Capital-Energy Substitution in U.S. Manufacturing

The ease with which energy may be substituted for by other types of inputs is of great importance in predicting economic disruptions arising from energy shortages as well as the energy implications of public policy. Studies of energy substitution in the economies of developed countries have produced differing results. A major reason for the divergent results, according to the authors, could be that two quite-different types of capital inputs - physical capital and working capital - have been used. These two types of capital input behave in quite-different ways, at least as regards their relationship with energy inputs to explore this, the authors incorporated the prices of physical capital, working capital, labor, and energy in a constant-returns-to-scale cost function. The authors conclude that reproducible capital and energy are, for the most part, complements - while working capital and energy are largely substitutes in production. Results lead the authors to explain the differences among previous studies by reference to the way in which the capital input was handled. On the level of aggregate US manufacturing a value-added approach to capital cost would be expected to show capital-energy substitutability, while a service-price approach to capital cost would show complementarity. 21 references, 2more » tables (SAC)« less