Energy substitutability and modernization of energy-consuming technologies

The paper examines long-term strategies of capital modernization under different assumptions about embodied technological change, energy regulation, and substitutability between energy and capital. To describe modernization of physical capital, the authors use a vintage capital model with the constant elasticity of substitution between capital and energy. The models take into account (i) availability of new more energy-efficient equipment under energy-saving technical progress, (ii) possibility of buying new capital with various combinations of energy parameters and prices, (iii) controlled scrapping of obsolete capital, and (iv) energy regulation quotas. The paper analyzes how the elasticity of substitution between capital and energy impacts the capital modernization policy. In particular, it is proven that the optimal lifetime of capital appears to be longer for a larger elasticity. ► Long-term strategies of capital replacement under energy-saving technical progress. ► Limited substitutability between energy and capital is assumed. ► Vintage model with the constant elasticity of substitution between capital and energy. ► The economically optimal lifetime of capital is longer for a larger elasticity. ► The capital scrapping rule is independent of energy prices and quotas.