Doing more with less: the role of institutional quality in enhancing energy efficiency in Italy’s “hard-to-abate” sectors

This paper investigates the role of institutional quality in enhancing energy efficiency within Italy’s “hard-to-abate” industrial sectors, which include cement and lime, glass and ceramics, metal, pulp and paper, and refineries. These sectors account for a significant share of global energy consumption and CO2 emissions and face unique challenges in decarbonization. Using a novel dataset from the EU Emissions Trading System (EU ETS), covering 329 Italian plants from 2013 to 2019, the study applies the Directional Distance Function (DDF) to measure energy efficiency and explores the impact of institutional quality on energy performance through Ordinary Least Squares (OLS) and Two-Stage Least Squares (2SLS) regression. The analysis highlights greater energy efficiency among multi-plant firms, firms in the pulp and paper sector, and firms located in Central Italy. Regression results further show that institutional quality has a significant positive effect on energy efficiency, especially in competitive markets, among multi-plant and non-innovative firms, in Northern regions, and in the glass and ceramics and metal sectors. This paper contributes to the literature by underscoring the importance of institutional quality in driving energy efficiency in energy-intensive sectors and offers policy implications for promoting industrial decarbonization.