What Do the Mitigation Policy Models Assume about Interfuel Substitution? And is it Important?

In my previous blogpost I commented that the elasticity of substitutions between fuels and between energy and capital were likely to be very important in estimates of the costs of emissions reduction policies. I've been trying to find support for, or evidence against, this hypothesis.

Bhattacharya (1996) writes: "It is generally agreed that the elasticity values are the single most important parameters that affect the results. In the economic literature, there is little consensus about different elaticities for energy products." (p159) He notes that some modelers have used sensitivity analysis. It would be nice if he noted which ones :)

Pezzey and Lambie (2001) reviewed a number of Australian CGE models used in climate policy research. Though they differ in the specifics most have low degrees of substitutability between fuels. The GTEM model developed by ABARE and used by Treasury in their advice to government has less substitutability than G-Cubed (Treasury used GTEM, G-Cubed, and MMRF in their research).

Anyway, it looks like I should add sensitivity analysis of climate change policy modeling to my research agenda.