Fuel-factor nesting structures in CGE models of China
Shenghao Feng and
Energy Economics, 2018, vol. 75, issue C, 274-284
Fuel-factor nesting structures are critical features of CGE models but have rarely been chosen in a robust manner. This study thoroughly examines two popular fuel-factor nesting structures in CGE models of China, namely KL-E11In which, Capital (K) and labour (L) forms of KL bundle, which in turn forms a KL-E bundle with energy (E). and KE-L.22In which, capital (K) and energy (E) forms of KE bundle, which in turn forms a KE-L bundle with labour (L). We use non-linear algorithms to estimate the underlying CES production functions of these two structures. We recommend the latter to be used in CGE models of China, as it exhibits 1) better goodness of fit, 2) better convergence, and 3) better compliance with economic meanings. Our estimations show that the ranges for the inner- and outer-CES parameters33The inner-elasticity in a KE-L nesting structure refers to CES parameter between capital and energy, and the outer-elasticity in a KE-L nesting structure refers to the CES parameter between the capital-energy bundle and labour. in our preferred KE-L structure are 0.6–0.8 and 0.7–0.9, respectively. Applying these in a CGE model, we find nesting strategies used in previous CGE exercises might have overestimated energy conservation costs in China. A decomposition shows that, using our KE-L, changes in energy use are dominate by output effects rather than substitution effects.
Keywords: CGE; CES; Fuel-factor substitution; Nesting; China (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:75:y:2018:i:c:p:274-284
Access Statistics for this article
Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant
More articles in Energy Economics from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().