Energy-extended CES aggregate production: Current aspects of their specification and econometric estimation

Abstract

Capital-labour-energy Constant Elasticity of Substitution (CES) production functions and their estimated parameters now form a key part of energy-economy models which inform energy and emissions policy. However, the collation and guidance as to the specification and estimation choices involved with such energy-extended CES functions is disparate. This risks poorly specified and estimated CES functions, with knock-on implications for downstream energy-economic models and climate policy. In response, as a first step, this paper assembles in one place the major considerations involved in the empirical estimation of these CES functions. Discussions of the choices and their implications lead to recommendations for CES empiricists. The extensive bibliography allows those interested to dig deeper into any aspect of the CES parameter estimation process.