Title Representation of endogenous technical change
 Collaborators Hadi Dowlatabadi (CMU), Matthew Oravetz
 Keywords endogenous technical change, carbon emissions, energy efficiency

Technical change is how we hope to de-couple energy services from carbon emissions. The objective of climate policy is to bring about technical innovations that make this possible, and create incentives that diffuse such technologies rapidly. It is surprising then to learn that most energy economics models specify technical change as an exogenous process unaffected by policy. This is because it is very difficult to characterize and calibrate endogenous technical change models suitable for adoption in traditional energy economics models. We are seeking to develop simple reduced form models of endogenous technical change suitable for adoption in these models. It is not being offered as the ultimate solution to this thorny issue, but as an interim solution that will help our analyses to be more realistic.

Energy intensity of the economy is often modeled as being determined by the combined effect of a price elasticity of demand, and an exogenously specified, technical change parameter denoted as the "Autonomous Energy Efficiency Improvement" (AEEI). We study historic aggregate energy efficiency trends for the US from 1954-94. We show that the historic trends are inconsistent with an autonomous model of improved energy efficiency. As an alternative we propose a model of price induced efficiency, _, in which aggregate energy efficiency trends respond to changes in energy prices beyond price elasticity of demand _.

Our back-casting exercise reveals that the aggregate price elasticity of energy demand of the US economy has been declined by roughly 15% over the past four decades. But beyond this decline, bringing back-casts and history into close correspondence requires _ to change sign before and after 1974. Before 1974, after accounting for price elasticity of demand, the economy was growing less energy efficient. After 1974, after accounting for the price elasticity of demand, the economy was growing more energy efficient. Furthermore, since 1984, the rate of energy efficiency gain has been declining.

When projections of long-term energy use are compared, those with a price induced energy efficiency formulation generate significantly more price sensitive energy use and emissions trajectories. When in the business as usual scenario energy prices are expected to be rising, climate policies involve lower shadow carbon prices with _ than with AEEI formulations. In scenarios where energy prices are relatively flat, energy intensity rises leading to CO2 emissions far higher than standard business as usual projections utilizing AEEI assumptions.