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Energy Price, Environmental Policy, and Technological Bias

This paper investigates input biasing characteristics of technology, environmental compliance, and changing energy prices. In particular we wish to investigate whether input biases of technology and environmental compliance are induced by changes in relative fuel prices, or whether there are price induced technology and environmental compliance biases. Using a two-stage optimization, we estimate a truncated third-order translog model by its associated (second order) cost share equations. The model uses two-digit SIC data panel for the period 1974-- 1991. We find evidence of significant fuel-saving technological bias, while environmental compliance has been significantly fossil fuel using. The results indicate that technology and environmental compliance biases are, in part, induced by changes in relative fuel prices and such induced biases are mainly fuel saving. Finally, our demand elasticity estimates indicate that industrial demand for most fossil fuels and purchased electricity is significantly price inelastic. Policy implications of these results are also briefly discussed.

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Energy Specializations: Energy Modeling – Sectoral Energy Demand & Technology; Energy Efficiency; Energy and the Environment – Policy and Regulation

JEL Codes:
Q55 - Environmental Economics: Technological Innovation
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Energy prices, Environmental policy, Technology change, panel data, translog model

DOI: 10.5547/ISSN0195-6574-EJ-Vol23-No4-4

Published in Volume23, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.