Calibrating Constant Elasticity of Substitution Technologies to Bottom-up Cost Estimates

Edward Balisteri, Maxwell Brown

Research output: Contribution to journalArticlepeer-review


We propose a method for calibrating an industry-level technology to engineering (bottom-up) estimates with a particular focus on abatement opportunities. As a demonstration, substitution elasticities across inputs are adjusted in the nested cost function for the electricity sector to best fit a target marginal abatement cost (MAC) curve derived from engineering assessments of available technologies. Elasticities are optimized over an entire relevant range of the MAC, whereas current techniques use local point estimates under little or no abatement. In the context of fitting to a given MAC we evaluate alternative nesting structures and find that, while complexity in nesting improves the fit, even relatively simple nesting structures can reasonably approximate the target MAC. In our example, focused on the electricity sector, we find standard elasticities adopted in top-down models moderately overstate abatement costs relative to the engineering targets. In our preferred specification the most important adjustment is to escalate the substitution elasticity between energy and value-added inputs. This is consistent with an argument that the current set of point estimates fail to properly account for new capital-based technologies. These conclusions, however, are sensitive to our assumption about output-intensity abatement and consumer price responsiveness, both of which are not delineated in engineering estimates.

Original languageAmerican English
Pages (from-to)55-76
Number of pages22
JournalJournal of Global Economic Analysis
Issue number1
StatePublished - 2023

Bibliographical note

Publisher Copyright:
Copyright © 2023 American Society for Microbiology. All Rights Reserved.

NREL Publication Number

  • NREL/JA-6A20-86959


  • Abatement Cost
  • Applied General Equilibrium
  • Climate Policy
  • Computable General Equilibrium
  • Constrained Optimization
  • Energy Modeling
  • MPEC
  • Structural Estimation
  • Top-down


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