Fossil fuel–more precisely petroleum and its refinery products is an essential input in all modern economies. It has been argued that the limited availability of this basic input and the stabilization of greenhouse gases concentration call for a reduction of fossil fuel consumption.
However, the reduction in petroleum consumption could have a negative impact on economic growth and development through cutbacks in energy use (Smulders and de Nooij (2003)). Therefore, there is a clear trade-off between energy reduction and growth.
Some authors (see for instance Carraro, Gerlagh and van der Zwaan (2003)) suggest that this trade-off could be less severe if energy conservation is raised by energy saving technologies. In this paper, we re-examine the exhaustion problem of fossil fuel. In particular, we study the previous trade-off in a general equilibrium framework with energy saving technical progress. This model based on Boucekkine, Germain and Licandro (1997), considers an economy with exogenous energy saving technical progress embodied in the new equipment. As Baily (1981) observes, technical advances are typically incorporated to the economy through investment.
Therefore, the old capital goods get less and less efficient over time, which might well induce the firms to scrap them (obsolescence). In our economy, we assume that different vintages of capital coexist in each period. Since new vintages are less energy consuming, firms may decide to replace the oldest and less efficient vintage. Indeed, if we model the idea of minimum energy requirement to use a machine by assuming complementarity between capital and energy inputs, finite scrapping time is optimal (Boucekkine and Pommeret (2004)). This idea is implemented in our paper, and it is consisted with the empirical evidence put forward by Hudson and Jorgenson (1974), or Berndt and Wood (1975).
Our model incorporates two new elements with respect to the standard framework. First, we assume embodied technical progress in contrast to the typical neoclassical specification of neutral and disembodied technical progress. Second, we consider a vintage capital model, with endogenous scrapping decision. The standard models consider homogenous and infinitely lived capital stock.
We perform a comparative study to contrast constant and decreasing returns to scale, for two possible scenarios: constant (optimistic) and decreasing (pessimistic) exogenous energy supply. We find that, under the assumption of existence of a balance growth path (BGP) defined by constant growth rate of all the endogenous variables and constant scrapping age, constant returns to scale achieves positive long run growth if the growth rate of the energy saving technical progress exceeds the decreasing rate of the energy supply.
The paper is organized as follows. In section 2, we describe the general case model, with the representative consumer’s problem and the rules that depicts both the optimal investment and the scrapping behavior of firms. The BGP is presented in section 3, where we show the necessary conditions for its existence in both constant and decreasing returns to scale. Finally, some concluding remarks are considered in section 4.
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