoseemployed in IIASA’s Global Energy Perspectives study(Nakicenovic et al., 1998) and the 2000 IPCC SRESstudy (Nakicenovic and Swart, 2000). The share ofbiomass in world energy use is substantial, accountingfor 14% of primary energy use in 1998 (not shown) and20% of final energy use.

2.2. Socio-economic data

Data describing the size of population and economyare derived from Penn World Tables (PWT). Despite therecent release of the PWT Mark 6 data (Heston et al.,2002), this paper’s analysis is based upon the previousMark 5.6a version (Summers et al., 1996), which offers amore complete coverage of especially the EasternEurope and Former Soviet Union region. However,since Mark 5.6a data are only available through 1992,they had to be extended by scaling GDP/cap withcorresponding data from the International MonetaryFund (IMF, 2000) and the United Nations (UN, 2002).Finally, the percentages describing value added inagriculture, industry, and services were derived fromthe World Bank’s World Development Indicators(World Bank, 2003). In addition to final energy use,

Table 1 describes the major socio-economic variables for1971 and 1998.

3. Structural change in the economy

Using macroeconomic data sets from the PWT, theInternational Monetary Fund, and the World Bank,Fig. 1 reports the change in the structure of the economyas a function of its per capita growth for 11 worldregions. Mainly because of (i) different income elasti-ticies for goods and services produced by each of thesesectors, (ii) the competitive advantage for each of thesector’s industries, and (iii) changing needs of thesociety, rising economic development requires the sectorshares to shift from agriculture to industry to services(Kuznets, 1966). While more than half of the total valueadded is derived from the agriculture sector at incomelevels below US$ 1000 per capita, that sector’s share invalue added has become nearly insignificant in theindustrialized world today, where the service sectorgenerates 60–70% of economic output.1

4. Structural change in the energy system

As each of the three economic sectors agriculture,industry, and services is a final energy consumer, theillustrated structural change in GDP must cause asimilar sector shift in the energy system. However,before examining such change in the energy sector, afurther energy consumer has to be added. In addition tothe energy that is used by the intermediate sectors(agriculture, industry, and services) and thus indirectlyconsumed by households through consumption of goodsand services, households also directly consume energyfor heating, cooling, cooking, and operating appliances,commonly known as residential energy use. Note thatprivate transportation is aggregated with services.2

(Later in this paper, when estimating the contributionof structural change in the energy system on the declinein final energy intensity, a sensitivity test is presented forthe North America region, in which private transporta-tion is aggregated with the residential sector.) Fig. 2reports such sector shifts in final energy use and Fig. 3 in

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Table 1

Indicators of energy use in seven world regions for 1971 and 1998

CPA LAM SAS EEU NAM PAO WEU

1971 1998 1971 1998 1971 1998 1971 1998 1971 1998 1971 1998 1971 1998

GDP/cap, US$(1985) 729 2925 3349 4717 857 1715 2752 4636 12830 20717 7922 15828 7817 13300

By sector (%)

Agriculture 34.1 18.4 11.8 7.4 41.7 28.3 13.5 4.7 3.1 1.7 5.4 1.9 4.5 3.0

Industry 42.2 48.7 35.6 28.5 20.1 25.0 53.8 26.6 33.7 26.2 45.4 35.2 34.0 28.7

Services 23.8 32.9 48.4 64.0 38.2 46.7 32.7 48.2 63.2 72.0 49.1 62.8 61.5 68.3

Final energy (kgoe/cap) 400 516 823 943 315 353 1376 1148 5348 4622 1780 2408 2027 2265

By fuel (%)

Coal 40.7 39.7 1.8 2.6 6.5 8.9 46.9 19.7 6.7 2.3 11.6 6.9 17.3 4.6

Oil products 7.9 22.6 42.0 50.6 8.9 20.9 32.2 40.3 57.1 60.9 78.6 69.9 67.0 56.9

Natural gas 0.4 2.3 5.2 10.6 0.7 2.1 15.9 26.6 30.5 25.3 3.5 9.5 9.0 22.8

Biomass 50.2 32.4 47.7 25.6 82.6 65.7 4.3 6.8 2.4 2.7 1.6 2.3 2.4 3.9

0-carbon fuels 0.8 2.9 3.3 10.6 1.3 2.4 0.7 6.7 3.3 8.7 4.7 11.3 4.2 11.8

By sector (%)

Agriculture (FEA=FE) 3.7 3.8 2.1 4.6 0.5 2.3 2.1 4.6 1.3 1.2 1.5 3.1 1.8 2.4

Industry (FEI=FE) 31.6 42.8 55.9 45.0 18.6 24.7 55.9 45.0 35.6 30.0 59.3 41.1 44.9 34.1

Services (FES=FE) 4.3 14.7 22.2 24.9 9.9 14.4 22.2 24.9 42.9 51.9 29.5 41.6 28.4 38.4

Transportation 3.7 10.5 18.2 17.7 5.7 10.9 18.2 17.7 30.7 39.4 22.0 29.9 19.6 29.4

Other services 0.6 4.2 4.0 7.2 4.2 3.5 4.0 7.2 12.2 12.5 7.5 11.7 8.8 8.9

Residential (FER=FE) 60.4 38.7 19.9 25.5 71.1 58.6 19.9 25.5 20.2 16.9 9.6 14.2 25.0 25.1

CPA: Centrally Planned Asia; LAM: Latin America; SAS: South Asia; EEU: Eastern Europe; NAM: North America; PAO: Pacific OECD; WEU:

Western Europe.

A. Sch .afer / Energy Policy 33 (2005) 429–437 431

carbon emissions of the residential energy sector,agriculture, industry, and services.At very low levels of economic activity, nearly the

entire energy is consumed in the residential sector,essentially for heating and cooking (e.g., Sub-SaharanAfrica, South Asia, and Other Pacific Asia in the 1970sand 80s). During that initial stage of economic develop-ment, biomass (including fuel wood, switch grass, cowdung, etc.) accounts for typically more than half of totalfinal energy use and carbon emissions; its comparativelyinefficient combustion also contributes to the residentialsector’s high share in energy use and carbon emissions.With the onset of industrialization and build-up ofenergy-intensive infrastructures, industrial energy useand carbon emissions arise more strongly, causing theshare in household energy use and carbon emissions todecline (Centrally Planned Asia, South Asia, OtherPacific Asia, Middle-East and North Africa, LatinAmerica). Once the basic infrastructure is set up andthe economy is beginning to be saturated with basicdurable consumer goods, industrial energy consumptionand carbon emissions begin to saturate at 40–60% oftotal final energy use at a GDP per capita level ofroughly US$(1985) 5000. Examples for this phase of abeginning saturation are Eastern Europe and theFormer Soviet Union, where in the mid-1990s about30–40% of all households owned an automobile, 80% awashing machine, and 90% a refrigerator (Euromoni-tor, 1997).Finally, in a post-industrial economy, the share in

final energy consumed and carbon emissions released by

the industry sector decreases due to a continuous declinein industrial energy intensity and a rapid increase inservice sector energy use and carbon emissions.Although the decline in industrial energy intensity wasespecially strong between 1973 and 1985 (the period ofhigh oil prices), it was mainly caused by a long-termtrend that is typically referred to as dematerialization, atrend that includes increasingly energy-efficient pro-cesses, saturation of the demand for fundamentaldurable consumer products, and the increased use oflighter and often less energy-intensive materials andproducts (Williams et al., 1987; Herman et al., 1989). Bycontrast, the more rapidly rising energy use of theservice sector mainly results from the strongly increasingdemand for services including leisure activities, andmost important, transportation, satisfying multipledemands of an increasingly affluent society. Thesetrends are evident in North America, Pacific OECDand Western Europe.Due to regional differences in climate and the

resulting residential heating requirements, industrializa-tion, and other factors, the regional sector trajectories ofenergy use and carbon emissions are not identical butrather evolve within a specific range. For example, thelower-income regions located around the equator(Middle East and North Africa, Latin America, OtherPacific Asia) require less energy for home heating whichinherently causes higher shares in industrial andtransportation energy use. Similar observations can bemade for the industry sector. Regions that developalong the upper boundary of industrial energy use

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Former Soviet UnionEastern Europe

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Centrally Planned AsiaMiddle East & North AfricaLatin AmericaOther Pacific AsiaSouth AsiaSub-Saharan Africa

Developing Regions

0 5000 10000 15000 20000 25000GDP/cap, US$(1985)

Fig. 1. Structural shift in value added from agriculture to industry to services over GDP/cap. All regional data range from 1971 through 1998, with

the exception of Eastern Europe and Former Soviet Union, where the data series starts in 1984 and 1987, respectively. For data source see text.


and carbon emission shares are either material- andenergy-intensive central planning economies (CentrallyPlanned Asia, Eastern Europe, Former Soviet Union) orhighly industrialized countries with high-density citiesand thus comparatively little living space per capita(lower per capita residential energy use) and largeshare of public transport (lower per capita transportenergy use), i.e., Pacific OECD, which is dominated byJapan.Such differences in cross-regional sector-specific en-

ergy use and carbon emission shares are highest at lowlevels of GDP/cap and decline with rising income. Thegrowing consistency can be attributed in part toincreasingly similar consumer behavior with rising

income (e.g., more and more households in warmclimate begin to buy air conditioning systems and thuscontribute to a less drastic decline in that sector’s shareof final energy use). The vertical spread of the regionaltrajectories also narrows since the degree of industria-lization is becoming less significant as economies growand ultimately move away from basic materials andprocesses to less energy-intensive, higher-value pro-ducts. In that regard, the most drastic change isassociated with Eastern Europe’s and the Former SovietUnion’s transition toward a market economy, whichresulted in a significant decline in the (previouslyartificially high) relative importance of industrial energyuse and carbon emissions in favor of rising energy use

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Fig. 2. Sector shifts in final energy use of the residential sector, the industrial sector, agriculture, and services for 11 world regions between 1971 and

1998.


and carbon emission shares in the residential andtransportation sector. The more recent, adjusted sharesof the latter two sectors are on the same trajectory as theindustrialized regions.Trends very similar to those in Fig. 2 can also be

observed on a primary energy level. However, mainlybecause of the different levels of electricity use across thefour end-use sectors and the corresponding conversionlosses (highest electricity use share in services and lowestshare in transportation), the service sector has acomparatively large share in energy use, mainly on thecost of the transportation sector (15–20% versus about30% at the income levels of the industrialized worldtoday).

5. Formal interpretation of structural change in energy

use

To illustrate the significance of the changing sectorshares in final energy use, Eq. (1) describes the change infinal energy intensity as a function of energy intensityreductions per sector (FEi=GDPi) and sector shifts invalue added (GDPi=GDP) in the economy and reduc-tions in residential energy intensity (FER=GDP) on theconsumption side:

FE

GDP¼X

i

FEi

GDPi

GDPi

GDPþ

FER

GDP; ð1Þ

where the index i corresponds to the economic sectors—agriculture, industry, and services. DifferentiatingEq. (1), dividing by the LHS variable, and separatingthe components results in the percentage change of finalenergy intensity as the sum of three terms, all weightedby the sector share of final energy Eq. (2). The first termin Eq. (2) corresponds to the weighted sum of energyefficiency improvements by sector and shifts in sub-sectors within each of the three production sectors.By contrast, the second term reflects the reductionin energy intensity through shifts toward other produc-tion sectors. Finally, the third term reflects the changein final energy intensity as caused by the consumptionside, i.e., through changes in residential energy intensityover time

d FE=GDP� �FE=GDP

¼X

i

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� �FEi=GDPi

FEi

FE

þX

i

d GDPi=GDP� �GDPi=GDP

FEi

FE

þd FER=GDP� �FER=GDP

FER

FE: ð2Þ

The ratios FEi=FE in Eq. (2) correspond to elasti-cities. For example, a 1% decline in residential energyintensity causes total energy intensity to decline by onlyFER=FE; all other factors being equal. As the size of theelasticities FEi=FE changes over time (see Fig. 2), so

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Residential Agriculture

Industry Services

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Fig. 3. Sector shifts in carbon emissions of the residential sector, the industrial sector, agriculture, and services for 11 world regions between 1971

and 1998.


does their contribution to the reduction in final energyintensity. At low income levels, most of the reduction inenergy intensity results from energy efficiency improve-ments in the residential sector, mainly through the shiftfrom biomass to commercial fuels and the increasingshare in electricity use. With rising economic develop-ment and relative importance of industry and servicesector energy use, sub-sector shifts and efficiencyimprovements within these two production sectorscontribute most to the decline in final energy intensity(see the values of FEi=FE in Table 1).Integrating and exponentiating Eq. (2) leads to

FE=GDP� �

t2

FE=GDP� �

t1

¼Y

i

FEi=GDPi

� �t2

FEi=GDPi

� �t1

!FEi=FE

�Y

i

GDPi=GDP� �

t2

GDPi=GDP� �

t1

!FEi=FE

�FER=GDP� �

t2

FER=GDP� �

t1

!FER=FE

; ð3Þ

where the altering elasticities FEi=FE need to beaveraged over the time periods t1 and t2: The majorcomponents contributing to the decline in final energyintensity between 1971 and 1998 are illustrated in

Table 2 for selected representative world regions(because of data limitations, the time period in theEastern Europe region only spans from 1984 to 1998).As suggested by Eq. (3), (sub)totals of these changesresult from multiplying individual changes.In low-income regions, the elasticities FEi=FE are

largest for the residential sector, being 0.49 and 0.65 forthe Centrally Planned Asia and South Asia region (seeTable 1 and Fig. 2a); thus, changes in that sectorcontribute most to the reduction in final energyintensity. Nearly all the remaining reductions in finalenergy intensity result from efficiency improvements andsub-sector shifts within the industry sector, thesereductions are partially offset by the comparativelystrong shift in value added toward the industry sector.In the high-income regions, the decline in final energy

intensity can largely be attributed to the industrial andservice sector, mainly because of these sectors’ highelasticities, together adding to a value of 0.7–0.9. Whilein the industry sector, the decline in energy intensity isamplified by the shift in value added away fromindustry, the reductions in service sector energy intensityare partially compensated by the rising relative im-portance of that sector’s value added. In contrast to thedeveloping regions, the decline in residential energyintensity contributes significantly less to the decline in

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Table 2

Change in final energy intensity due to changes in sector energy intensity and shifts in GDP by sector in seven world regions

Contribution to decline in energy intensity CPA LAM SAS EEU NAM PAO WEU

71/98 71/98 71/98 84/98 71/98 71/98 71/98

Agriculture

Sector energy intensity 0.98 0.99 1.02 1.04 1.00 1.03 1.01

Shift in GDP 0.98 0.98 0.99 0.96 0.99 0.98 0.99

Sub-total 0.96 0.97 1.01 1.00 0.99 1.01 1.00

Industry


Shift in GDP 1.06 0.91 1.05 0.69 0.92 0.88 0.90

Sub-total 0.76 1.00 0.95 0.66 0.79 0.70 0.77

Services


Shift in GDP 1.03 1.07 1.02 1.09 1.06 1.09 1.06

Sub-total 1.02 1.04 0.98 0.94 0.84 1.00 0.97

Total production sector


Shift in GDP 1.06 0.95 1.07 0.73 0.97 0.94 0.94

Sub-total 0.75 1.01 0.94 0.62 0.65 0.70 0.74

Residential


Total impact 0.36 0.82 0.59 0.59 0.57 0.70 0.67

A value of 0.90 corresponds to a 10% decline in energy intensity over the indicated time period. All subtotals and totals result from multiplying

individual changes. CPA: Centrally Planned Asia; LAM: Latin America; SAS: South Asia; EEU: Eastern Europe; NAM: North America; PAO:

Pacific OECD; WEU: Western Europe.


final energy intensity—mainly a consequence of thecomparatively low elasticities, being only between 10%and 20% (see FER=FE in Table 1). Although reductionsin sectoral energy intensity through sector shifts can besignificant, cross-sector compensation effects cause theiroverall influence on the energy economy as a whole tocontribute by only a few percent, except in the EasternEurope region, where economic restructuring hasresulted in a significant shift away from the industrysector (Table 2). Irrespective of the income level, amongthe three sectors of the economy, changes in industrialenergy intensity contribute most to the reduction inenergy intensity.Note again that the rough sector aggregation of the

economy into only agriculture, industry, and servicesdoes not allow a more detailed analysis of the forcescontributing to the decline in energy intensity, especiallywithin the industry sector. Studies examining the USindustry sector came to contradictive conclusions aboutthe contribution of technological change and sub-sectorshifts in value added; see, e.g., Hogan and Jorgenson(1991) and Popp (2001).The contributions to the decline in final energy

intensity in Table 2 are based upon the inclusion ofprivate transportation in the service sector. If instead,

aggregating energy use from private transportation toresidential energy consumption (see footnote 2 anddiscussion in section ‘‘Structural Change in the EnergySystem’’), the contribution of the residential sector tothe decline in final energy intensity increases to the sameextent, as that of the service sector declines. In the caseof the North America region, the contribution of theresidential energy intensity increases from originally13% to 20% (a factor change from 0.87 to 0.80 inTable 2), while that of the service sector declines fromoriginally 16% to 9% (a factor change from 0.84 to0.91).

6. The changing focus of energy policy

The changing sector shares in final energy useillustrated in Fig. 2 offer a structured perspective ofthe changing need for important areas of energy policyimplementation. While the main goals of energy policyremain identical, i.e., secure, reliable, and affordableenergy supply, rational energy use, meeting environ-mental constraints, etc., the sector of applicationchanges with economic development. Due to thehigh share of household energy use, energy policy

ARTICLE IN PRESSA. Sch .afer / Energy Policy 33 (2005) 429–437436

should primarily focus on affordable, efficient, andclean use of residential energy at low levels of economicdevelopment. With the exception of Latin Americaand Middle East and North Africa, more than halfof the region’s population lives in rural areas andoften relies on inefficient burning of non-commercialbiomass energy. Policies aiming at the penetration ofenergy-efficient low particulate emitting cooking stovesare one example for more sustainable energy use at thatstage of economic development (Bhattacharya andAbdul Salam, 2002). With continuous economic devel-opment and the onset of industrialization, the energypolicy focus necessarily shifts toward more energy-efficient industrial processes. Case studies examining theiron and steel industry suggest that the energy intensityfor manufacturing 1 ton of steel in China can be nearlycut in half if using best-practice technology producingthe same type of product (Price et al., 2002). Finally,with the shift toward a post-industrial society and therapidly growing relative importance of service sectorenergy use, much attention is necessarily being directedto the transportation sector. Controlling energy use,greenhouse gas emissions, and other negative impactsare a special challenge, given the strong naturaldynamics in the transport system toward faster andmore energy-intensive modes (see, e.g., Sch.afer andVictor, 2000).

7. Conclusions

The change in sector shares in final energy use, causedby structural change in the economy, follows regularpatterns, i.e., from residential to industry to services,with the agriculture sector maintaining a nearly insig-nificant share in final energy use over a wide range ofGDP per capita levels. These sector shares in finalenergy use correspond to elasticities of the determinantsof final energy intensity. Since the residential sector isthe major consumer of final energy at low levels ofeconomic development and thus has the highestelasticity value, energy intensity reductions in theresidential sector contribute most to the decline in finalenergy intensity in low-income regions. With risingincome levels, most of the reduction in final energyintensity is caused within the economy, first by theindustry sector and later by the service sector. Due to itscomparatively low energy consumption, the contribu-tion of the agriculture sector to the decline in finalenergy intensity is negligible. From the perspectiveof sectoral energy intensity and structural change,about 95% of the decline in final energy intensity canbe attributed to energy intensity reductions and sub-sector shifts within each sector. Although the contribu-tion of structural shifts between the three aggregateeconomic sectors can be significant, cross-sector com-

pensation effects limit its overall net contribution toabout 5%.

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Documents

Structural change in energy use