Short- and long-run dynamics of energy demand

13 January 2020

The timing of the response of CO2 emissions to a carbon tax depends crucially on the timing of response of energy demand of changes in energy prices. In this paper, we investigate the path of changing energy demand from the moment of a change in price until it reaches its new steady state. First, by applying the LeChatelier principle, we show that the response of energy demand in the short run must be smaller than in the long run if firms are only able to adjust their choices of technology in the long run. Then, using a putty-clay model with induced technological change, we show that the elasticity of demand approaches its long-run level exponentially at the rate that is determined by the capital depreciation rate and the growth rate of the economy. Thus, according to the model, it takes more than 8 years from the introduction of the carbon tax until half of the long-run effect of induced technological change on energy demand is realised in developed countries. We also examine the macroeconomic consequences of the long-run adjustment of energy demand. To this end, we incorporate the theoretical model into a large-scale multi-sector DSGE model. We find that the adjustment of energy demand reduces the negative impact of CO2 tax on GDP.

keywords: induced technological change; rebound effect; general equilibrium model; mitigation costs
JEL codes: 
publication year: 2019
Publications category:  , ,
publishing series: IBS Working Paper
publication number: 11/2019
ISSN: 2451-4373

Institute for Structural Research (IBS); Faculty of Economic Sciences, University of Warsaw

Institute for Structural Research (IBS); SGH Warsaw School of Economics

We value your privacy
Cookie settings
Some cookies are necessary for the proper operation of our site. We also encourage you to agree to the use of analytical tool cookies. They allow us to continuously improve the site. You can find more information in the Privacy Policy. More.
Customize Reject all Accept all
Cookie settings
Customize settings
"Necessary" cookies are required for the operation of the site. Consent to the other categories, will help us improve the operation of the site. Third-party companies, such as: Google, also store cookies. For more information: data use and privacy. Cookies set by Google for logged in users.
Necessary cookies are required for the proper operation of the site.
Store the data of analytical tools such as: Google Analytics.
They store data related to the ad function.
Allows user data related to advertisements to be sent to Google

There is no cookies.

Allows personalized ads to be displayed

There is no cookies.

Save settings Accept all
Cookie settings
Skip to content