The Impact of TFP Improvement on CO2 Intensity

This study examines the relationship between total factor productivity (TFP) and CO₂ intensity at manufacturing installations and investigates the channels underlying this relationship. Previous studies suggest that higher TFP is associated with lower CO₂ intensity, but relatively little is known about whether this relationship operates primarily through improvements in energy efficiency or through the decarbonization of the energy used in production. By combining multiple Japanese government statistical datasets on installations’ business activities, CO₂ emissions, and energy consumption, this study distinguishes between these two channels. The results show that higher TFP is associated with substantially lower CO₂ intensity. This relationship is driven primarily by lower energy intensity, whereas the association between TFP and the carbon intensity of energy is relatively weak. These findings suggest that improvements in productivity are associated mainly with more efficient energy use rather than with the decarbonization of the energy consumed in production.