Introduction

It is clear from the results reported above, and indeed the survey in Chapter 3, that there is considerable uncertainty about the value of the long-term price elasticity of energy demand. Indeed, this is one reason why some of these elasticities were imposed in the estimated equations. Given this uncertainty, it is important to test the effect of changing the imposed elasticities when the model is used in applications, in particular the analysis of the introduction of a carbon tax. MDM, with the inclusion of the DEn specification of the equations, has previously been used to analyse the effects of the European Union's (EU) proposed carbon/energy tax. The research reported here starts from these results as a base and examines the sensitivity of the results to different assumptions about the price elasticities.

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