Growth, Firm Scale, and the Energy Intensity of Production

We uncover a new mechanism that links growth and a decline in the energy intensity of production, observed globally since 1990. Using microdata from India and a causal research design, we demonstrate that the expenditure share of energy declines steeply with firm scale, due both to physical scaling laws and technology investment. Given that average firm size increases with growth, this scale dependence implies that production endogenously becomes less energy-intensive along the growth path. We develop a model of this mechanism in general equilibrium, and quantify significant reductions in aggregate energy intensity as low-income countries like India grow. We conclude with a discussion of the future path of emissions in India.