Ž .
Energy Economics 23 2001 57]75
Bridging the energy efficiency gap: using bottom-up information in a
top-down energy demand model
Carl C. Koopmans
a,U
, Dirk Willem te Velde
b
a
CPB Netherlands Bureau for Economic Policy Analysis, Van Stolkweg 14, P.O. Box 80510, 2508 GM, The Hague, The Netherlands
b
National Institute of Economic and Social Research, London, UK
Abstract
Bottom-up modelers typically predict a lower energy demand and a higher energy efficiency than top-down modelers do, leading to the notion of the energy efficiency gap.
This difference is often ‘explained’ by combining bottom-up information with unrealistically high discount rates. In this paper we combine the bottom-up and top-down approaches in an
energy demand model. The model has a top-down structure, but we employ bottom-up information to estimate most of its parameters, using the discount rate that firms say they
use. This new approach provides a partial reconciliation of top-down and bottom-up methods, which proves to be very useful for policy analysis. Q 2001 Elsevier Science B.V. All
rights reserved.
JEL classifications: Q41; Q43; Q48
Keywords: Energy demand; Energy efficiency gap; Bottom-up information
1. Introduction
1
Although the motivation has changed from the perceived energy crises in the 1970s to the environmental concerns of the 1990s, there is a sustained interest in
U
Corresponding author. Tel.: q31-70-3383456; fax: q31-70-3383350. Ž
. E-mail address:
cckcpb.nl C.C. Koopmans .
1
This paper is based on work done at CPB Netherlands Bureau for Economic Policy Analysis in 1996. We are grateful for helpful comments from Lans Bovenberg, Maurice Dykstra, Andre de Jong and from
´
participants of seminars at NIESR, CPB and the University of Utrecht. 0140-9883r01r - see front matter Q 2001 Elsevier Science B.V. All rights reserved.
Ž .
PII: S 0 1 4 0 - 9 8 8 3 0 0 0 0 0 5 4 - 2
C.C. Koopmans, D.W. te Velde r Energy Economics 23 2001 57]75 58
the relationship between economic growth and energy use. Crucial in this relation- ship is the evolution of energy efficiency, defined as the use of energy per unit of
output. Top-down modelers investigating the observed behavior often predict that the volume of output increases much faster than energy efficiency, with energy use
thus increasing. However, scientists studying bottom-up information on costs and performance of energy saving techniques argue that significant unexploited oppor-
tunities exist for cost-effective investments in energy efficiency, thereby pointing to an energy efficiency gap. Consequently, bottom-up modelers suggest that energy
use will increase less rapidly than top-down modelers do.
The energy efficiency gap has been the subject of much debate in the literature. This has provided a host of possible explanations for the existence of this gap.
Many authors emphasize market failures, and conclude that energy use is ineffi- ciently large. Others point at non-market hurdles, which make seemingly inefficient
Ž .
outcomes efficient after all. For overviews, see Hassett and Metcalf 1993 , Jaffe Ž
. Ž
. Ž
. and Stavins 1994a,b , Huntington 1994 , Metcalf 1994 , Sanstad and Howarth
Ž .
Ž .
Ž .
Ž .
1994 , Scheraga 1994 , Howarth and Sanstad 1995 . Gillissen et al. 1995 and Ž
. Velthuijsen 1995 , discuss the Dutch situation in particular. Although many of
these publications provide useful empirical information, the size and composition of the energy efficiency gap still remains to a large extent a ‘black box’ in
quantitative terms.
Having two alternative approaches for predicting energy demand is confusing for environmental policy making. In this paper we introduce a new type of top-down
energy demand model. Its parameters are estimated using bottom-up information, Ž
. thereby taking into account the energy efficiency gap Koopmans et al., 1999 . The
Ž .
energy efficiency predictions of the model have a top-down aggregated nature, but they are consistent with bottom-up information. We note that previous at-
tempts to combine bottom-up information and top-down models involved linking Ž
. Ž
. Ž bottom-up models or modules to top-down models or modules
see e.g. Ja- .
cobsen, 1998 . Our approach involves using bottom-up information within a top down energy demand model.
The new model uses the putty-semi-putty type of production function introduced Ž
. by Fuss 1977 . In such vintage models, the substitution of factors of production is
Ž .
easier ex-ante than ex-post. Hence, following an unexpected energy price in- crease, the energy efficiency of new vintages will improve more than the energy
efficiency of existing vintages. A price change achieves its full impact only after the capital stock has been completely renewed. Hence, price elasticities are larger in
the long run than in the short run.
The structure of the paper is as follows. Section 2 shows how the bottom-up modelers approach energy efficiency, and investigates the energy efficiency gap.
Section 3 describes the bottom-up information that we have used to estimate the parameters for the new model. Section 4 presents the main behavioral equations of
the model and discusses how we have incorporated bottom-up information in the top-down model. In Section 5 we perform historical simulations. Section 6 discusses
some policy analysis results. Finally, Section 7 draws conclusions.
C.C. Koopmans, D.W. te Velde r Energy Economics 23 2001 57]75 59
2. The bottom-up approach and the energy efficiency gap
