How does energy efficiency contribute to economic growth?

At the microeconomic level, below-cost energy efficiency improvements lead to cost savings, allowing consumers or firms to spend or invest on economic activities. At the macroeconomic, economy-wide level, widespread energy efficiency improvements could increase the overall productivity of the economy, resulting in increased economic growth. In some cases, energy efficiency improvements lead to the efficiency of other factors of production, such as capital or labor. Consider how the introduction of electric arc furnaces to steelmaking in the United States allowed scrap steel to be recycled for the first time, bypassing the most energy intensive step of the incumbent technology (the blast furnace) and greatly improving the energy efficiency of the industry. But arc furnaces greatly improved capital efficiency as well, compounding the overall productivity improvement. Another way that energy efficiency improvements may lead to economic growth is when more efficient energy technologies and services open up new markets or enable new, widespread energy-using applications, products, or industries – a so-called “frontier effect.” Frontier effects are most likely to occur following the commercialization of energy efficient technologies have “a wide scope for improvement and elaboration, have potential for use in a wide variety of products and processes, and have strong complementarities with existing or potential new technologies.” Energy efficiency improvements in such general-purpose technologies (GPTs) can open up new frontiers of economic activity, particularly when the efficiency improvements occur at an early stage of development and diffusion of the technology.