The Dynamics of Structural and Energy Intensity Change

Abstract

In this study, an extended structural change model is adopted to explore the mechanisms of how structural adjustments influence the changes of energy intensity. Through adding an energy production sector to the standard model, we find that the change of sectoral energy intensity is determined by the differences of sectoral and energy production technologies. Moreover, the change of economy-wide energy intensity is shaped by both structural and sectoral energy intensity changes. According to theoretical findings and simulation exercises, structural change, initiated by technological growth rate and substitution elasticity, affects the growth rate of economy-wide energy intensity. (1) If the energy threshold technological growth rates are high or low enough, the overall energy intensity will develop monotonically. (2) If the energy threshold technological growth rate is moderate, and (i) substitution elasticity and initial final production technological growth rate meet some requirements, the economy-wide energy intensity will grow monotonically; otherwise, (ii) with the suitable combination of substitution elasticity and initial final production technological growth rate, the overall energy intensity can develop nonmonotonically, like U or inverted-U curves.

Theoretical Explanations for the Inverted-U Change of Historical Energy Intensity

“…There are two different lines of literature concerning structural change models (see, e.g., [48]): the first line is demand-driven, and the second line is supply-driven. This present model is extended directly from the model in Cao [33], and belongs to the supply-driven line that was initiated by Baumol [29] and further developed by Ngai and Pissarides [34], regarding technological differences as the reason for structural change. Specifically, structural change is determined by relative sectoral technological growth rates as well as the elasticity of substitution between sectors.…”

“…Equation 12is an analog of Equation 14in Cao [33], implying that energy-labor ratios are equal across sectors in equilibrium and will grow proportionally to energy technological development, which can be applied to investigate the change of energy intensity next.…”

“…Considering the two-tier CES final production function and according to Cao [33], we choose to analyze the production of modern good first and then extend it into the final good production.…”

“…However, in each scenario of energy price growth, the overall energy intensity grows monotonically. After Cao [33] developed an alternative theoretical model based on the structural change model proposed in Ngai and Pissarides [34] to explore the underlying mechanisms of energy intensity change, featuring in the exploration of nonmonotonic developments (U and inverted-U trends) endogenously. However, the above two theoretical studies mainly focus on the identification of general mechanisms of energy intensity change with two-sector growth models and some numerical examples, but pay no attention to the energy intensity change under the background of industrialization, which is more general and valuable for those developing countries to formulate energy policies.…”

“…Based on the marginally extended version of the models in Ngai and Pissarides [34] and Cao [33], and the availability of Swedish historical data for the period of 1850-2010 [8,47], we investigate: (i) how structural transformation among agriculture, manufacturing and services might take place with a nested CES function; (ii) under what conditions the inverted-U change of overall energy intensity might occur accompanied by structural changes; and (iii) how the turning points of inverted Us might be shaped by heterogeneous elasticities of substitution.…”