The effectiveness of policies to reduce the use of energy depend on the elasticity
of substitution between the various inputs and on the rate of technological
progress. This paper presents a theoretical model emphasising energy investments
characteristics of uncertainty and irreversibility that result in testable hypotheses
concerning the relative values of substitution parameters and rates of technological
change in periods of high and increasing energy prices and in periods of low
prices.
Estimation results for a panel of sectors of the Dutch economy show that
the elasticity of substitution between energy and other inputs is low in periods of
low energy prices, whereas it is significantly higher in the preceding period of
high and increasing energy prices. Furthermore, energy-saving technological
progress in periods of high and increasing energy prices is also significantly
higher than if energy prices are low and falling.
The regression results suggest that, due this asymmetric response of firms
to changes in energy prices, taxing energy in the current period of low energy
prices will not yield substantial reductions in energy use of Dutch industry.