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Estimation of substitution elasticities for CGE models

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  • Azusa OKAGAWA

    ()
    (Graduate School of Economics, Osaka University)

  • Kanemi BAN

    ()
    (Graduate School of Economics, Osaka University)

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    Abstract

    Many studies of climate policy are based on computable general equilibrium (CGE) modeling. The simulation results and conclusions reached by these models depend on the size of the parameters specified. In particular, the substitution elasticities between production factors have a major influence. Therefore, in order to obtain reliable simulation results we should employ empirical evidence gathered on the substitution elasticities. Unfortunately, in many instances, the lack of econometric analysis means we must specify these key parameters based on existing work or borrow them from prominent modeling exercises. In this study, we estimate nested constant elasticity of substitution (CES) production functions using panel data for OECD countries to help improve the reliability of CGE models for climate policy. Our results show higher values for substitution elasticities closely related to energy inputs for energy-intensive industries and lower values for other industries compared to the conventional values often used in existing models. With the new parameters estimated, we find that conventional parameters could overestimate the necessary carbon price by 44%, and obtain evidence of different distributions of CO2 emission reduction costs across industries.

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    File URL: http://www2.econ.osaka-u.ac.jp/library/global/dp/0816.pdf
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    Bibliographic Info

    Paper provided by Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP) in its series Discussion Papers in Economics and Business with number 08-16.

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    Length: 19 pages
    Date of creation: Apr 2008
    Date of revision:
    Handle: RePEc:osk:wpaper:0816

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    Web page: http://www.econ.osaka-u.ac.jp/
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    Keywords: Substitution elasticities; CGE modeling; Climate policy;

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    Cited by:
    1. Christoph Böhringer & Nicholas Rivers & Thomas F. Rutherford & Randall Wigle, 2013. "Sharing the burden for climate change mitigation in the Canadian federation," ZenTra Working Papers in Transnational Studies 30 / 2014, ZenTra - Center for Transnational Studies, revised Jan 2014.
    2. Böhringer, Christoph & Fischer, Carolyn & Einar Rosendahl, Knut, 2011. "Cost-Effective Unilateral Climate Policy Design: Size Matters," Discussion Papers dp-11-34, Resources For the Future.
    3. Costantini, Valeria & D'Amato, Alessio & Martini, Chiara & Tommasino, Maria Cristina & Valentini, Edilio & Zoli, Mariangela, 2013. "Taxing international emissions trading," Energy Economics, Elsevier, vol. 40(C), pages 609-621.
    4. Sara Proença, 2013. "The role of renewable energy in Portugal´s decarbonisation strategy – application of the HyBGEM model," EcoMod2013 5647, EcoMod.
    5. Lucas Bretschger & Lin Zhang & Roger Ramer, 2012. "Economic effects of a nuclear-phase out policy: A CGE analysis," CER-ETH Economics working paper series 12/167, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    6. Christoph Böhringer & Jared C. Carbone & Thomas F. Rutherford, 2014. "The Strategic Value of Carbon Tariffs," Working Papers V-360-14, University of Oldenburg, Department of Economics, revised Jan 2014.
    7. Sara Proença & Miguel St. Aubyn, 2012. "A low-carbon strategy for Portugal – a hybrid CGE modelling approach," EcoMod2012 4527, EcoMod.
    8. Beckman, Jayson & Hertel, Thomas & Tyner, Wallace, 2011. "Validating energy-oriented CGE models," Energy Economics, Elsevier, vol. 33(5), pages 799-806, September.
    9. Christoph Böhringer & Andreas Lange & Thomas F. Rutherford, 2010. "Optimal Emission Pricing in the Presence of International Spillovers: Decomposing Leakage and Terms-of-Trade Motives," NBER Working Papers 15899, National Bureau of Economic Research, Inc.
    10. Schenker, Oliver, 2010. "Transporting goods and damages. The role of trade on the distribution of climate change costs," MPRA Paper 25350, University Library of Munich, Germany.
    11. Alessandro Antimiani & Valeria Costantini & Chiara Martini & Luca Salvatici, 2011. "Cooperative and non-cooperative solutions to carbon leakage," Departmental Working Papers of Economics - University 'Roma Tre' 0136, Department of Economics - University Roma Tre.
    12. Lucas Bretschger & Roger Ramer & Florentine Schwark, 2010. "Long-Run Effects of Post-Kyoto Policies: Applying a Fully Dynamic CGE model with Heterogeneous Capital," CER-ETH Economics working paper series 10/129, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    13. Parrado, Ramiro & De Cian, Enrica, 2014. "Technology spillovers embodied in international trade: Intertemporal, regional and sectoral effects in a global CGE framework," Energy Economics, Elsevier, vol. 41(C), pages 76-89.
    14. Bretschger, Lucas & Ramer, Roger & Schwark, Florentine, 2011. "Growth effects of carbon policies: Applying a fully dynamic CGE model with heterogeneous capital," Resource and Energy Economics, Elsevier, vol. 33(4), pages 963-980.
    15. Dimaranan, Betina V. & Laborde, David, 2012. "Ethanol Trade Policy and Global Biofuel Mandates," 2012 Conference, August 18-24, 2012, Foz do Iguacu, Brazil 126869, International Association of Agricultural Economists.

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