The economic growth enigma revisited: The EU-15 since the 1970s

Current macro-econometric models mostly incorporate just two factors of production, labour and capital (with a time-dependent multiplier representing technological change or total factor productivity). These models assume that energy is an intermediate product of some combination of human labour and capital. These models also assume that the supply of energy is driven by economic demand. We assume the contrary, i.e. that useful energy is a primary input, derived (mostly) from natural capital. This failure to capture the impact of primary resources (as useful energy) on economic growth leads to inappropriate formulation of economic growth theories. To understand that impact better we need explicit evidence of marginal products of capital, labour and useful energy or useful work. As applied to the explanation of the past half century of economic growth of the EU-15 countries, the new results demonstrate the use of non-parametric relationships between capital, labour and useful energy to explain economic growth. They also indicate that marginal products of capital, labour and useful energy are variable – the marginal product depends on the levels of capital stock, labour input and useful energy flows. The proposed semi-parametric production function suggests country-specific policy implications for the EU (and other countries).     

Analyzing carbon pricing policies using a general equilibrium model with production parameters estimated using firm data

Policy simulation results of Computable General Equilibrium (CGE) models largely hinge on the choices of substitution elasticities among key input factors. Currently, most CGE models rely on the common elasticities estimated from aggregated data, such as the GTAP model elasticity parameters. Using firm level data, we apply the control function method to estimate CES production functions with capital, labor and energy inputs and find significant heterogeneity in substitution elasticities across different industries. Our capital-labor substitution elasticities are much lower than the GTAP values while our energy elasticities are higher. We then incorporate these estimated elasticities into a CGE model to simulate China's carbon pricing policies and compare with the results using GTAP parameters. Our less elastic K-L substitution leads to lower base case GDP growth, but our more elastic energy substitution lead to lower coal use and carbon emissions. In the carbon tax policy exercises, we find that our elasticities lead to easier reductions in coal use and carbon emissions.     

Capital-energy substitution in manufacturing for seven OECD countries: learning about potential effects of climate policy and peak oil

The simultaneous influence of increasing oil scarcity, greenhouse gas control and renewable energy targets will result in a future of sustained energy prices. Whether modern economies can find a smooth path away from fossil fuels is a fundamental socio-economic and political question, which according to standard economics depends to a large extent on the degree of substitution between energy and capital. We study this issue by modelling the manufacturing sector with a translog cost function in seven OECD countries using the EU-KLEMS database for the period 1970–2005. After a literature survey, different production structures accounting for input substitution, returns to scale and technical change are estimated, and substitution elasticities are derived. Our results indicate a general complementarity or weak substitution relationship between energy and capital, suggesting that an increase in energy price, e.g. due to climate policy or scarcer fossil fuels, will likely reduce capital inputs, which might lead to a lower output of manufacturing.     

Estimates of energy and non-energy elasticities in selected Asian manufacturing sectors: Policy implications

This paper presents the results of a study of the demand elasticities for energy and non-energy inputs in the food processing and textile industries in Bangladesh, the Philippines and Thailand. Estimates of substitution elasticities in production were derived by fitting data to a translog cost function for the period 1970–1980 for Bangladesh, 1970–1978 for the Philippines, and 1974–1977 for Thailand. The results varied according to the industries studied and across countries. They were compared with those of several developing and industrialized countries, and substitutability among inputs was found to be greater in the manufacturing sector of the developing countries studies than in those of industrialized countries. The generally high elasticities between labour and energy have implications for relative input pricing and use in developing countries.     

An almost ideal supply system estimate of US energy substitution

This paper introduces a Linear Almost Ideal Supply System (LAISS) model to examine aggregate US energy demand. Based on the Almost Ideal Demand System (AIDS) model, the LAISS model is a flexible functional form for imposing and testing properties of demand for the inputs of production. Own and cross price elasticities are derived for aggregate capital, labor, and energy, and compared to the translog cost function. Both models reduce to estimating a system of input share equations on input prices and output, with output normalized by the Stone's input price index in the LAISS model. Results indicate that all inputs are substitutes in both models, but elasticities differ. A log likelihood dominance criterion shows that the LAISS model dominates the translog cost function for this dataset. Results suggest that inputs are substitutes, and that an energy import tariff would increase demand for labor and capital.     

Capital-labour-energy substitution in a nested CES framework: A replication and update of Kemfert (1998)

The ease with which firms can substitute away from energy to other inputs is an important determining factor in the costs of climate change mitigation policies. Climate policy simulation models usually represent this substitutability by using the Constant Elasticity of Substitution (CES) function with parameter values often taken from econometric studies. Hence, the accuracy of the estimated substitution parameters has a strong influence on the validity of the climate policy simulation. In this article, we attempt to replicate the results presented in a widely cited article in this field: Kemfert (1998) (‘Estimated substitution elasticities of a nested CES production function approach for Germany’, Energy Economics, 20, 249–264). We first use the data and software reported in that article and compare our results with those reported in the original study. We then test the same data and a new, more recent, data set on German industrial data with an improved econometric approach. Despite applying various approaches and modifications, we are not able to replicate the results in Kemfert (1998). We furthermore conclude that the data sets that are typically used to estimate nested CES functions often have too few observations and too little independent variation of the explanatory variables to obtain reliable estimates when using a direct non-linear approach.     

Economic and climate impacts of reducing China's renewable electricity curtailment: A comparison between CGE models with alternative nesting structures of electricity

To mitigate climate change impacts and achieve low-carbon transformation, China has accelerated the development of renewable energy, which is severely challenged by the curtailment of renewable electricity. This study uses a dynamic multi-sectoral CGE model with alternative nesting structures and substitution elasticities for electricity with different power sources to capture the economic and environmental feasibility of reducing renewable electricity curtailment across all economic sectors in China. The reduction of renewable electricity curtailment is simulated during 2021–2030 from the curtailment rates of 2015–2017. We found that the reduction of renewable electricity curtailment would lead to a significant expansion in the output of renewable electricity and a moderate decrease in non-renewable electricity production. Among the renewable electricity, wind power has the most significant output gain (over 9%), with solar power and hydropower outputs rising by over 5% and 1.5%, respectively. However, without the cost-neutrality assumption, the impacts of reducing electricity curtailment would be largely over-estimated with CGE models simulated by improved technology. The disparity between results from the models with alternative nesting constant elasticity of substitution (CES) functions for electricity sectors is highly dependent on the difference between their substitution elasticities. Accompanying the changes in electricity generation, the reduction of renewable electricity curtailment would bring multiple green co-benefits like significantly reducing CO2 and air pollutants emitted from electricity sectors, and improvements in real GDP and employment.     

Output and substitution elasticities of energy and implications for renewable energy expansion in the ECOWAS region

This study estimates output and substitution elasticities of renewable energy and nonrenewable energy for the Economic Community of West African States (ECOWAS) and discusses implications for expanding the former. The results show that nonrenewable energy promises greater benefits for ECOWAS economic transition, with output elasticities averaging between 0.052–0.579 and −0.055 to 0.223 for nonrenewable energy and renewable energy respectively. Overall estimated technological progress is low (−0.5% to 2.6%); the bulk coming from input efficiency. Substitution elasticities (0.02–0.94) suggest potential for switching towards renewable energy. Notwithstanding, scale, economics and sitting problems inherent in renewable power generation challenge the opportunities for energy substitution. A sustainable policy solution, therefore, appears to be one favoring scaled and efficient electricity generation from fossil energy in the short-run with a gradual switch towards renewable power in the long-run. In general, the applied model provides insights that energy efficiency enhances sustainable growth by propelling technological advancement especially when technical change is scale-biased and factor-augmenting. The study also provides insights that impacts of exogenous shocks to inputs are temporary, and hence, do not jeopardize efforts aimed at scaling output through increased and efficient use of labor, capital and energy; especially nonrenewable energy.     

Fossil fuel producing economies have greater potential for industrial interfuel substitution

This study analyzes industrial interfuel substitution in an international context using a large unbalanced panel dataset of 63 countries. We find that compared to other countries fossil fuel producing economies have higher short-term interfuel substitution elasticities. This difference increases further in the long run as fossil fuel producing countries have a considerably longer adjustment of their fuel-using capital stock. These results imply lower economic cost for policies aimed at climate abatement and more efficient utilization of energy resources in energy-intensive economies.     

Swedish industry and Kyoto—An assessment of the effects of the European CO2 emission trading system

We assess the effects on Swedish industry input demands and output of different climate policy scenarios connected to energy policy induced by the Kyoto protocol. We use a unique dataset containing firm-level data on outputs and inputs between 1991 and 2001 to estimate a factor demand model, which we use to simulate different policy scenarios. Sector-specific estimation suggests that the proposed quadratic profit function specification exhibits properties and robustness that are consistent with economic theory; that is, all own-price elasticities are negative and all output elasticities are positive. Furthermore, the elasticities show that the input demands are, in most cases, relatively inelastic. Simulation of the model for six different policy scenarios reveal that effects on the Swedish base industry of a EU-level permit-trading system depends on (i) the removal or maintenance of the current CO₂ tax, (ii) the price of permits, and (iii) the future price of electricity. Our analysis shows that changes in electricity price may be more important than the price of permits for some sectors.     

Climate policy: Bucket or drainer?

Worldwide, industry is responsible for about 40% of greenhouse gas (GHG) emissions, making it an important target for climate policy. Energy-intensive industries may be particularly vulnerable to higher energy costs caused by climate policy. If companies cannot offset rising energy costs and would face increased competition from countries without climate policy, they may decide to relocate their industrial production to the countries without climate policy. The resulting net effect of climate policy on GHG emissions in foreign countries is typically referred to as “carbon leakage”. Carbon leakage may lead to higher global GHG emissions due to the use of less advanced technology in less developed countries. Based on a literature review of climate policy, earlier environmental policy and analyses of historical trends, this paper assesses the carbon leakage effects of climate policy for energy-intensive industries. Reviews of past trends in production location of energy-intensive industries show an increased global production share of Non-Annex 1 countries. However, from empirical analyses we conclude that the trend is primarily driven by regional demand growth. In contrast, climate policy models show a strong carbon leakage. Even though future climate policy may have a more profound impact than environmental policies in the past, the modelling results are doubtful. Leakage generally seems to be overestimated in current models, especially as potential positive spillovers are often not included in the models. The ambiguity of the empirical analyses and the modelling results warrants further research in the importance of production factors for relocation.     

Input substitution in Thailand's manufacturing sector: Implications for energy policy

Input demand and substitution elasticities for five manufacturing sector industries in Thailand are estimated using a three-factor (capital, labour and energy) translog cost function covering the first oil-shock period 1974–1977. In all cases the demand is elastic for energy, close to unity for labour, and inelastic for capital. Capital and energy are always substitutes as are capital and labour. The labour-intensive and comparative- advantage-based industries showed greater responsiveness to energy price changes relative to the capital-intensive and protected industries in the sense that the former two can substitute capital and labour for energy whereas the latter two can substitute only capital.     

Energy and technical progress

When we use the Cobb-Douglas equation to investigate economic growth, we require data on the levels of the capital and labor inputs, and corresponding data on the level of output, at different points in time. We conclude that the inclusion of energy in the standard Cobb Douglas production function does not explain the contribution of technological process (Hicks-neutral) to a rise in the rate of output unless, possibly, one is able to make the seemingly unreasonable assumption that labor should not appear in the production function.An interesting future project will be a statistical analysis of the historic trend in GNP, a technological change and the consumption of available energy.     

Accounting for quality: Issues with modeling the impact of R&D on economic growth and carbon emissions in developing economies

The literature on climate policy modeling has paid scant attention to the important role that R&D is already playing in industrializing countries such as China, where R&D investments are targeting not only productivity improvements but also enhancements in the quality and variety of products. We focus here on the effects of quality-enhancing innovation on energy use and GHG emissions in developing countries. We construct an analytical model to show that efficiency-improving and quality-enhancing R&D have opposing influences on energy and emission intensities, with the efficiency-improving R&D having an attenuating effect and quality-enhancing R&D having an amplifying effect. We find that the balance of these opposing forces depends on the elasticity of upstream output with respect to efficiency-improving R&D, the elasticity of downstream output with respect to upstream quality-enhancing R&D occurring upstream, and the relative shares of emissions-intensive inputs in the costs of production of upstream versus downstream industries. We employ a computable general equilibrium (CGE) simulation of the Chinese economy to illustrate the difficulties that arise in incorporating these results into models for climate policy analysis, and we offer a simple remedy.     

Sensitivity of modeling results to technological and regional details: The case of Italy's carbon mitigation policy

Model differences in technological and geographical scales are common, but their contributions to uncertainties have not been systematically quantified in the climate policy literature. This paper carries out a systematic assessment on the sensitivity of Computable General Equilibrium models to technological and geographical scales in evaluating the economic impacts of carbon mitigation policies. In particular, we examine the impacts of sub-national details and technological details of power generation on the estimate of carbon price and economic cost. Taking Italy as an example, we find that the estimation for carbon price and the economic cost of a de-carbonization pathway by means of a model with technological and regional details can be lower than a model without such details by up to 40%. Additionally, the effect of representing regional details appears to be far more important than the effect of representing the details of electricity technology in both the estimated carbon prices and the estimated economic impacts. Our results for Italy highlight the importance of modeling uncertainties of these two key assumptions, which should be appropriately acknowledged when applying CGE models for policy impact assessment. Our conclusions can be generalized to different countries and policy scenarios not in terms of absolute numbers but in terms of economic explanations. In particular, intra-national trade and the sub-national sectoral/technological specialization are important variables for understanding the economic dynamics behind these outcomes.     

Carbon taxation in Russia: Prospects for a double dividend and improved energy efficiency

This study analyses the sectoral and macroeconomic impact of carbon taxes on the Russian economy, one of the world's most energy- and carbon-intensive economies, while assessing the hypothesis of a double dividend. Substituting carbon taxes for labour taxes can reduce GHG emissions and enhance welfare by improving the efficiency of the tax system — a strong double dividend. The analyses confirm, when capital is not internationally mobile, that a double dividend is likely to occur under (i) a high elasticity of labour supply, (ii) high elasticities of substitution between labour and the capital-energy aggregate, (iii) low elasticities of substitution between capital and energy. It is the tax-shifting effect between capital and labour that is crucial. In contrast, welfare losses resulting from the environmental tax reform may be substantial if capital is internationally mobile.     

CO2 emissions in the global supply chains of services: An analysis based on a multi-regional input–output model

As the service sector dominates the economy in developed countries, its environmental impact has become an important issue. Based on a multi-regional input–output model, this paper estimates consumption-based emissions of service sectors of 41 countries and regions, and discusses the emission abatement policy of service sectors. The results indicate that consumption-based emissions of the service sector in most countries and regions are much greater than direct emissions generated by the service sector. Further decomposition by production sources demonstrates that final demand for services in certain countries causes substantial emissions in the other countries. In most countries, major parts of consumption-based emissions of the service sector come from upstream emissions in non-service sectors due to the intermediate consumption of non-service inputs in the service sector. For the US and China, the consumption-based emissions of their service sectors are traced back to different service consumption bundles and production sectors, which enable us to identify service categories and production sectors that play key roles in the impact of service sectors on CO₂ emissions. Finally, policy implications of the results are discussed for the climate effect of the service-oriented economy, global mitigation of climate change, sustainability, and the decarbonization of the service sector.     

A multiplicative environmental DEA approach to measure efficiency changes in the world's major polluters

We propose a multiplicative environmental data envelopment analysis (ME-DEA) approach to measure the performance of 46 countries that generate most of the world's carbon dioxide (CO₂) emissions. In the model, we combine economic (labour and capital), environmental (freshwater) and energy inputs with a desirable output (GDP) and three undesirable outputs (CO₂, methane and nitrous oxide emissions). We rank each country according to the optimum use of its resources employing a multiplicative extension of environmental DEA models. By computing partial efficiency scores for each input and output separately, we thus identify major sources of inefficiency for all sample countries. Based on the partial efficiency scores obtained from the model, we define aggregate economic, energy and environmental efficiency indexes for 2002, 2007 and 2011, reflecting points in time before and after the official enactment of the Kyoto Protocol. We find that for most countries efficiency scores increase over this period. In addition, there exists a positive relationship between economic and environmental efficiency, although, at the same time, our results suggest that environmental efficiency cannot be realized without first reaching a certain threshold of economic efficiency. We also find support for the Paradox of Plenty, whereby an abundance of natural and energy resources results in their inefficient use.