Energy-capital-labor substitution and the economic effects of CO2 abatement: Evidence for Germany

Although the economic effects of CO2 abatement depend substantially on the degree to which capital and labor can substitute for energy, the issue of e nergy-capital-labor substitution is surrounded by considerable uncertainty. In this article we use econometrically estimated, sectorally differentiate d elasticities of substitution for Germany to shed some light on this issue . The elasticity estimates are used within a dynamic multisector CGE model to assess the economic effects of CO2 emission limits for Germany. In parti cular, we consider the implementation of emission limits by means of a carb on tax, assuming two alternative ways of tax revenue recycling, i.e., lump- sum transfer to private households versus labor cost reduction. The results are compared with results based on "standard" substitution elasticities fr om the literature. Because the estimated elasticities are on average higher and closer to unity than the "standard" elasticities, we get lower tax rat es and tax revenues, and a more stable revenue/GDP ratio. In the case of us ing the tax revenue to reduce labor costs, the smaller revenue translates i nto a less favorable (but still positive) effect on employment and GDP. If the revenue is transferred to private households, the sensitivity of GDP wi th respect to the elasticities is rather negligible, whereas its various co mponents are affected somewhat stronger. (C) 2000 Society for Policy Modeli ng. Published by Elsevier Science Inc.