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Energy substitutability and modernization of energy-consuming technologies

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  • Hritonenko, Natali
  • Yatsenko, Yuri

Abstract

The paper examines long-term strategies of capital modernization under different assumptions about embodied technological change, energy regulation, and substitutability between energy and capital. To describe modernization of physical capital, the authors use a vintage capital model with the constant elasticity of substitution between capital and energy. The models take into account (i) availability of new more energy-efficient equipment under energy-saving technical progress, (ii) possibility of buying new capital with various combinations of energy parameters and prices, (iii) controlled scrapping of obsolete capital, and (iv) energy regulation quotas. The paper analyzes how the elasticity of substitution between capital and energy impacts the capital modernization policy. In particular, it is proven that the optimal lifetime of capital appears to be longer for a larger elasticity.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 34 (2012)
Issue (Month): 5 ()
Pages: 1548-1556

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Handle: RePEc:eee:eneeco:v:34:y:2012:i:5:p:1548-1556

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Web page: http://www.elsevier.com/locate/eneco

Related research

Keywords: Elasticity of substitution between capital and energy; CES; Vintage capital; Endogenous capital lifetime; Energy consumption; Environmental pollution;

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References

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  1. Jovanovic, B., 1998. "Vintage Capital and Equality," Working Papers 98-16, C.V. Starr Center for Applied Economics, New York University.
  2. Patrick J. Kehoe & Andrew Atkeson, 1999. "Models of Energy Use: Putty-Putty versus Putty-Clay," American Economic Review, American Economic Association, vol. 89(4), pages 1028-1043, September.
  3. Boucekkine, Raouf & Germain, Marc & Licandro, Omar, 1997. "Replacement Echoes in the Vintage Capital Growth Model," Journal of Economic Theory, Elsevier, vol. 74(2), pages 333-348, June.
  4. van Zon, Adriaan & Yetkiner, I. Hakan, 2003. "An endogenous growth model with embodied energy-saving technical change," Resource and Energy Economics, Elsevier, vol. 25(1), pages 81-103, February.
  5. Mulder, Peter & de Groot, Henri L. F. & Hofkes, Marjan W., 2003. "Explaining slow diffusion of energy-saving technologies; a vintage model with returns to diversity and learning-by-using," Resource and Energy Economics, Elsevier, vol. 25(1), pages 105-126, February.
  6. Judd, Kenneth L. & Guu, Sy-Ming, 1997. "Asymptotic methods for aggregate growth models," Journal of Economic Dynamics and Control, Elsevier, vol. 21(6), pages 1025-1042, June.
  7. Simon Gilchrist & John C. Williams, 2000. "Putty-Clay and Investment: A Business Cycle Analysis," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 928-960, October.
  8. Kuper, Gerard H. & van Soest, Daan P., 2003. "Path-dependency and input substitution: implications for energy policy modelling," Energy Economics, Elsevier, vol. 25(4), pages 397-407, July.
  9. Hritonenko, Natali & Yatsenko, Yuri, 2010. "Technological innovations, economic renovation, and anticipation effects," Journal of Mathematical Economics, Elsevier, vol. 46(6), pages 1064-1078, November.
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  11. Boyan Jovanovic & Peter L. Rousseau, 2002. "Moore's Law and Learning-By-Doing," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(2), pages 346-375, April.
  12. PEREZ-BARAHONA, Agustin & ZOU, Benteng, . "A comparative study of energy saving technical progress in a vintage capital model," CORE Discussion Papers RP -1841, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  13. Sakellaris, Plutarchos, 1997. "Irreversible Capital and the Stock Market Response to Shocks in Profitability," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 351-79, May.
  14. Acemoglu, Daron, 2009. "When Does Labor Scarcity Encourage Innovation?," CEPR Discussion Papers 7247, C.E.P.R. Discussion Papers.
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  16. Robert J. Barro & Rachel McCleary, 2003. "Religion and Economic Growth," NBER Working Papers 9682, National Bureau of Economic Research, Inc.
  17. Boucekkine, Raouf & Pommeret, Aude, 2004. "Energy saving technical progress and optimal capital stock: the role of embodiment," Economic Modelling, Elsevier, vol. 21(3), pages 429-444, May.
  18. Robert J. Barro & Xavier Sala-i-Martin, 2003. "Economic Growth, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262025531, January.
  19. van Hilten, Onno, 1991. "The optimal lifetime of capital equipment," Journal of Economic Theory, Elsevier, vol. 55(2), pages 449-454, December.
  20. Yazid Dissou & Reza Ghazal, 2008. "Energy Substitutability in Canadian Manufacturing: Econometric Estimation with Bootstrap Confidence Intervals," Working Papers 0809E, University of Ottawa, Department of Economics.
  21. repec:cor:louvrp:1275 is not listed on IDEAS
  22. Kuper, Gerard H., 1996. "The effects of energy taxes on productivity and employment: The case of the Netherlands," Resource and Energy Economics, Elsevier, vol. 18(2), pages 137-159, June.
  23. Chao Wei, 2003. "Energy, the Stock Market, and the Putty-Clay Investment Model," American Economic Review, American Economic Association, vol. 93(1), pages 311-323, March.
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