Environmental Modeling & Assessment

, Volume 18, Issue 1, pp 13–26 | Cite as

Factor-Augmenting Technical Change: An Empirical Assessment

  • Carlo Carraro
  • Enrica De CianEmail author


This paper estimates factor-specific technical change and input substitution using a structural approach. It contributes to the existing literature by introducing various technology drivers for factor productivities and by assessing the impact of endogenous technical change on the elasticity of substitution. The empirical results suggest that factor productivities are indeed endogenous. In addition, technology drivers are factor-specific. Whereas the R&D stock and machinery imports are important determinants of energy and capital productivity, the education stock is statistically related to labour productivity. The rate of energy-augmenting technical change is larger than that of either labour or capital. By contrast, the productivity of these two factors grows at similar rates. Estimates of the elasticity of substitution are within the range identified by previous literature. In addition, we show that endogenous technical change reduces substitution. Because the elasticity of substitution is lower than one, knowledge and human capital can ultimately have an energy-using effect. The estimated structure of endogenous technical change suggests that Integrated Assessment models focusing on energy-saving technical change might underestimate climate policy costs.


Endogenous technical change Integrated assessment models Panel regression 

JEL Classifications

C3 O47 Q55 Q56 


  1. 1.
    Acemoglu, D. (2002). Directed technical change. Review of Economic Studies, 69, 781–809.CrossRefGoogle Scholar
  2. 2.
    Arrow, J. K. (1962). The economic implications of learning by doing. The Review of Economic Studies, 29, 155–173.CrossRefGoogle Scholar
  3. 3.
    Barro, R., & Sala-i-Martin, X. (2004). Economic growth. Cambridge: MIT Press.Google Scholar
  4. 4.
    Binswanger, H. P., & Ruttan, V. W. (1978). Induced innovation: technology, institutions and development. Baltimore: John Hopkins University Press.Google Scholar
  5. 5.
    Boone, L.H., & Kemball-Cook, D. (1992). Fossil Fuel Demand for Nine OECD Countries. Discussion Paper DP 21–92, Centre for Economic Forecasting, London Business School.Google Scholar
  6. 6.
    Bovenberg, A.-L., & Smulders, S. (1995). Environmental quality and pollution augmenting technological change in a two sectors endogenous growth model. Journal of Public Economics, 57, 369–391.CrossRefGoogle Scholar
  7. 7.
    Brock, W.A., and Taylor M.S. (2004). Economic growth and the environment: a review of theory and empirics, NBER Working Paper, No. W10855.Google Scholar
  8. 8.
    Cameron, G., Proudman, J., & Redding, S. (2005). Technological convergence, R&D, trade and productivity growth. European Economic Review, 49(3), 775–807.CrossRefGoogle Scholar
  9. 9.
    Carraro, C., & Siniscalco, D. (1994). Technical innovation and environmental protection, environmental policy reconsidered: the role of technological innovation. European Economic Review, 38, 545–554.CrossRefGoogle Scholar
  10. 10.
    Carraro, C., & Galeotti, M. (1996). WARM: a European model for energy and environmental analysis. Environmental Modelling and Assessment, 1, 171–189.CrossRefGoogle Scholar
  11. 11.
    Carraro, C., De Cian, E., & M. Tavoni (2009). “Human capital formation and global warming mitigation: evidence from an integrated assessment model”, CESifo Working Paper Series, No. 2874.Google Scholar
  12. 12.
    Carraro, C., De Cian, E., Nicita, L., Massetti, E., & Verdolini, E. (2010). Environmental policy and technical change: a survey. International Review of Environmental and Resource Economics, 4, 163–219.CrossRefGoogle Scholar
  13. 13.
    Carraro, C., Massetti, E., & Nicita, L. (2009). How does climate policy affect technical change? An analysis of the direction and pace of technical progress in a climate–economy model. The Energy Journal, 30(2), 7–38.Google Scholar
  14. 14.
    Caselli, F. (2005). Accounting for cross country income differences. In P. Aghion and S. Durlaf (Eds.), Handbook of Economic Growth. Elsevier, (1).Google Scholar
  15. 15.
    Coe, D. T., & Helpman, E. (1995). International R&D spillovers. European Economic Review, 39, 859–887.CrossRefGoogle Scholar
  16. 16.
    Coe, D. T., Helpman, E., & Hoffmaister, W. (1997). North–south R&D spillovers. Economic Journal, 07, 134–49.CrossRefGoogle Scholar
  17. 17.
    David, P. A., & van de Klundert, T. (1965). Biased efficiency growth and capital-labor substitution in the U.S., 1899–1960. American Economic Review, 55(3), 357–394.Google Scholar
  18. 18.
    Delong, J. B., & Summers, H. L. (1991). Equipment investment and economic growth. The Quarterly Journal of Economics, 106(2), 445–502.CrossRefGoogle Scholar
  19. 19.
    Edenhofer, O., Bauer, N., & Kriegler, E. (2005). The impact of technological change on climate protection and welfare: insights from the model MIND. Ecological Economics, 54, 277–292.CrossRefGoogle Scholar
  20. 20.
    Edenhofer Ottmar, Kay Lessmann, Claudia Kemfert, Micheal Grubb and Jonathan Koehler (2006). “Technological Change: Exploring its Implications for the Economics of Atmospheric Stabilization”, The Energy Journal: Special Issue, Endogenous Technological Change and the Economics of Atmospheric Stabilization, Vol. 9.Google Scholar
  21. 21.
    Engelbrecht, H. J. (1997). International R&D spillovers, human capital and productivity in OECD economies: an empirical investigation. European Economic Review, 41, 1479–1488.CrossRefGoogle Scholar
  22. 22.
    Kenneth, G., Newell, R., & Palmer, K. (2009). Energy efficiency economics and policy. Annual Review of Resource Economics, 1(14), 1–23.Google Scholar
  23. 23.
    Gerlagh, R. (2008). A climate–change policy induced shift from innovations in carbon-energy production to carbon-energy savings. Energy Economics, 30, 425–448.CrossRefGoogle Scholar
  24. 24.
    Greenwood, J., Yorukoglu, M. (1997). 1974. Carnegie-Rochester Conference Series on Public Policy, North-Holland.Google Scholar
  25. 25.
    Griliches, Z. (1980). Returns to R&D expenditure in the private sector. In K. Kendrick & B. Vaccara (Eds.), New developments in productivity measurement. Chicago: Chicago University Press.Google Scholar
  26. 26.
    Grossman, G., & Helpman, E. (2001). Innovation and growth in the global economy. Cambridge: MIT Press.Google Scholar
  27. 27.
    Grubb, M., Köhler, J., & Anderson, D. (2002). Induced technical change in energy and environmental modelling: analytic approaches and policy implications. Annual Review of Energy and the Environment, 27, 271–308.CrossRefGoogle Scholar
  28. 28.
    Goulder, L. H., & Schneider, S. H. (1999). Induced technological change and the attractiveness of CO2 abatement policies. Resource and Energy Economics, 21, 211–253.CrossRefGoogle Scholar
  29. 29.
    Heston, A., Summers, R., & Aten, B. (2006). Penn World Table Version 6.2, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, September 2006.Google Scholar
  30. 30.
    Jorgenson, D. W., & Fraumeni, B. M. (1981). Relative prices and technical change. In E. Berndt & B. Field (Eds.), Modeling and measuring natural resource substitution (pp. 17–47). Cambridge: MIT Press.Google Scholar
  31. 31.
    Jorgenson, D. W., & Fraumeni, B. (1992). Investment in education and U.S. economic growth. Scandinavian Journal of Economics, 94, S51–S70.CrossRefGoogle Scholar
  32. 32.
    Jorgenson, D. W., & Wilcoxen, P. J. (1990). Intertemporal general equilibrium modelling of the US environmental regulation. Journal of Policy Modelling, 12, 715–44.CrossRefGoogle Scholar
  33. 33.
    Kendrick, J. W. (1956). Productivity trends: capital and labor. The Review of Economics and Statistics, 38(3), 248–257.CrossRefGoogle Scholar
  34. 34.
    Lucas, R. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22, 3–42.CrossRefGoogle Scholar
  35. 35.
    Lopez, R. (1994). The environment as a factor of production: the effects of economic growth and trade liberalization. Journal of Environmental Economics and Management, 27, 163–184.CrossRefGoogle Scholar
  36. 36.
    Andreas, L. (2002). Technological change in economic models of environmental policy: a survey. Ecological Economics, 43(2–3), 105–126.Google Scholar
  37. 37.
    Mansfield, E. (1979). Rates of returns from industrial R&D. American Economic Review, 55, 310–322.Google Scholar
  38. 38.
    Mansfield, E. (1980). Basic research and productivity increase in manufacturing. American Economic Review, 70, 863–73.Google Scholar
  39. 39.
    Markandya, A., & Pedroso-Galinato, S. (2007). How substitutable is natural capital? Environmental Resource Economics, 37, 297–312.CrossRefGoogle Scholar
  40. 40.
    Nadiri, M. I. (1970). Some approaches to the theory and measurement of total factor productivity: a survey. Journal of Economic Literature, 8, 1137–77.Google Scholar
  41. 41.
    Otto, V. M., Löschel, A., & Dellink, R. (2007). Energy biased technical change: a CGE analysis. Resource and Energy Economics, 29(2), 137–158.CrossRefGoogle Scholar
  42. 42.
    Pindyck, R. S. (1979). Interfuel Substitution and the industrial demand for energy: an international comparison. The Review of Economics and Statistics, 61(2), 169–79.CrossRefGoogle Scholar
  43. 43.
    Popp, D. (2004). ENTICE: endogenous technical change in the DICE model of global warming. Journal of Environmental Economics and Management, 48, 742–768.CrossRefGoogle Scholar
  44. 44.
    Romer, P. M. (1986). Increasing return to scale and long-run growth. Journal of Political Economy, 94, 1002–1037.CrossRefGoogle Scholar
  45. 45.
    Romer, P. M. (1990). Endogenous technological change. Journal of Political Economy, 98, 71–102.CrossRefGoogle Scholar
  46. 46.
    Rosenberg, N. (1983). Inside the black box: technology and economics, Cambridge University Press.Google Scholar
  47. 47.
    Sanstad, A. H., Roy, J., & Sathaye, J. A. (2008). Estimating energy-augmenting technological change in developing country industries. Energy Economics, 28, 720–729.CrossRefGoogle Scholar
  48. 48.
    Slade, M. E. (1989). Modeling stochastic and cyclical components of technical change: an application of the Kalman Filter. Journal of Econometrics, 41(3), 363–383.CrossRefGoogle Scholar
  49. 49.
    Smulders, Sjak, & de Nooij, Michiel. (2003). The impact of energy conservation on technology and economic growth. Resource and Energy Economics, 25(1), 59–79.CrossRefGoogle Scholar
  50. 50.
    Solow, R.M. (1957). Technical change and the aggregate production function. Review of Economics and Statistics, 39, 312–320. Sue Wing 2033.Google Scholar
  51. 51.
    Sue Wing, I. (2006). Representing induced technological change in models for climate policy analysis. Energy Economics, 28(5–6), 539–562.CrossRefGoogle Scholar
  52. 52.
    Sue Wing, I., & Eckaus, J. A. (2007). The decline in U.S. energy intensity: its origins and implications for long-run CO2 emission projections. Energy Policy, 35, 5267–5286.CrossRefGoogle Scholar
  53. 53.
    van der Werf, E. (2008). Production functions for climate policy modelling: an empirical analysis. Energy Economics, 30(6), 2964–2979.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media B.V. 2012

Authors and Affiliations

  1. 1.University of Venice, Fondazione Enrico Mattei, CEPR, and CESifoVeniceItaly
  2. 2.Fondazione Eni Enrico Mattei, Isola di San Giorgio MaggioreVeniceItaly

Personalised recommendations