Elasticity of substitution in capital-energy relationships: how central is a sector-based panel estimation approach?

The challenging climate change reduction policies envisaged by current international negotiations have fuelled the debate on abatement cost assessment. One specific issue under investigation is the role of behavioural parameters in influencing cost assessment results. This paper specifically addresses the computation of energy-output and capital-energy substitution elasticity values in ten manufacturing sectors for OECD countries. The paper contains five novelties with regard to the existing literature: i) energy-output elasticities are computed for disaggregated manufacturing sectors for a long time span (1970-2008) for a panel of 21 OECD countries; ii) capital-energy substitution elasticity is estimated at aggregate level for the whole manufacturing sector for the same longitudinal dataset; iii) capital-energy substitution elasticities are also accurately estimated for 10 distinguished manufacturing sectors ; iv) average substitution values at sector level are computed by comparing several alternative econometric estimation methods; v) average substitution values at sector level are also computed for separate sub-periods in order to trace the dynamics over time of these behavioural parameters. These results should constitute the basis for sensitivity analysis for several forecasting economic models by computing abatement costs derived from climate change policies.