Why is the response asymmetric? Many factors may be involved, but a central role is probably that of induced technical change, in a very broad sense. The issues can be illustrated in terms of an orthodox production function. In the simplest economic model, the function shows the combinations of energy and other inputs required to produce a given output and is assumed to be fixed when relative prices change: the effect of a change in energy prices is to change the mix of energy and other factors employed in production, and it is initially assumed that the response to price changes is symmetric. Autonomous technology development would be reflected in a reduction of inputs required to produce a given level of output. In most economic models, however, after allowing for this autonomous trend, responses are still symmetric.
Induced technical change, however, also changes production possibilities according to changes in relative prices. An energy price rise stimulates more rapid development of energy-saving technologies, or alternative fuel technologies, in the direction of saving even more energy. Upon a price reversal, these technical changes will not be reversed or forgotten, leaving the outcome very different from what it might otherwise have been. The effect of changes in government regulations affecting energy efficiency and energy use in general is similar: when prices rise, especially when this takes the form of a strong signal to governments affecting national interests, new laws are enacted and new institutions created, but on price reversal the laws are not revoked or the institutions disbanded. For example, the United States introduced regulations for fuel efficiency in light vehicles in 1978 (the CAFE standards); after the 1985 oil price falls, these standards were relaxed for some manufacturers but were not removed and more recently they have been tightened again.
In fact, at least three factors may be involved in such an induced shift and consequent irreversibilities: infrastructural investments, behavioural change, and induced technological development. Infrastructural investments are easy to comprehend: cavity wall insulation installed in the 1970s is not going to be removed during the 1990s just because of low energy prices. More subtly, cavity wall insulation may have become a standard part of building practice and codes, so that even new investments will sustain the change. Similarly, it is not hard to grasp the possibilities that people may get used to switching off lights in response to an energy price rise, and continue to do so when prices fall.
Induced technical development is a more complex issue. The process of innovation is not understood— given the high level of failure of innovation it has been characterized as 'the triumph of action over analysis' (Ausubel 1991). Various technology diffusion studies emphasize the complexity of factors which determine whether or not technological ideas are developed and adopted, but it is clear that development does depend heavily upon conditions external to the firm (Freeman 1986).
In the energy sector, many examples can be given. The cost of offshore oil rigs declined sharply as companies struggled to keep North Sea operations viable in the face of falling oil prices during the 1980s. Wind energy costs fell dramatically in response to Californian tax incentives for development. The author's own study of 'Emerging energy technologies'—those which seem likely to have significant market impact over the next decade or two—also concluded that 'most of technologies considered reflect primarily a process of "demand pull" rather than "supply push"' (Grubb and Walker 1992: ch. 14). All this points to the importance of induced technology development, and its direct corollary—asymmetric price responses.
Dargay (1993) clarifies his study of asymmetric responses in these terms when he describes and justifies his analysis as challenging two of the common assumptions made.that a return to low energy prices.would eventually restore demand to what it would have been had prices never risen.. .not only does this not seem to be happening, but it also appears highly unrealistic. It is obvious that high energy prices induced the development and application of considerably more energy-efficient technologies in all sectors of the economy, many of which will remain economically optimal despite falling prices.
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