Energy elasticities seem to be a prerequisite for all kinds of analyses related to the energy sector of an economy. Major failures to predict the events on the energy markets of the last two decades and many implausible scenarios for the next two decades produced by conventional energy models offer at least an incentive to rethink the current practices in the use of energy elasticities. The basic theme of this chapter is the proposition that an evolution of paradigms in our understanding of the energy sector of an economy also requires an evolution of methodologies applied to analyse energy systems.
There has been a fairly dramatic change in the focus of energy policy over the past two decades. The early 1970s were marked by the potential threat of energy shortages caused either by the monopoly power of cartels like the OPEC or the visions of resource depletion by the Club of Rome. The Brundtland Report Our Common Future of the World Commission for Economic Development (WCED 1987) formulated sustainable economic development as the long-term goal for economic policy. This aim is closely linked with the use of energy and the related problems of exhaustible resources and environmental problems, including global warming. These problems suggest a fundamental redesign of the global energy system.
The chapter starts with some empirical evidence about energy elasticities and looks into the emerging new paradigms for analysing energy systems. It continues by confronting conventional energy demand models with the more structurally oriented approaches in order to identify the limits of elasticity-based energy demand analysis. Finally suggestions are presented for improving the energy-economy link in macroeconomic models and some simulation results are provided for high energy price policies.
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