Introduction

In recent years, climate scientists, economists, engineers and policy makers have paid more and more attention to the possibilities that changes in energy use might introduce for environmental and climate policies. Economists often cite price-induced increases in energy efficiency as critical in addressing environmental problems, such as an increase in CO₂ emissions and global warming. For example, the United Nations Framework Convention on Climate Change (2007, p. 39) miti-gation scenario foresees that by 2030 energy-efficiency improvements will provide the same services with 15 per cent less energy, and shift the energy supply to more climate-friendly technologies. The International Energy Agency's World Energy Outlook (2008, p. 49) projects that improved energy efficiency will lower fossil fuel consumption by a cumulative amount of 22 billion tonnes of oil equivalent between 2010 and 2030, yielding cumulative savings of more than $7 trillion.

Critics of proactive energy and climate policies, meanwhile, argue that reduction in energy demand from such policies will result in economic recession and affect international competitiveness of industrialized countries (Cosbey and Tarasofsky, 2007). In this context, sorting between different effects of changes in energy prices, based on sound econometric methodology, becomes especially important.