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Faculty of Economics

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Steinbuks, J. and Neuhoff, K.

Operational and Investment Response to Energy Prices in the OECD Manufacturing Sector

CWPE1015

Abstract: This paper estimates the vintage capital model of energy demand and examines operational and investment responses to energy prices at disaggregate level using data from five OECD manufacturing industries. Applying the model to less aggregate level data helps avoiding the distortions from exogenous structural shifts and measurement errors. The results confirm the previous findings that including capital stock vintages significantly improves the econometric model's goodness of fit. Estimated own-price elasticities of energy demand vary between 0.26 and 1.00 and are economically sound. Estimated own-price investment elasticities of energy efficiency of capital stock vary between 0.03 and 0.9. The investment response to energy prices thus varies significantly across manufacturing industries, being significant in some of them and negligible in other. The results of policy simulations for the U.K. petrochemical industry (the most energy-intensive industry in the sample) indicate that total (operational and investment) own-price elasticity of energy demand is close to one.

Keywords: energy efficiency, energy prices, investment, vintage capital model

JEL Codes: D24 E22 Q41 Q43

PDF: http://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe1015.pdf

EPRG Paper Link: 1006

Open Access Link: https://doi.org/10.17863/CAM.1123