Kiel Working Papers, Kiel Institute for World Economics
No 1316:
Production Functions for Climate Policy Modeling: An Empirical Analysis
Edwin van der Werf
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.
Keywords: Climate policy, input substitution, technological change; (follow links to similar papers)
JEL-Codes: O13,; Q32,; Q43,; Q55; (follow links to similar papers)
30 pages, March 2007
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