The Effect of Energy Prices on Operation and Investment in OECD Countries: Evidence from the Vintage Capital Model

This paper analyzes the effect of energy prices on energy efficiency, separately accounting for operational and investment choices in different sectors. For this purpose, capital stock is characterised by vintages with different intensities of energy use, calculated as a function of exogenously-evolving technology availability and energy prices. Our model separately accounts for substitution between inputs to for production (labour, energy and materials), and the potential for more efficient use of these inputs by choosing more efficient technologies at the time of investment. The model is estimated for 23 OECD countries across four sectors, and their respective prices for final energy consumption over the period 1990-2005. Vintage representation of capital stock significantly improves the explanatory value of the model at the sector level. Our results imply that rising energy costs result in substantial decline in energy use in the long-run.