Emission and sectoral energy intensity: a variance decomposition analysis

Purpose In the backdrop of growing global concern on escalating CO2 emission leading to climate disorder and controversy between economic growth and environment, this study undertakes a decomposition analysis of the top 20 emitters of the world during 1992-2016 with two objectives: to identify the relative contribution of the major driving factors in CO2 emission and to comprehend the role and performance of sectoral energy consumption pattern in changing the emission level. Design/methodology/approach The paper uses variance analysis method to perform two stage decomposition: first, it decomposes emission into the major driving factors, and, secondly, it also decomposes fossil fuel intensity of different sectors into fuel mix and energy intensity effects, which are new in the literature. Findings The results indicate that aggressive pursuit for economic growth, particularly by developing countries, is the major reason behind unprecedented emission growth, with income effect, fossil fuel intensity effect and population effect having substantial roles. Considerable decline in dependence on fossil fuel, coupled with rising emissions, signifies that emission intensity is still to be harnessed. Sectoral decomposition shows that while fossil fuel intensity has declined in residential sector, it has remarkably shot up in industry, transport and commercial sectors. On the other hand, sectoral energy intensity has declined, particularly due to favourable performances of transport and commercial sectors. Research limitations/implications The detailed country-wise sectoral analysis identifies the sectors with favourable contribution in curtailing emission and lends a direction to other countries for policy making. Originality/value This study contributes by incorporating multi-country sectoral segregation in decomposition analysis. It focuses not only on energy intensity, but on the effect of energy substitution in each sector as well. It identifies the sectors that have lowered their dependence on fossil fuel to highlight that emission can effectively be dealt with through a prudent choice of fuel mix.