Quantifying the role of energy in aggregate production functions for industrialized countries

This dissertation tries to enhance our understanding of the relation between energy and other production inputs, and what the elasticity of substitution of energy means for enacting good environmental policy. It develops a versatile new method to estimate three-factor CES functions that incorporate capital, labor, and energy inputs. The methodology represents an improvement overexisting methods, such as a direct nonlinear estimation, or a linear approximation. The method is applied on macroeconomic data for three industrialized nations: Germany, the US, and the UK. We find that all three input factors are gross complements. In Germany, the elasticity of substitution between energy and capital or labor is estimated to be just 0.18. At the same time, we find that technical change was mostly labor- and energy-saving and capital-using. In the US, the elasticity of substitution of energy is estimated at around 0.67 and technical change is labor saving. When looking at the UK, the analysis reveals that the oil crises had a profound effect on the economy. Around the years 1960 - 1980 we find elasticity estimates much larger than unity. This would indicate that during this time, energy was a gross substitute to capital and labor. This was later reversed, with post-1985 data showing very low elasticity