IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v28y2011i6p2832-2841.html
   My bibliography  Save this article

An investigation of issues relating to where energy should enter the production function

Author

Listed:
  • Lecca, Patrizio
  • Swales, Kim
  • Turner, Karen

Abstract

This paper examines the impact of imposing different separability assumptions in the specifications of the standard hierarchical KLEM production function in a computable general equilibrium (CGE) model. The appropriate means of introducing energy to production functions has been a source of debate for a number of years. However, while modellers often subject results to parametric sensitivy analysis regarding the values associated with elasticities of substitution between inputs, it is rarely the case that the structure of the production function is subjected to testing. However, the chosen structure reflects the modeller's view about elasticity between different inputs and will have implications for model results wherever there are changes in relative prices. We illustrate our argument by introducing a simple demand shock to a CGE model of the Scottish economy (targeted at the energy supply sector) under different assumptions regarding the structure of the KLEM production function and separability assumptions therein.

Suggested Citation

  • Lecca, Patrizio & Swales, Kim & Turner, Karen, 2011. "An investigation of issues relating to where energy should enter the production function," Economic Modelling, Elsevier, vol. 28(6), pages 2832-2841.
  • Handle: RePEc:eee:ecmode:v:28:y:2011:i:6:p:2832-2841
    DOI: 10.1016/j.econmod.2011.08.014
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999311002069
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Louis Beuuséjour & Gordon Lenjosek & Michael Smart, 1995. "A CGE Approach to Modelling Carbon Dioxide Emissions Control in Canada and the United States," The World Economy, Wiley Blackwell, vol. 18(3), pages 457-488, May.
    2. Turner, Karen, 2009. "Negative rebound and disinvestment effects in response to an improvement in energy efficiency in the UK economy," Energy Economics, Elsevier, vol. 31(5), pages 648-666, September.
    3. Kemfert, Claudia, 1998. "Estimated substitution elasticities of a nested CES production function approach for Germany," Energy Economics, Elsevier, vol. 20(3), pages 249-264, June.
    4. Harrigan, Frank & McGregor, Peter G. & Dourmashkin, Neil & Perman, Roger & Swales, Kim & Yin, Ya Ping, 1991. "AMOS : A macro-micro model of Scotland," Economic Modelling, Elsevier, vol. 8(4), pages 424-479, October.
    5. Berndt, Ernst R & Wood, David O, 1975. "Technology, Prices, and the Derived Demand for Energy," The Review of Economics and Statistics, MIT Press, vol. 57(3), pages 259-268, August.
    6. Wissema, Wiepke & Dellink, Rob, 2007. "AGE analysis of the impact of a carbon energy tax on the Irish economy," Ecological Economics, Elsevier, vol. 61(4), pages 671-683, March.
    7. Glomsrod, Solveig & Taoyuan, Wei, 2005. "Coal cleaning: a viable strategy for reduced carbon emissions and improved environment in China?," Energy Policy, Elsevier, vol. 33(4), pages 525-542, March.
    8. John Beghin & David Roland-Holts & Dominique van der Mensbrugghe, 1995. "Trade Liberalization and the Environment in the Pacific Basin: Coordinated Approaches to Mexican Trade and Environment Policy," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(3), pages 778-785.
    9. Layard, Richard & Nickell, Stephen & Jackman, Richard, 2005. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780199279173.
    10. Chang, Kuo-Ping, 1994. "Capital-energy substitution and the multi-level CES production function," Energy Economics, Elsevier, vol. 16(1), pages 22-26, January.
    11. Turner, Karen, 2008. "A computable general equilibrium analysis of the relative price sensitivity required to induce rebound effects in response to an improvement in energy efficiency in the UK economy," SIRE Discussion Papers 2008-20, Scottish Institute for Research in Economics (SIRE).
    12. Pindyck, Robert S & Rotemberg, Julio J, 1983. "Dynamic Factor Demands and the Effects of Energy Price Shocks," American Economic Review, American Economic Association, vol. 73(5), pages 1066-1079, December.
    13. Hanley, Nick D. & McGregor, Peter G. & Swales, J. Kim & Turner, Karen, 2006. "The impact of a stimulus to energy efficiency on the economy and the environment: A regional computable general equilibrium analysis," Renewable Energy, Elsevier, vol. 31(2), pages 161-171.
    14. Bergman, Lars, 1990. "Energy and environmental constraints on growth: A CGE modeling approach," Journal of Policy Modeling, Elsevier, vol. 12(4), pages 671-691.
    15. Despotakis, Kostas A. & Fisher, Anthony C., 1988. "Energy in a regional economy: A computable general equilibrium model for california," Journal of Environmental Economics and Management, Elsevier, vol. 15(3), pages 313-330, September.
    16. Grepperud, Sverre & Rasmussen, Ingeborg, 2004. "A general equilibrium assessment of rebound effects," Energy Economics, Elsevier, vol. 26(2), pages 261-282, March.
    17. Thomas W. Hertel & Timothy D. Mount, 1985. "The Pricing of Natural Resources in a Regional Economy," Land Economics, University of Wisconsin Press, vol. 64(3), pages 229-243.
    18. Bohringer, Christoph & Rutherford, Thomas F., 1997. "Carbon Taxes with Exemptions in an Open Economy: A General Equilibrium Analysis of the German Tax Initiative," Journal of Environmental Economics and Management, Elsevier, vol. 32(2), pages 189-203, February.
    19. Naqvi, Farzana, 1998. "A computable general equilibrium model of energy, economy and equity interactions in Pakistan," Energy Economics, Elsevier, vol. 20(4), pages 347-373, September.
    20. Perroni, Carlo & Rutherford, Thomas F., 1995. "Regular flexibility of nested CES functions," European Economic Review, Elsevier, vol. 39(2), pages 335-343, February.
    21. Solow, John L, 1987. "The Capital-Energy Complementarity Debate Revisited," American Economic Review, American Economic Association, vol. 77(4), pages 605-614, September.
    22. Lee C. Adkins & Dan S. Rickman & Abid Hameed, 2003. "Bayesian Estimation of Regional Production for CGE Modeling," Journal of Regional Science, Wiley Blackwell, vol. 43(4), pages 641-661.
    23. 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.
    24. Learmonth, D. & McGregor, P.G. & Swales, J.K. & Turner, K.R. & Yin, Y.P., 2007. "The importance of the regional/local dimension of sustainable development: An illustrative Computable General Equilibrium analysis of the Jersey economy," Economic Modelling, Elsevier, vol. 24(1), pages 15-41, January.
    25. Kemfert, Claudia & Welsch, Heinz, 2000. "Energy-Capital-Labor Substitution and the Economic Effects of CO2 Abatement: Evidence for Germany," Journal of Policy Modeling, Elsevier, vol. 22(6), pages 641-660, November.
    26. Morrison, C. J. & Berndt, E. R., 1981. "Short-run labor productivity in a dynamic model," Journal of Econometrics, Elsevier, vol. 16(3), pages 339-365, August.
    27. Griffin, James M & Gregory, Paul R, 1976. "An Intercountry Translog Model of Energy Substitution Responses," American Economic Review, American Economic Association, vol. 66(5), pages 845-857, December.
    28. Zhongxiang Zhang, 1998. "Macro-economic and Sectoral Effects of Carbon Taxes: A General Equilibrium Analysis for China," Economic Systems Research, Taylor & Francis Journals, vol. 10(2), pages 135-159.
    29. Berndt, Ernst R & Wood, David O, 1979. "Engineering and Econometric Interpretations of Energy-Capital Complementarity," American Economic Review, American Economic Association, vol. 69(3), pages 342-354, June.
    30. Kamat, Rajnish & Rose, Adam & Abler, David, 1999. "The impact of a carbon tax on the Susquehanna River Basin economy," Energy Economics, Elsevier, vol. 21(4), pages 363-384, August.
    31. van der Werf, Edwin, 2008. "Production functions for climate policy modeling: An empirical analysis," Energy Economics, Elsevier, vol. 30(6), pages 2964-2979, November.
    32. Bergman, Lars, 1988. "Energy Policy Modeling: A survey of general equilibrium approaches," Journal of Policy Modeling, Elsevier, vol. 10(3), pages 377-399.
    33. Anson, Sam & Turner, Karen, 2009. "Rebound and disinvestment effects in refined oil consumption and supply resulting from an increase in energy efficiency in the Scottish commercial transport sector," Energy Policy, Elsevier, vol. 37(9), pages 3608-3620, September.
    34. Prywes, Menahem, 1986. "A nested CES approach to capital-energy substitution," Energy Economics, Elsevier, vol. 8(1), pages 22-28, January.
    35. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-142, March.
    36. Hanley, Nick & McGregor, Peter G. & Swales, J. Kim & Turner, Karen, 2009. "Do increases in energy efficiency improve environmental quality and sustainability?," Ecological Economics, Elsevier, vol. 68(3), pages 692-709, January.
    37. Mark D. Partridge & Dan S. Rickman, 1998. "Regional Computable General Equilibrium Modeling: A Survey and Critical Appraisal," International Regional Science Review, , vol. 21(3), pages 205-248, December.
    38. Gunter Stephan & Renger van Nieuwkoop & Thomas Wiedmer, 1992. "Social Incidence and Economic Costs of Carbon Limits - A Computable General Equilibrium Analysis for Switzerland," Diskussionsschriften dp9201, Universitaet Bern, Departement Volkswirtschaft.
    39. Allan, Grant & Hanley, Nick & McGregor, Peter & Swales, Kim & Turner, Karen, 2007. "The impact of increased efficiency in the industrial use of energy: A computable general equilibrium analysis for the United Kingdom," Energy Economics, Elsevier, vol. 29(4), pages 779-798, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Valeria Costantini & Elena Paglialunga, 2014. "Elasticity of substitution in capital-energy relationships: how central is a sector-based panel estimation approach?," SEEDS Working Papers 1314, SEEDS, Sustainability Environmental Economics and Dynamics Studies, revised May 2014.
    2. Lecca, Patrizio & Swales, Kim & Turner, Karen, 2011. "Rebound Effects from Increased Efficiency in the Use of Energy by UK Households," SIRE Discussion Papers 2011-34, Scottish Institute for Research in Economics (SIRE).
    3. Turner, Karen & Hanley, Nick, 2011. "Energy efficiency, rebound effects and the environmental Kuznets Curve," Energy Economics, Elsevier, vol. 33(5), pages 709-720, September.
    4. Paul E. Brockway & Matthew K. Heun & João Santos & John R. Barrett, 2017. "Energy-Extended CES Aggregate Production: Current Aspects of Their Specification and Econometric Estimation," Energies, MDPI, Open Access Journal, vol. 10(2), pages 1-23, February.
    5. Steve Sorrell, 2014. "Energy Substitution, Technical Change and Rebound Effects," Energies, MDPI, Open Access Journal, vol. 7(5), pages 1-24, April.
    6. Broberg, Thomas & Berg, Charlotte & Samakovlis, Eva, 2015. "The economy-wide rebound effect from improved energy efficiency in Swedish industries–A general equilibrium analysis," Energy Policy, Elsevier, vol. 83(C), pages 26-37.
    7. Antimiani, Alessandro & Costantini, Valeria & Paglialunga, Elena, 2015. "The sensitivity of climate-economy CGE models to energy-related elasticity parameters: Implications for climate policy design," Economic Modelling, Elsevier, vol. 51(C), pages 38-52.
    8. Garau, Giorgio & Lecca, Patrizio & Mandras, Giovanni, 2013. "The impact of population ageing on energy use: Evidence from Italy," Economic Modelling, Elsevier, vol. 35(C), pages 970-980.
    9. Yazid Dissou & Lilia Karnizova & Qian Sun, 2015. "Industry-level Econometric Estimates of Energy-Capital-Labor Substitution with a Nested CES Production Function," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 43(1), pages 107-121, March.
    10. Lecca, Patrizio & McGregor, Peter G. & Swales, J. Kim & Turner, Karen, 2014. "The added value from a general equilibrium analysis of increased efficiency in household energy use," Ecological Economics, Elsevier, vol. 100(C), pages 51-62.
    11. repec:eee:appene:v:221:y:2018:i:c:p:280-298 is not listed on IDEAS
    12. Koesler, Simon & Swales, Kim & Turner, Karen, 2016. "International spillover and rebound effects from increased energy efficiency in Germany," Energy Economics, Elsevier, vol. 54(C), pages 444-452.
    13. Tapia-Ahumada, Karen & Octaviano, Claudia & Rausch, Sebastian & Pérez-Arriaga, Ignacio, 2015. "Modeling intermittent renewable electricity technologies in general equilibrium models," Economic Modelling, Elsevier, vol. 51(C), pages 242-262.
    14. Koesler, Simon & Swales, Kim & Turner, Karen, 2014. "Beyond national economy-wide rebound effects: An applied general equilibrium analysis incorporating international spillover effects," ZEW Discussion Papers 14-025, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    15. Alessandro Antimiani & Valeria Costantini & Elena Paglialunga, 2015. "An analysis of the sensitivity of a dynamic climate-economy CGE model (GDynE) to empirically estimated energy-related elasticity parameters," SEEDS Working Papers 0515, SEEDS, Sustainability Environmental Economics and Dynamics Studies, revised Mar 2015.
    16. Matthew K. Heun & João Santos & Paul E. Brockway & Randall Pruim & Tiago Domingos & Marco Sakai, 2017. "From Theory to Econometrics to Energy Policy: Cautionary Tales for Policymaking Using Aggregate Production Functions," Energies, MDPI, Open Access Journal, vol. 10(2), pages 1-44, February.
    17. Yu, Xuewei & Moreno-Cruz, Juan & Crittenden, John C., 2015. "Regional energy rebound effect: The impact of economy-wide and sector level energy efficiency improvement in Georgia, USA," Energy Policy, Elsevier, vol. 87(C), pages 250-259.
    18. Valeria Costantini & Francesco Crespi & Elena Paglialunga, 2018. "Capital-energy substitutability in manufacturing sectors: methodological and policy implications," Departmental Working Papers of Economics - University 'Roma Tre' 0234, Department of Economics - University Roma Tre.
    19. Zha, Donglan & Zhou, Dequn, 2014. "The elasticity of substitution and the way of nesting CES production function with emphasis on energy input," Applied Energy, Elsevier, vol. 130(C), pages 793-798.
    20. Elena Lagomarsino & Karen Turner, 2017. "Is the production function Translog or CES? An empirical illustration using UK data," Working Papers 1713, University of Strathclyde Business School, Department of Economics.
    21. Lecca, Patrizio & McGregor, Peter G. & Swales, Kim J. & Tamba, Marie, 2017. "The Importance of Learning for Achieving the UK's Targets for Offshore Wind," Ecological Economics, Elsevier, vol. 135(C), pages 259-268.
    22. Işıl Şirin SELÇUK & Altuğ Murat KÖKTAŞ, 2016. "Energy Market Regulations and Productivity: An Examination on OECD Countries between the Years of 1975-2007," Sosyoekonomi Journal, Sosyoekonomi Society, issue 24(27).
    23. G. Mandras & G. Garau, 2015. "Economy-wide rebound effects from an increase in efficiency in the use of energy: the Italian case," Working Paper CRENoS 201520, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    24. Ha, Soo Jung & Lange, Ian & Lecca, Patrizio & Turner, Karen, 2012. "Econometric estimation of nested production functions and testing in a computable general equilibrium analysis of economy-wide rebound effec ts," Stirling Economics Discussion Papers 2012-08, University of Stirling, Division of Economics.

    More about this item

    Keywords

    General equilibrium; KLEM production function; Separability assumptions;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • R15 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Econometric and Input-Output Models; Other Methods
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:28:y:2011:i:6:p:2832-2841. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.