Capital-labour-energy substitution in a nested CES framework

A replication and update of Kemfert (1998)

Arne Henningsen, Geraldine Henningsen*, Edwin van der Werf

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

3 Citations (Scopus)

Abstract

The ease with which firms can substitute away from energy to other inputs is an important determining factor in the costs of climate change mitigation policies. Climate policy simulation models usually represent this substitutability by using the Constant Elasticity of Substitution (CES) function with parameter values often taken from econometric studies. Hence, the accuracy of the estimated substitution parameters has a strong influence on the validity of the climate policy simulation. In this article, we attempt to replicate the results presented in a widely cited article in this field: ('Estimated substitution elasticities of a nested CES production function approach for Germany', Energy Economics, 20, 249-264). We first use the data and software reported in that article and compare our results with those reported in the original study. We then test the same data and a new, more recent, data set on German industrial data with an improved econometric approach. Despite applying various approaches and modifications, we are not able to replicate the results in We furthermore conclude that the data sets that are typically used to estimate nested CES functions often have too few observations and too little independent variation of the explanatory variables to obtain reliable estimates when using a direct non-linear approach.
Original languageEnglish
Pages (from-to)16-25
JournalEnergy Economics
Volume82
Early online date13 Feb 2018
DOIs
Publication statusPublished - Aug 2019

Fingerprint

Elasticity
Substitution reactions
Personnel
Climate change
Labor
Replication
Elasticity of substitution
Energy substitution
Economics
Costs
Policy simulation
Climate policy
Econometrics

Keywords

  • CES
  • Climate policy
  • Elasticity of substitution
  • Energy
  • Replication study

Cite this

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title = "Capital-labour-energy substitution in a nested CES framework: A replication and update of Kemfert (1998)",
abstract = "The ease with which firms can substitute away from energy to other inputs is an important determining factor in the costs of climate change mitigation policies. Climate policy simulation models usually represent this substitutability by using the Constant Elasticity of Substitution (CES) function with parameter values often taken from econometric studies. Hence, the accuracy of the estimated substitution parameters has a strong influence on the validity of the climate policy simulation. In this article, we attempt to replicate the results presented in a widely cited article in this field: ('Estimated substitution elasticities of a nested CES production function approach for Germany', Energy Economics, 20, 249-264). We first use the data and software reported in that article and compare our results with those reported in the original study. We then test the same data and a new, more recent, data set on German industrial data with an improved econometric approach. Despite applying various approaches and modifications, we are not able to replicate the results in We furthermore conclude that the data sets that are typically used to estimate nested CES functions often have too few observations and too little independent variation of the explanatory variables to obtain reliable estimates when using a direct non-linear approach.",
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author = "Arne Henningsen and Geraldine Henningsen and {van der Werf}, Edwin",
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language = "English",
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pages = "16--25",
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}

Capital-labour-energy substitution in a nested CES framework : A replication and update of Kemfert (1998). / Henningsen, Arne; Henningsen, Geraldine; van der Werf, Edwin.

In: Energy Economics, Vol. 82, 08.2019, p. 16-25.

Research output: Contribution to journalArticleAcademicpeer-review

TY - JOUR

T1 - Capital-labour-energy substitution in a nested CES framework

T2 - A replication and update of Kemfert (1998)

AU - Henningsen, Arne

AU - Henningsen, Geraldine

AU - van der Werf, Edwin

PY - 2019/8

Y1 - 2019/8

N2 - The ease with which firms can substitute away from energy to other inputs is an important determining factor in the costs of climate change mitigation policies. Climate policy simulation models usually represent this substitutability by using the Constant Elasticity of Substitution (CES) function with parameter values often taken from econometric studies. Hence, the accuracy of the estimated substitution parameters has a strong influence on the validity of the climate policy simulation. In this article, we attempt to replicate the results presented in a widely cited article in this field: ('Estimated substitution elasticities of a nested CES production function approach for Germany', Energy Economics, 20, 249-264). We first use the data and software reported in that article and compare our results with those reported in the original study. We then test the same data and a new, more recent, data set on German industrial data with an improved econometric approach. Despite applying various approaches and modifications, we are not able to replicate the results in We furthermore conclude that the data sets that are typically used to estimate nested CES functions often have too few observations and too little independent variation of the explanatory variables to obtain reliable estimates when using a direct non-linear approach.

AB - The ease with which firms can substitute away from energy to other inputs is an important determining factor in the costs of climate change mitigation policies. Climate policy simulation models usually represent this substitutability by using the Constant Elasticity of Substitution (CES) function with parameter values often taken from econometric studies. Hence, the accuracy of the estimated substitution parameters has a strong influence on the validity of the climate policy simulation. In this article, we attempt to replicate the results presented in a widely cited article in this field: ('Estimated substitution elasticities of a nested CES production function approach for Germany', Energy Economics, 20, 249-264). We first use the data and software reported in that article and compare our results with those reported in the original study. We then test the same data and a new, more recent, data set on German industrial data with an improved econometric approach. Despite applying various approaches and modifications, we are not able to replicate the results in We furthermore conclude that the data sets that are typically used to estimate nested CES functions often have too few observations and too little independent variation of the explanatory variables to obtain reliable estimates when using a direct non-linear approach.

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KW - Replication study

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