Handbook of Environmental and Resource Economics
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Handbook of Environmental and Resource Economics

Edited by Jeroen C.J.M. van den Bergh

This major reference book comprises specially commissioned surveys in environmental and resource economics written by an international team of experts. Authoritative yet accessible, each entry provides a state-of-the-art summary of key areas that will be invaluable to researchers, practitioners and advanced students.
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Chapter 75: Input–Output Structural Decomposition Analysis of Energy and the Environment

A. Rose


75 Input-output structural decomposition analysis of energy and the environment Adam Rose’ 1. Introduction Changes in the patterns of energy use and pollution emissions are influenced by such factors as sociopolitical events, behavioural shifts, technological innovation, resource scarcity and government regulation. Although these stimuli differ from one another, they manifest themselves through a common set of channels within the economic system. These channels correspond to production function responses, and we can examine the effects through a set of stylized ‘sources’ of change, or the pure form that the changes take in the context of production theory. For example, an OPEC price increase will lead to interfuel substitution, spur the development and subsequent adoption of energy-saving technology, and accelerate the decline of energy-intensive heavy industry. Likewise, a carbon tax will lead to substitution away from fossil fuels and will spur conservation. Once these individual responses are estimated, they can be grouped together to characterize the impact of the original stimulus. Since the classic work on intermediate energy demand analysis by Hudson and Jorgenson (1974), it has been popular to employ flexible functional forms, inclusive of all inputs, for the production function modelling used in energy and natural resource analysis. The most common example is the translog production function specified in terms of capital, labour, energy and material aggregates, often denoted by the acronym KLEM. Typically, the production function has two decisionmaking levels, or tiers, with sub-aggregates within some of the KLEM components (for example, coal, oil, gas and nuclear components of...

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