Energy-Augmenting Productivity and Carbon Pricing: Evidence from Production Microdata

Tatsuya Abe, Arlan Brucal and Yuta Toyama
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Tatsuya Abe: Graduate School of Economics, Hitotsubashi University, 2-1 Naka, Kunitachi, Tokyo, Japan.
Arlan Brucal: The World Bank Group, 1818 H Street, NW, Washington, DC, USA.
Yuta Toyama: School of Political Science and Economics, Waseda University, 1-6-1 Nishi-Waseda, Shinjuku-ku, Tokyo, Japan.

RIEEM Discussion Paper Series from Research Institute for Environmental Economics and Management, Waseda University

Abstract: How does directed technological change toward energy efficiency shape the effects and design of carbon pricing? We estimate a structural production function that separates energy-augmenting productivity from Hicks-neutral productivity using Indonesian manufacturing microdata. Exploiting energy-price variation from fossil-fuel subsidy reforms, we find that higher energy prices induce energy-augmenting productivity growth. Counterfactual simulations show that heterogeneity in energy-augmenting productivity, rather than Hicks-neutral productivity, drives the welfare advantage of carbon pricing over uniform regulation. When carbon pricing induces energy-augmenting innovation, aggregate emissions fall further, although a rebound effect partially offsets this additional abatement. Effective carbon-pricing design should account for productivity heterogeneity, induced innovation, and rebound effects.

Keywords: Energy-augmenting productivity; production function; rebound effect; induced innovation; structural estimation; carbon pricing; production microdata (search for similar items in EconPapers)
JEL-codes: D24 O33 Q41 Q54 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2026-06
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