Decoupling economic and energy growth in the EU: a red herring?

 This article is part of Friends of Europe’s latest discussion paper ‘The overlooked side of the ecological transition’, available here. 

A state of climate emergency has been declared at national and regional levels across the EU, signalling government intent to reduce carbon emissions, sooner rather than later. Achieving net zero emissions by 2050 is a significant challenge that will require bold structural changes to be made at the governmental level. At the individual level, a lifestyle compatible with 1.5 degrees of global warming will require reductions of up to 80% from current emissions per capita in the EU. This means fewer km travelled, denser living spaces and a dietary revolution.

At the European level, domestic emissions have declined over the past 15 years despite small but continued growth in gross domestic product (GDP). A positive change in GDP (+1 % per year) with a negative change in emissions (– 2 % per year) points to the conclusion that the EU has decoupled emissions and economic output. The underlying causes of this decoupling must be understood to assess whether decarbonising economic activities in industry and services can be strengthened and sustained without the need to shift emissions abroad.

Energy consumption remains the largest contributor to carbon emissions due to the combustion of fossil fuels. Paradoxically, low-carbon energy production is relatively straightforward, given the alternatives that exist for fossil fuels, such as wind, solar and biomass energy. Energy consumption, however, evolves under complex dynamics and its drivers must be evaluated and quantified carefully to better understand the real potential for decoupling. Fewer cars in our cities, for instance, can mean more planes in our skies or more products (goods and services) created as a result of energy intensive processes.

Firstly, economic growth has been highly correlated with energy use, meaning that all economic activities depend, to a great extent, on abundant energy sources. Secondly, considerable efficiency gains have been achieved since the 1970s, typically measured by declining energy intensity, as evidenced by the ratio of energy use over economic output. Thirdly, structural changes in the economy and service-oriented activities are examples of developments that have a significant impact on energy consumption. In particular, deindustrialisation and a growing share of services may lead to the substitution of imported products for domestic industrial activities.

Ultimately, these are three effects that have been generated over a period of time. As a result, they collectively provide a unique insight into the potential for decoupling energy, and therefore emissions, from economic growth in the long run.

In the EU, economic growth contributed to an average 2.2% increase in overall energy consumption per year from 1990 to 2000, and only 1.2% per year since 2000. Combining structural effects and measures taken to improve energy efficiency resulted in an average decrease of 1.7% in energy consumption per year from 1990 to 2000 and a 1.6 % decrease per year thereafter, hence resulting in a small net negative rate in energy consumption since 2000. This shows that a change in economic growth has more of an impact on energy consumption than the implementation of efficiency measures. Moreover, this combined effect shows opposite dynamics between structure, such as deindustrialisation and energy efficiency.

Large structural changes occurred in the second half of the 1990s, when the EU15 experienced a phase of rapid deindustrialisation in conjunction with trade liberalisation. Of the various energy intensive activities in question, metal manufacturing outsources relatively well. Until the mid-2000s, these changes reduced energy consumption by almost 2% per year on average across all EU member states. In parallel, the energy embodied in imports, or the energy required in manufacturing imported products, peaked in 2008 when it comprised approximately 99% of the EU’s primary energy consumption. In other words, economic activities abroad supply member states with an amount of energy equivalent to their own consumption, except when embodied in imports.

Changes in energy consumption are more significant across member states than they are at the EU level. This means trade in embodied energy is important among member states themselves. Indeed, deindustrialisation has been more prominent in northern Europe than elsewhere, generating a simultaneous growth in services which has contributed to a small and lagged increase in energy consumption. At the same time, the greatest efficiency gains were achieved in eastern Europe when industrial activities underwent modernisation.

The relative homogeneity in energy consumption at the EU level reveals some disparities with consequences for any future potential efficiency gains. In southern Europe, a small rise in energy consumption from a larger share of services translates into higher energy intensity, unlike in the rest of Europe. The output of services generally exceeds that of industry – financial services as opposed to metal recycling for example – such that the energy intensity of services is generally lower than that of industry. The additional output, however, leads to more energy consumption.

This trend predicts more upcoming energy challenges and structural changes for the economy. In other words, the marginal energy savings from further deindustrialising economic activities in the EU will be increasingly thinner. Similarly, the low hanging fruits of energy efficiency, new motors and waste heat recovery, for example, have already been picked, making future savings less likely. This casts doubt on the potential of energy efficiency measures to deliver the deep energy and emissions cuts claimed by national and EU energy transition strategies. Also, once the potential for efficiency has been captured, any increase in economic activity will lead to an equivalent increase in energy consumption.

In conclusion, the cumulative reduction in energy consumption from a combination of outsourcing activities and efficiency gains since 1990 has been significant, resulting in approximately 40% less energy use, half of it due to deindustrialisation. The prospects for decoupling economic growth and energy are therefore limited, given that half of it is more virtual than real. Moreover, economic growth has almost entirely offset these savings by increasing energy consumption. Absolute reductions in energy use are unlikely to be achieved through energy efficiency measures alone, since they are capped by the laws of thermodynamics. Decoupling emissions, however, can rely on the decarbonisation of the energy system and carbon tariffs to reduce emissions embodied in trade. At the end of the day, the extent to which energy consumption can be reduced remains a critical question.