There are two key challenges to a decoupling of economic growth from energy demand: a long-term decelerating energy bias in technical progress and a significant economy-wide rebound effect.
\nThe latter comprises a feedback mechanism of energy into the economic system (substitution- and output effects) triggered by energy-augmenting technical progress and consequent relative price changes of energy.
\nWe investigate both phenomena by identifying the unobservable long-term supply side characteristics in the US and Japan\u2019s aggregate economy between 1978 and 2019.
\nJapan constitutes an interesting case study due to its low energy sufficiency and reliance on fossil fuel imports.<\/p>\n
We estimate a normalized and energy-extended gross output production function of CES type that incorporates capital and labor as a composite input of primary factor inputs and final energy as an intermediate factor of gross output production. We apply the Klump et al. (2007)\u201csupply-side-system approach\u201d that allows the simultaneous identification of the energy substitution elasticity and factoraugmenting technical progress.
\nAnd we use a Box-Cox transformed technology function, capturing time-varying technical progress with an additional curvature parameter.<\/p>\n
Our baseline results indicate for both countriesthat energy input and primary factors inputs are strong complements, with technology generally biased toward energy savings. The economy-wide rebound effect is similar in both countries (39.2% for the US and 41.9% for Japan). Both nations exhibit a longterm deceleration in energy-biased technical progress, with Japan\u2019s energy bias growing more slowly and decelerating faster than in the US over the study period.
\nBy incorporating structural breaks in the technology function\u2019s curvature parameter we identify three phases of time-varying energy bias in both countries:
\n(1) from 1978 to 1990, energy-biased technical progress shows slight acceleration (nearly log-linear); (2) from 1991 to 2002, the energy bias decelerates significantly, especially in Japan; and (3) from 2003 (or 2011 in Japan) to 2019, the energy bias accelerates again.
\nThe sharp deceleration in Japan during the 1990s, along with the slower acceleration of primary-input technical progress, provides a key explanation in our model for Japan\u2019s prolonged low-growth experience.<\/p>\n
Finally, we disaggregate final energy consumption in electrical and non-electrical energy carriers and estimate a CES-in-CES structure where the disaggregated energy enters as a composite input of CES type as well. In both of our country cases, electricity and non-electricity inputs are complements in the long-term (with estimates for the interfuel of 0.88 in the US and 0.63 in Japan).
\nThis confirms recent conclusions by Mortha and Arimura (2024) about the slow pace of electrification in Japan.<\/p>\n