Abstract

This paper analyzes the effect of energy prices on energy intensity, 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 allows for a differentiation between the flexibility of substitution between factors of 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 employed for 23 OECD countries, four sectors, and their respective prices for final energy consumption over the period 1990-2005. The explicit representation of capital stock explains the delayed response to energy price changes. At the sector level, the explanatory value of the model with vintage capital stock is significantly improved. The results of the model confirm the significance of the capital stock in future energy and materials intensity of production. These findings point to the importance of action on energy and climate policy to provide incentives for early investment in energy – and materials-efficient capital stock, and reduce future energy and materials consumption.