Brazil has not had the same success as nations around the world in promoting energy efficiency (EE). As presented by the American Council for an Energy-Efficient Economy, Brazil ranked 20th among 25 of the world’s top energy-consuming countries in the Council’s analysis that examines efficiency policies and performance. Brazil has a tremendous opportunity to encourage economic growth and to reduce greenhouse gas emissions from investment in EE. To date, however, the country has barely pursued this tool for achieving sustainable growth, especially in industry, and little is known about the relationship between energy efficiency and productive efficiency (the value added by a worker).

This brief introduces an analysis of energy efficiency and productivity in Brazilian industry. Climate Policy Initiative (CPI/PUC-Rio) researchers show that, energy efficiency and productive efficiency in the Brazilian industry are related. Because of that, challenges in promoting energy efficiency align with broader issues regarding sectoral productivity.

The analysis uses a series of economic exercises to determine how energy efficiency relates to productivity in Brazilian industrial firms and assesses its effects on aggregate product. It develops indicators to assess efficiency in the use of inputs and the potential for productivity gains. Annual data at the level of the industrial firm are used, covering 106 sectors of extractive and processing industries from 2003 through 2015.

CPI researchers conclude that the energy efficiency and the productive efficiency of industrial sectors are stable during the study period. To shed further light onto this, efficiency measures are separated into two factors: the efficiency of the typical firm, which characterizes efficiency in the use of resources within the firm; and the Allocation Quality Indicator (AQI), which measures efficiency of resource allocation among firms in the same sector.

For the first indicator, the results show that energy and productive efficiencies of the typical firm tend to grow during the study period, suggesting an improvement in the use of resources within firms. Nevertheless, for the second indicator, there was an increase in market share of less efficient firms from both energy and productive perspectives (reduction in AQIs). Thus, although the economic environment favors greater efficiency of typical firms, it reduces the market share of the most efficient firms.

The analysis also evaluates alternative scenarios for improving resource allocation and their impact on productivity. Resource reallocation (capital, labor, and electricity) across firms in the same sector generates gains in total factor productivity of 81% in 2015. The researchers show that better capital allocation generates higher productivity gains than improvements in energy efficiency.

Hence, Brazil must stimulate sectors to move the EE agenda forward, by making gains in energy efficiency. In this sense, Brazilian industry can move closer to long-term sustainability, bringing private and broader social benefits to the nation.