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EMF 4: Aggregate Elasticity of Energy Demand

The response of energy demand to changes in energy prices is central to the evaluation of energy policies. To study this response, analysts and modelers have developed many sophisticated models of energy demand. These models, differing in their structure and degree of detail, do not lend themselves to easy comparisons of the relationship between demand and prices.

Simplified to a single number, the response of demand to changes in price can be described as elasticity. The aggregate price elasticity of energy demand is equal to the percent reduction in energy demand produced by a 1 percent increase in energy price, with all else held constant. This definition of elasticity is presented graphically in figure 1. By convention, aggregate elasticities are positive whenever price increases lead to a decrease in demand.

Straightforward in concept, the aggregate elasticity of demand for energy is elusive in practice. However, there is an appeal to this simple single parameter as an indicator of important underlying relationships. There is little doubt that analysts will continue to use this single elasticity to describe aggregate changes in future energy demand. If it is to be used correctly, there must be an improvement in its definition and measurement. The present report works towards this end by summarizing results from the Energy Modeling Forum (EMF) comparison of energy demand models.

The goal of this study is the description of the aggregate price elasticity of demand implicit in energy demand models. An EMF working group conducted experiments with 16 detailed models of the energy sector. The group developed consistent estimates of the 15-, 25-, and 35-year energy demand elasticities implicit in each of these models. The comparison of results is descriptive; there was no attempt to produce a single best estimate of the demand elasticity.