We estimate an aggregate production function with constant elasticity of substitution between energy and a capital/labor composite using U.S. data. The implied measure of energysaving technical change appears to respond strongly to the oilprice shocks in the 1970s and has a negative medium-run correlation with capital/labor-saving technical change. Our findings are suggestive of a model of directed technical change, with low short-run substitutability between energy and capital/labor but significant substitutability over longer periods through technical change. We construct such a model, calibrate it based on the historical data, and use it to discuss possibilities for the future.
Market work per person is roughly 10 percent higher in the U.S. than in Sweden. However, if we include the work carried out in home production, the total amount of work only differs by 1 percent. I set up a model and show that differences in policy -mainly taxes -can account for the discrepancy in both labor supply and home production between Sweden and the U.S. These results are independent of the elasticity of labor supply.
How do markets economize on scarce natural resources? With an applica-tion to fossil energy, we emphasize technological change aimed at saving on the scarce resource. We develop quantitative macroeconomic theory as a tool for interpreting the past and thinking about the future. We argue, first, that aggre-gate U.S. data calls for a short-run substitution elasticity between energy and the capital/labor inputs that is near Leontief. Given this fact and an aggregate CES function, we note that energy-saving technical change took off right as the oil shocks hit in the 1970s. We rationalize this observation using a theory that views technical change as directed: it can be used to save on different inputs and, hence, the long-run substitutability between inputs becomes higher than Leontief. For our application, we estimate long-run dependence on fossil energy-measured by its factor shareto climb to a little below 10%; absent endogenous technical change directed toward energy-saving, it would go to 100%.
We construct an integrated assessment model with multiple energy sources—two fossil fuels and green energy—and use it to evaluate ranges of plausible estimates for the climate sensitivity, as well as for the sensitivity of the economy to climate change. Rather than focusing explicitly on uncertainty, we look at extreme scenarios defined by the upper and lower limits given in available studies in the literature. We compare optimal policy with laissez faire, and we point out the possible policy errors that could arise. By far the largest policy error arises when the climate policy is overly passive; overly zealous climate policy (i.e., a high carbon tax applied when climate change and its negative impacts on the economy are very limited) does not hurt the economy much as there is considerable substitutability between fossil and nonfossil energy sources.
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