Theoretical Explanations for the Inverted-U Change of Historical Energy Intensity

Historical experience shows that the economy-wide energy intensity develops nonmonotonically like an inverted U, which still lacks direct theoretical explanations. Based on a model of structural change driven by technological differences, this paper provides an attempt to explore the underlying mechanisms of energy intensity change and thus to explain the above empirical regularity accompanied by structural transformation, through introducing a nested constant elasticity of substitution production function with heterogeneous elasticities of substitution. According to some reasonable assumptions, this extended model not only describes the typical path of structural change but also depicts the inverted-U development of economy-wide energy intensity. With the availability of Swedish historical data, we take calibration and simulation exercises which confirm the theoretical predictions. Furthermore, we find that: (1) elasticities of substitution may affect the shapes and peak periods of the inverted-U curves, which can explain to a certain extent the heterogeneous transitions of economy-wide energy intensity developments in different economies; and (2) over long periods of time, the economy-wide energy intensity determined by the initial industrial structure and sectoral energy intensity tends to grow upward, while structure change among sectors provides a driving force on reshaping this trend and turning it downward.