The elasticity of substitution between energy and other inputs is also a crucial variable for Computable General Equilibrium (CGE) models of the macro-economy. The assumptions made for this variable can have a major influence on model results in general and estimates of the rebound effect in particular.
These observations suggest that a closer examination of the nature, determinants and typical values of elasticities of substitution between energy and other inputs could provide some useful insights into the likely magnitude of rebound effects in different sectors. This was the motivation for this report, which includes an in-depth examination of empirical estimates of the elasticity of substitution between energy and capital. However, the empirical literature on this subject is confusing and contradictory and more than three decades of empirical research has failed to reach aconsensus on whether energy and capital can be described as either ‘substitutes’ or ‘complements’. Moreover, the relationship between this literature and the rebound effect is more complex than it first appears.