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Capital-Energy Relationships: An Analysis when Disaggregating by Industry and Different Types of Capital

In this paper we analyze the relationship between capital and energy through cross price elasticities. First, we extend Thomsen's (2000) methodology in order to link the short and long run in a panel data setting, by including an equation for the motion of capital. Then, by using an expansive industry-level data set and two functional forms, we show clear evidence of long run complementarity in all the analyzed industries, and with respect to the different types of capital that we consider (buildings and machinery). We identify the industries with the greatest degree of dependence between energy and capital. These are therefore, the industries in which a policy of increasing energy prices via taxes to reduce energy consumption may have a serious effect, reducing their investment levels. Hence we recommend that a better governmental policy would be to encourage technological diffusion.

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Energy Specializations: Energy Investment and Finance – Corporate Strategy; Energy Modeling – Energy Data, Modeling, and Policy Analysis; Electricity – R&D and Emerging Technologies; Electricity – Policy and Regulation; Energy and the Economy – Energy as a Productive Input; Energy and the Economy –Economic Growth and Energy Demand; Energy and the Economy – Resource Endowments and Economic Performance; Energy and the Economy – Energy Shocks and Business Cycles

JEL Codes:
D92 - Intertemporal Firm Choice: Investment, Capacity, and Financing
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
O32 - Management of Technological Innovation and R&D
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
O13 - Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Products
Q34 - Natural Resources and Domestic and International Conflicts
F44 - International Business Cycles

Keywords: Capital-Energy Relationships, Dynamic Panel Data Methods, Disaggregation by industry and types of capital, Substitutability and Complementarity, Flexible Forms.

DOI: 10.5547/01956574.34.4.7

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Published in Volume 34, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.