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An econometric model of production with endogenous improvement in energy efficiency, 1970-1995

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  • Conrad, Klaus

Abstract

The purpose of this paper is to introduce a modification of a standard four input production process where energy is used in an inefficient way due to partly unnecessary waste of energy. In this production process, R&D investment is an additional input in order to improve energy efficiency. It closes the gap between energy purchased and energy used effectively. The more is invested, the less is the waste of energy. With the cost and benefit of R&D investment incorporated in our model of the firm, we analyze the impact of an energy tax on R&D effort, on output and on the waste of energy. The model is implemented empirically by choosing a translog cost function and a set of first-order conditions, using data for the German chemical industry, 1970-1995. In a simulation study based on higher energy prices we found outsourcing as the consequent reaction of the firm - more material is used and less of energy, labor, and capital, given the unchanged output level. There is no indication of a double dividend in terms of environmental improvement as well as higher demand for labor on the industry level calling for a computable general equilibrium approach in order to answer this open question.

Suggested Citation

  • Conrad, Klaus, 1999. "An econometric model of production with endogenous improvement in energy efficiency, 1970-1995," Discussion Papers 563, Institut fuer Volkswirtschaftslehre und Statistik, Abteilung fuer Volkswirtschaftslehre.
  • Handle: RePEc:mnh:vpaper:1047
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    1. Bovenberg, A Lans & Smulders, Sjak A, 1996. "Transitional Impacts of Environmental Policy in an Endogenous Growth Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(4), pages 861-893, November.
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    4. Conrad, Klaus & Henseler-Unger, Iris, 1986. "Applied general equilibrium modeling for long-term energy policy in Germany," Journal of Policy Modeling, Elsevier, vol. 8(4), pages 531-549.
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    7. Mckibbin, W.J. & Wilcoxen, P.J., 1992. "The Global Costs of Policies to Reduce Greenhouse Gas Emissions," Papers 97, Brookings Institution - Working Papers.
    8. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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