TY - JOUR

T1 - Constant elasticity of substitution functions for energy modeling in general equilibrium integrated assessment models

T2 - a critical review and recommendations

AU - Kaya, Abdulla

AU - Csala, Denes

AU - Sgouridis, Sgouris

N1 - The final publication is available at Springer via http://dx.doi.org/10.1007/s10584-017-2077-y

PY - 2017/11

Y1 - 2017/11

N2 - Applying constant elasticity of substitution (CES) functions in general equilibrium integrated assessment models (GE-IAMs) for the substitution of technical factor inputs (e.g., replacing fossil fuels) fails to match historically observed patterns in energy transition dynamics. This method of substitution is also very sensitive to the structure of CES implementation (nesting) and parameter choice. The resulting methodology-related artifacts are (i) the extension of the status quo technology shares for future energy supply relying on fossil fuels with carbon capture, biomass, and nuclear; (ii) monotonically increasing marginal abatement costs of carbon; and (iii) substitution of energy with non-physical inputs (e.g., knowledge and capital) without conclusive evidence that this is possible to the extent modeled. We demonstrate these issues using simple examples and analyze how they are relevant in the case of four major CES-based GE-IAMs. To address this, we propose alternative formulations either by opting for carefully applied perfect substitution for alternative energy options or by introducing dynamically variable elasticity of substitution as a potential intermediate solution. Nevertheless, complementing the economic analysis with physical modeling accounting for storage and resource availability at a high resolution spatially and temporally would be preferable.

AB - Applying constant elasticity of substitution (CES) functions in general equilibrium integrated assessment models (GE-IAMs) for the substitution of technical factor inputs (e.g., replacing fossil fuels) fails to match historically observed patterns in energy transition dynamics. This method of substitution is also very sensitive to the structure of CES implementation (nesting) and parameter choice. The resulting methodology-related artifacts are (i) the extension of the status quo technology shares for future energy supply relying on fossil fuels with carbon capture, biomass, and nuclear; (ii) monotonically increasing marginal abatement costs of carbon; and (iii) substitution of energy with non-physical inputs (e.g., knowledge and capital) without conclusive evidence that this is possible to the extent modeled. We demonstrate these issues using simple examples and analyze how they are relevant in the case of four major CES-based GE-IAMs. To address this, we propose alternative formulations either by opting for carefully applied perfect substitution for alternative energy options or by introducing dynamically variable elasticity of substitution as a potential intermediate solution. Nevertheless, complementing the economic analysis with physical modeling accounting for storage and resource availability at a high resolution spatially and temporally would be preferable.

KW - climate change

KW - carbon price

KW - constant elasticity of substitution

KW - energy transition

KW - renewable energy

KW - Integrated Assessment Modelling

U2 - 10.1007/s10584-017-2077-y

DO - 10.1007/s10584-017-2077-y

M3 - Journal article

AN - SCOPUS:85030108839

VL - 145

SP - 27

EP - 40

JO - Climatic Change

JF - Climatic Change

SN - 0165-0009

IS - 1-2

ER -