Exploring the links between total factor productivity and energy efficiency: Portugal, 1960-2014

A good understanding of the sources of economic growth is fundamental. Total factor productivity (TFP) frequently taken as synonymous of technical change but computed as a residual - is credited as a major driver of growth. Despite considerable efforts, the sources of TFP growth are still poorly understood. As all economic processes necessarily entail the conversion of energy, aggregate energy (conversion) efficiency is a plausible candidate to measure technical change. Here, we test the hypothesis that there is a statistically significant long-term relationship between TFP and aggregate energy efficiency (measured as final-to-useful aggregate exergy efficiency), for Portugal, 1960-2014. Our results strongly suggest that these variables are cointegrated, with unit elasticity between technical change and energy efficiency. This link is stronger when TFP is computed considering the more theoretically correct capital services and schooling-corrected labour measures. Since we also find that aggregate energy efficiency Granger-causes TFP, we can legitimately claim that the former is the main driver of economic growth. As thermodynamic laws impose that aggregate energy efficiency is upper bounded at 100%, our findings also suggest there are thermodynamic limits on growth. This carries implications for models currently used to inform policymakers on economic growth, sustainable development, and climate change scenarios.