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Production Functions for Climate Policy Modeling: An Empirical Analysis

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  • van der Werf, Edwin
Abstract
Quantitative models for climate policy modeling differ in the production structure used and in the sizes of the elasticities of substitution. The empirical foundation for both is generally lacking. This paper estimates the parameters of two-level CES production functions with capital, labour and energy as inputs, and is the first to systematically compare all nesting structures. Using industry-level data from 12 OECD countries, we find that the nesting structure where capital and labour are combined first, fits the data best, but for most countries and industries we cannot reject that all three inputs can be put into one single nest. These two nesting structures are used by most climate models. However, while several climate policy models use a Cobb-Douglas function for (part of the) production function, we reject elasticities equal to one, in favour of considerably smaller values. Finally we find evidence for factor-specific technological change. With lower elasticities and with factor-specific technological change, some climate policy models may find a bigger effect of endogenous technological change on mitigating the costs of climate policy.

Suggested Citation

  • van der Werf, Edwin, 2007. "Production Functions for Climate Policy Modeling: An Empirical Analysis," Kiel Working Papers 1316, Kiel Institute for the World Economy (IfW Kiel).
    • Handle: RePEc:zbw:ifwkwp:1316
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    File URL: https://www.econstor.eu/bitstream/10419/17841/1/kap1316.pdf
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    1. Manne, Alan & Mendelsohn, Robert & Richels, Richard, 1995. "MERGE : A model for evaluating regional and global effects of GHG reduction policies," Energy Policy, Elsevier, vol. 23(1), pages 17-34, January.
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    Cited by:

    1. Emanuele Massetti & Lea Nicita, 2010. "The Optimal Climate Policy Portfolio when Knowledge Spills across Sectors," CESifo Working Paper Series 2988, CESifo.
    2. CARRARO Carlo & MASSETTI Emanuele & NICITA Lea, 2010. "How Does Climate Policy Affect Technical Change? ?An Analysis of the Direction and Pace of Technical Progress in a Climate-Economy Model (Fondazione Eni Enrico Mattei)," ESRI Discussion paper series 229, Economic and Social Research Institute (ESRI).
    3. Maurizio Ciaschini & Rosita Pretaroli & Francesca Severini & Claudio Socci, 2013. "Environmental tax and regional government consumption expenditure in a fiscal federalism system," ECONOMICS AND POLICY OF ENERGY AND THE ENVIRONMENT, FrancoAngeli Editore, vol. 2013(2), pages 129-152.
    4. Roolfs, Christina & Gaitan Soto, Beatriz & Edenhofer, Ottmar & Lessmann, Kai, 2021. "Technology Beats Capital -- Sharing the Carbon Price Burden in Federal Europe," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242381, Verein für Socialpolitik / German Economic Association.
    5. Adriana Marcucci & Lin Zhang, 2019. "Growth impacts of Swiss steering-based climate policies," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 155(1), pages 1-13, December.
    6. Lucas Bretschger & Lin Zhang, 2014. "Going beyond tradition: Carbon policy in a high-growth economy: The case of China," CER-ETH Economics working paper series 14/201, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    7. Dean M. Hanink, 2010. "Perspectives on Regional Change: A Review Essay on Handbook of Regional Growth and Development Theories," Growth and Change, Wiley Blackwell, vol. 41(1), pages 3-27, March.
    8. Hübler, Michael, 2011. "Technology diffusion under contraction and convergence: A CGE analysis of China," Energy Economics, Elsevier, vol. 33(1), pages 131-142, January.
    9. Ruslana Palatnik & Mordechai Shechter, 2008. "Can Climate Change Mitigation Policy Benefit the Israeli Economy? A Computable General Equilibrium Analysis," Working Papers 2008.2, Fondazione Eni Enrico Mattei.
    10. Bretschger, Lucas & Zhang, Lin, 2017. "Carbon policy in a high-growth economy: The case of China," Resource and Energy Economics, Elsevier, vol. 47(C), pages 1-19.
    11. Hübler, Michael, 2009. "Energy saving technology diffusion via FDI and trade: a CGE model of China," Kiel Working Papers 1479, Kiel Institute for the World Economy (IfW Kiel).
    12. Curran, Louise, 2008. "Unravelling the textiles trade: How accurate were GTAP models in predicting the impact of the end of the MFA?," Conference papers 331796, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    13. M. Chepeliev, 2015. "Econometric estimation of capital-labor substitution elasticities for Ukrainian CGE model," Economy and Forecasting, Valeriy Heyets, issue 2, pages 33-46.
    14. Ramón López & Sang Won Yoon, 2013. "Sustainable Economic Growth: Structural Transformation with Consumption Flexibility," Working Papers wp375, University of Chile, Department of Economics.
    15. Maciej Bukowski & Pawel Kowal, 2010. "Large scale, multi-sector DSGE model as a climate policy assessment tool - Macroeconomic Mitigation Options (MEMO) model for Poland," IBS Working Papers 3/2010, Instytut Badan Strukturalnych.
    16. Schubert, Stefan F., 2014. "Dynamic Effects Of Oil Price Shocks And Their Impact On The Current Account," Macroeconomic Dynamics, Cambridge University Press, vol. 18(2), pages 316-337, March.
    17. Nguyen Ngoc Thach, 2020. "How to Explain When the ES Is Lower Than One? A Bayesian Nonlinear Mixed-Effects Approach," JRFM, MDPI, vol. 13(2), pages 1-17, February.
    18. Eisenack, Klaus & Edenhofer, Ottmar & Kalkuhl, Matthias, 2012. "Resource rents: The effects of energy taxes and quantity instruments for climate protection," Energy Policy, Elsevier, vol. 48(C), pages 159-166.
    19. 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.
    20. Roolfs, Christina & Gaitan, Beatriz & Edenhofer, Ottmar, 2021. "Make or brake — Rich states in voluntary federal emission pricing," Journal of Environmental Economics and Management, Elsevier, vol. 109(C).
    21. Lucas Bretschger & Roger Ramer, 2012. "Sectoral Growth Effects of Energy Policies in an Increasing-Varieties Model of the Swiss Economy," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 148(II), pages 137-166, June.

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    More about this item

    Keywords

    Climate policy; input substitution; technological change;
    All these keywords.

    JEL classification:

    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development

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