The Substitution of Energy Sources – an Analysis of Short- and Long-term Economic Effects

November 28, 2022

Paper | Recent controversies over the impact of an energy embargo on Russia triggered by Russia’s war in Ukraine have focused on reducing dependence on fossil fuels and reorganizing energy supplies. This German- language paper presents a model-based econometric framework to estimate both the short-term effects of fossil energy shortages and long-term effects of different climate policy measures on individual sectors of the economy.

Authors: Stefan Mittnik and Willi Semller

Economists have come up with very different predictions about the consequences of the energy embargo on Russia. However, the empirical basis and the extent of output losses remain unclear – also in terms of whether the predicted losses refer to the level of output or its future growth rates. Moreover, the period and duration of the predicted losses are not or insufficiently specified. Furthermore, it is not explained how the size and dynamics of the losses depend on the state of the economy. Substituting fossil fuels with renewables has long been an important policy perspective of the EU and its member states. Reliable economic impact assessments of both a short-term embargo and longer-term decarbonization are important prerequisites for the implementation of comprehensive policy measures.

The background for our work is a multisectoral growth model, which has been studied in detail elsewhere. We limit ourselves here to an empirically oriented analysis based on multisector input-output tables for Germany and other countries, drawing on more recent input-output analysis as well as econometric and macrodynamic work. For simplicity, the multisector model is reduced to two sectors. The short-term consequences of an energy shock are examined using a nonlinear multi-regime VAR model. The long-term consequences of a decarbonization of the economy are explored using composite policy shocks applied to a VAR model. The results indicate positive effects on production and employment, especially in the long run.

Read the paper, published in Vierteljahrshefte zur Wirtschaftsforschung, here.