1 Intelligent Well Technology: Status and Opportunities for Developing Marginal Reserves SPE

CARBON EMISSISONSAND ECONOMIC GROWTH: A COST FUNCTION APPROACH

Jihyo Kim, Seoul National University, +82-2-880-8284,

Eunnyeong Heo, Seoul National University, +82-2-880-8284,

Overview

As the issue of climate change has been emerging globally, international efforts for the reduction of carbon emissions, indicated as the main reason of the climate change, has been brisk. Energy consumption causing carbon emissions is one of the important input factors of economic growth. Therefore, it is a serious challenge to reduce carbon emissions while promoting economic growth. Under this issue, it is needed to examine the linkage between economic growth and carbon emissions. Some studies (Xiumei et al., 2011; Zhang and Cheung, 2011; Ghosh, 2010)analyzed correlation and causal relationships between these two factors using an econometric approach. However, those studies do not show the mechanism of carbon emissions change in the process of an economic growth. To set up a blueprint for a low carbon economy, a more in-depth study should be carried out.

This study suggests a new approach to analyze the linkage between economic growth and carbon emissions: a cost function approach. Typically, a cost function approach has been applied to investigate relationships among input factors such as capital (K), labour (L), material (M), and energy (E) empirically. We expands the scope of a cost function approach into the analysis of relationships among capital (K), labour (L), material (M), and carbon emissions (C), and derives a function that can explain the change of carbon emissions demand. Based on this analysis, the following two research topics were discussed. First, the relationship between K and C is examined. If K substitutes C, it is likely that a de-carbonizing capital use has been occurred. Second, the effects of economic growth and technological change on carbon emissions are analyzed. In particular, whether economic growth or technological changes induce the reduction of carbon emissions is discussed.

The remainder of this paper is organized as follows: the second section introduces the data, model, and econometric methodology used in this study; the third section discusses the answers of two research topics, followed by the fourth section deriving policy implications.

Methods

A set of translgog cost-share equations (Christensen et al., 1973)is estimated for Korean manufacturing. The data include price, quantity indices and cost share for capital (C), labour (L), materials (M), and carbonemissions(C) used in Korean manufacturing from 1970 to 2009. In particular, the cost share forC is considered to be equivalent to that of energy consumption, and the quantity index for C is drawn from the transform of energy consumption data using IPCC carbon emission factors by variant energy type. The price index for C is deducted from the cost share and the quantity index for C.

Assumed non-homothetic economic growth and technological change, a system of translog cost-share equations is given by:

,

where denotes cost share for i-th input factor, the price for thei-th input factor, output and time. The above linear share equations yield a set of well-behaved neoclassical demand equations if the following parameter restrictions are imposed: symmetry, adding-up and homogeneity in prices. Using the SUR (seemingly unrelated regression) proposed by Zellner (1962), the coefficients are estimated. Based on the coefficient estimates, the Allen-Uzawa elasticities of substitution (AES) are calculated for identification the relations among those input factors. Also, hypotheses of scale and technology neutrality (Binswanger, 1974; Berndt and Khaled, 1979) are tested.

Results

First, from the results of AES calculation, C and K are substitutes in Korean manufacturing. Thus, it is supposed that a de-carbonizing capital use has been arisen.

Second, from the test results of scale and technology neutrality, carbon saving economic growth as well as carbon saving technological change is observed. These results seem to reflect the increase of electricity use while the scale and technological level of Korean manufacturing have been growing.

Conclusions

This study firstly applies a cost function approach to investigate the linkage between economic growth and carbon emissions.This approach enables to analyze both the relationships between carbon emissions and other input factors and the effects of economic growth or technological change on carbon emissions. The substitution relationship between C and K proposes that Korean manufacturing has made effort to reduce carbon emission by capital investments. Also, both carbon saving economic growth and carbon saving technological change imply that the expansion of electricity use has been helpful to reduce carbon emissions in Korean manufacturing.

Acknowledgement

This work was supported by the New and Renewable Energy Program of the Korea Institute of Energy Technology Evaluation and Planning(KETEP) grant funded by the Korea government Ministry of Knowledge Economy (No. 20093021020020).

References

Berndt, E.R. and M.S, Khaled (1979): "Parametric productivity measurement and choice among flexible functional forms." Journal of Political Economy 87(6): 1220-1245.

Binwanger, H.P. (1974): "A cost function approach to the measuremnet of elasticities of factor demand and elasticities of substitution."American Journal of Agricultural Economics 56(2): 377-386.

Christensen, L.R., D.W. Jorgenson and L.J. Law (1973): "Transcendental logarithmic production frontiers."The Review of Economic and Statistics 55(1): 28-45.

Ghosh, S. (2010) "Examining carbon emissions economic growth nexus for India: a multivariate cointegration approach."Energy Policy 38(6): 3008-3014.

Xiumei, S., Z. Min and Z. Ming (2011): "Empirical study on the relationship between economic growth and carbon emissions in reosurce-dependent cities based on vector autoregressive model. "Enenrgy Procedia 5: 2461-2467.

Zellner, A. (1962): "An efficient method of estimating seemingly unrelated regression equations and tests for aggregation bias."Journal of the American Statistical Association 57: 348-368.

Zhang, X-P. and X-M. Cheng (2009): "Energy consumption, carbon emissions, and economic growth in China."Ecological Economics 68: 2706-2712.