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Energy substitutability and modernization of energy-consuming technologies

Natali Hritonenko and Yuri Yatsenko ()

Energy Economics, 2012, vol. 34, issue 5, 1548-1556

Abstract: The paper examines long-term strategies of capital modernization under different assumptions about embodied technological change, energy regulation, and substitutability between energy and capital. To describe modernization of physical capital, the authors use a vintage capital model with the constant elasticity of substitution between capital and energy. The models take into account (i) availability of new more energy-efficient equipment under energy-saving technical progress, (ii) possibility of buying new capital with various combinations of energy parameters and prices, (iii) controlled scrapping of obsolete capital, and (iv) energy regulation quotas. The paper analyzes how the elasticity of substitution between capital and energy impacts the capital modernization policy. In particular, it is proven that the optimal lifetime of capital appears to be longer for a larger elasticity.

Keywords: Elasticity of substitution between capital and energy; CES; Vintage capital; Endogenous capital lifetime; Energy consumption; Environmental pollution (search for similar items in EconPapers)
JEL-codes: O11 O13 O33 C61 (search for similar items in EconPapers)
Date: 2012
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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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