Energy Efficiency Financing: Case of Iran

Liquidity constraint of economic agents with disturbance in optimization leads to selection a non-optimal level of decision variables. In the energy economics literature also one reason of energy efficiency gap is related to credit constraint and capital market imperfections. Financial development by easing liquidity constraints also accelerates technological progress and could have a significant effect on energy efficiency. In present study the role of banks credits, as an indicator of financial development, on the energy efficiency of Iran’s economy in 1974-2012 was investigated. Results of the estimated models indicate that financial development through ease of credit constraints directly leads to decrease of energy intensity and therefore energy efficiency improvement, but this effectiveness does not via total factor productivity improvement. In the other words, in period of study financial development through improvement of technological progress does not lead to increase of Iran’s energy efficiency.