The applied theory of energy substitution in production

Abstract

This paper reviews the applied theory of energy cross price partial elasticities of substitution, and presents it in a transparent fashion. It uses log linear and translog production and cost functions due to their economic properties and convenient estimating forms, but the theory applies other functional forms. The objective is to encourage increased empirical research that would deepen understanding and appreciation of energy substitution.The economic outcome of decisions regarding energy policy often hinge on substitution between energy and other factors of production, but there is little consensus regarding the degree and even direction of energy substitution. As classic examples, Berndt and Wood (1975) find aggregate energy a substitute for labor but a complement with capital, while Griffin and Gregory (1976) find energy a substitute for both. Only continued theoretical and empirical investigation will be able to shed light on this issue, and the opaque dispersed literature on the theory of substitution must discourage new research.The empirical literature on energy cross price elasticities is thin relative to the economic impact of energy substitution.The present paper presents a transparent theory of energy substitution using log linear (Cobb Douglas) and translog production and cost functions. The focus is on the derivation of cross price elasticities that describe the substitution of inputs due to a change in the price of an input. For instance, cross price elasticities describe the adjustment in capital and labor inputs to a higher price of energy, or the

How ICT investment influences energy demand in South Korea and Japan

“…Thompson (2006), for example, emphasized the degree and direction of energy usecapital substitutability by using Cobb-Douglas and translog production and cost functions to describe the substitution of capital and energy use through the derivation of cross-price elasticity.…”

“…The sample periods for each of the studied countries were divided into three sub-periods7: 1980-1989, 1990-1999for Korea and 1974-1984, 1985-1995, and 1996-2006 for Japan. In addition, both samples were divided into knowledge-based and non-knowledgebased industries.…”

A general equilibrium view of global rebound effects

“…Various de…nitions of substitution elasticities are presented in the literature (e.g. Broadstock, et al, 2007;Thompson, 2006). However, we consider the substitution between energy and other factors by introducing another parameter as shown above.…”

Energy Market Regulations and Productivity: An Examination on OECD Countries between the Years of 1975-2007

“…Using such a hierarchical production function provides potential differentiation of substitution flexibility among the inputs in different nests. However, it should also be noted that the substitutability/ complementary relationship between the other factors of production (especially capital) and energy is a highly controversial subject in the literature (Sorrel, 2008;Thompson, 2006).…”

“…Thompson (2006) used Cobb-Douglas, log linear function, translog production function and cost functions. In his study, it is stated that simpler functional forms can be used for production estimates while production function is expanded with natural resources, energy, labor and capital inputs.…”