Production functions for

climate policy modeling: An

empirical analysis

Van der Werf, E. (2008). Production functions for climate policy modeling: An
empirical analysis. Energy economics, 30(6), 2964-2979
 • What is the optimal structure of the CES
production function and what are the
empirical derived values of its parameters?
Research • Motivation: Climate Policy Models allow
question firms to react to price changes, caused by
and climate policy, through input substitution, yet
this parameters are set theoretically.
motivation
•
 The minimization problem of the firms is
given by:

Model F.O.C and assuming perfect competition give

specification the conditional demand for E:
Model • After more algebra…
specification
 • Model to be estimated:

Econometric • Initially Country-industry fixed effects. Unable to reject

model and the hypothesis that the countries have the same fixed
effects. Thus pooled regressions are more efficient.
Data • Data from IEA energy balances and OECD international
sectoral database.
 • The nesting structure that fits the data the
best is the one in which capital and labor are
combined first: (KL)E.

Results
• Where Z is the nest and is defined as:
 • Reject elasticities equal to 1 (C-D PF).
Values ranging from 0.15 to 0.6 among
industries and countries.
• Factor-specific growth rates that are
significant and that mostly significantly
Results differ from each other. Rejecting input-
neutral TFP growth and ‘only energy-
augmenting technological change’.
 • The nesting structure (LE)K better fits the
data tan (KE)L.
Interesting • Elasticites smaller than 1 suggest that the
role of endogenous technical change plays a
points bigger role in reducing the costs of climate
policies.
 • Business cycles and parameter estimation in
macroeconomics.
Constructiv • Non-linearity of CES PFs.
e criticisim • Further research on the elasticity of
substitution between clean and fossil energy
sources.
 Bibliography:
• Van der Werf, E. (2008). Production functions for climate policy
modeling: An empirical analysis. Energy economics, 30(6),
2964-2979
• Fried, S. (2018). Climate policy and innovation: A quantitative
Thank you macroeconomic analysis. American Economic Journal:
Macroeconomics, 10(1), 90-118.
for your • Qian, H., Wu, L., & Fan, J. (2018). On Estimation of Deep
Nested CES Production Functions. Available at SSRN 3247693.
time. • Kaya, A., Csala, D., & Sgouridis, S. (2017). Constant elasticity
of substitution functions for energy modeling in general
equilibrium integrated assessment models: a critical review and
recommendations. Climatic Change, 145(1-2), 27-40.
• Papageorgiou, C., Saam, M., & Schulte, P. (2017). Substitution
between clean and dirty energy inputs: A macroeconomic
perspective. Review of Economics and Statistics, 99(2), 281-290.