Next Article in Journal
Energy-Extended CES Aggregate Production: Current Aspects of Their Specification and Econometric Estimation
Previous Article in Journal
The Role of Smart Meters in Enabling Real-Time Energy Services for Households: The Italian Case
Article Menu
Issue 2 (February) cover image

Export Article

Open AccessArticle
Energies 2017, 10(2), 203; doi:10.3390/en10020203

From Theory to Econometrics to Energy Policy: Cautionary Tales for Policymaking Using Aggregate Production Functions

1
Engineering Department, Calvin College, Grand Rapids, MI 49546, USA
2
MARETEC—Marine, Environment, and Technology Center, Environment and Energy Scientific Area, Department of Mechanical Engineering, Instituto Superior Técnico (IST), University of Lisbon, Avenida Rovisco Pais, 1 1049-001 Lisbon, Portugal
3
Sustainability Research Institute, School of Earth and Environment, University of Leeds, Leeds LS2 9JT, UK
4
Mathematics & Statistics Department, Calvin College, Grand Rapids, MI 49546, USA
*
Author to whom correspondence should be addressed.
Received: 18 November 2016 / Revised: 16 January 2017 / Accepted: 24 January 2017 / Published: 10 February 2017
View Full-Text   |   Download PDF [1735 KB, uploaded 20 February 2017]   |  

Abstract

Development of energy policy is often informed by economic considerations via aggregate production functions (APFs). We identify a theory-to-policy process involving APFs comprised of six steps: (1) selecting a theoretical energy-economy framework; (2) formulating modeling approaches; (3) econometrically fitting an APF to historical economic and energy data; (4) comparing and evaluating modeling approaches; (5) interpreting the economy; and (6) formulating energy and economic policy. We find that choices made in Steps 1–4 can lead to very different interpretations of the economy (Step 5) and policies (Step 6). To investigate these effects, we use empirical data (Portugal and UK) and the Constant Elasticity of Substitution (CES) APF to evaluate four modeling choices: (a) rejecting (or not) the cost-share principle; (b) including (or not) energy; (c) quality-adjusting (or not) factors of production; and (d) CES nesting structure. Thereafter, we discuss two revealing examples for which different upstream modeling choices lead to very different policies. In the first example, the (kl)e nesting structure implies significant investment in energy, while other nesting structures suggest otherwise. In the second example, unadjusted factors of production suggest balanced investment in labor and energy, while quality-adjusting suggests significant investment in labor over energy. Divergent outcomes provide cautionary tales for policymakers: greater understanding of upstream modeling choices and their downstream implications is needed. View Full-Text
Keywords: energy policy; econometrics; CES; Solow residual; cost share principle energy policy; econometrics; CES; Solow residual; cost share principle
Figures

Figure 1

This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

Supplementary material

  • Externally hosted supplementary file 1
    Doi: 10.5518/152
    Link: https://doi.org/10.5518/152
    Description: Input and results datasets for this paper have been stored with the University of Leeds Data Repository at https://doi.org/10.5518/152.

Scifeed alert for new publications

Never miss any articles matching your research from any publisher
  • Get alerts for new papers matching your research
  • Find out the new papers from selected authors
  • Updated daily for 49'000+ journals and 6000+ publishers
  • Define your Scifeed now

SciFeed Share & Cite This Article

MDPI and ACS Style

Heun, M.K.; Santos, J.; Brockway, P.E.; Pruim, R.; Domingos, T.; Sakai, M. From Theory to Econometrics to Energy Policy: Cautionary Tales for Policymaking Using Aggregate Production Functions. Energies 2017, 10, 203.

Show more citation formats Show less citations formats

Note that from the first issue of 2016, MDPI journals use article numbers instead of page numbers. See further details here.

Related Articles

Article Metrics

Article Access Statistics

1

Comments

[Return to top]
Energies EISSN 1996-1073 Published by MDPI AG, Basel, Switzerland RSS E-Mail Table of Contents Alert
Back to Top