Engineering and Econometric Interpretations of Energy-Capital Complementarity: Comment
Abstract
In a recent paper in this Review, Ernst Berndt and David Wood provide a useful clarification of and complementarity, pointing out that energy and capital can be substitutes in a production subfunction and yet complements in the aggregate production function. Using this theoretical proposition, they attempt to reconcile the econometric findings of energy-capital complementarity with other studies finding energy-capital substitutability. Their reconciliation rests on the finding that those studies finding energy-capital substitutability considered only capital (K), labor (L), and energy (E). By omitting materials (M) one obtains only a elasticity. The elasticity, which allows for the additional substitution between the KLE aggregate and M, can indicate energy-capital complementarity. In fact, KLEM studies generally find energy and capital complementarity. The purpose of this comment is to question whether the net and the gross elasticity distinction provides such a reconciliation among the econometric results. I agree that this explanation tends to reduce the disparity between the original Berndt-Wood elasticity estimate and Griffin-Gregory. Yet, three independent sources of evidence suggest that the omission of M is not a sufficient explanation, and probably not even a major explanation for the disparity of findings. First, the difference between the elasticity in a KLE submodel and the elasticity in a KLEM model depends critically on the elasticity of substitution between M and KLE. Let us adopt the Berndt-Wood notation and consider their mathematical example which demonstrates the possibility of capital energy substitutability as in the Griffin-Gregory study with capital-energy complementarity:
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