Nonparametric Estimates of the Clean and Dirty Energy Substitutability
8 Pages Posted: 4 May 2018
Date Written: March 14, 2018
In growth theory, a greater-than-one elasticity of substitution between clean and dirty energy is among key necessary conditions for long-run green economic growth. Using parametric specifications, Papageorgiou et al. (2017) provide first estimates of this fundamentally important inter-energy substitution elasticity. We extend their work by relaxing restrictive functional-form assumptions about production technologies using flexible nonparametric methods. We find that the technological substitutability between clean and dirty energy inputs may not be that strong, especially in the case of a final-goods sector for which the inter-energy elasticity of substitution statistically exceeds one for at most a third of industries/countries. Hence, the favorability of technological conditions for long-run green growth may not be corroborated by the cross-country empirical evidence as strongly as previously thought.
Keywords: aggregate production function, clean and dirty energy, cross-country analysis, elasticity of substitution, environmental policy, green growth
JEL Classification: O44, O47, Q54, Q58
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