October 24, 2011

Modeling Energy and Non-Energy Substitution: A Survey of Elasticities

by Manuel Frondel

- Estimating the degree of substitution between energy and non-energy inputs is key for any evaluation of environmental and energy policies. Yet, given the large variety of substitution elasticities, the central question arises as to which measure would be most appropriate. Apparently, ALLEN’s elasticities of substitution have been the most-used measures in applied production analysis. This paper argues that cross-price elasticities are preferable for many practical purposes. This conclusion is based on a survey of classical substitution measures, such as those from ALLEN, MORISHIMA, and MCFADDEN. The survey also highlights the fact that cross-price elasticities are their essential ingredients.

Frondel, M. (2011). "Modeling Energy and Non-Energy Substitution: A Survey of Elasticities." Ruhr Economic Papers No. 256, May 2011.