Factor-augmenting technical change in climate models: an empirical assessment

This paper estimates factor-specific technical change and input substitution using a structural approach. It contributes to the existing literature by introducing various technology drivers for factor productivities and by assessing the impact of endogenous technical change on the elasticity of substitution. The empirical results suggest that factor productivities are indeed endogenous. In addition, technology drivers are factor-specific. Whereas the R&D stock and machinery imports are important determinants of energy and capital productivity, the education stock is statistically related to labour productivity. The rate of energy-augmenting technical change is larger than that of either labour or capital. By contrast, the productivity of these two factors grows at similar rates. Estimates of the elasticity of substitution are within the range identified by previous literature. In addition, we show that endogenous technical change reduces substitution. Because the elasticity of substitution is lower than one, knowledge and human capital can ultimately have an energy-using effect. The estimated structure of endogenous technical change suggests that Integrated Assessment models focusing on energy-saving technical change might underestimate climate policy costs