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(A(EIY)I(EIY)), while 22 per cent can be attributed to a change in industrial structure. Fuel switching (A(CIE)I(CIE)) contributed only 4 per cent. This analysis confirms that Japan's success in continuing economic development after the first energy crisis in 1973 depended largely on the results of coordinated industry-government efforts to reduce energy dependency by increasing efficiency.

If we look carefully at these trends, we note that carbon emissions increased after 1983 (the start of the fall of international oil prices) owing to an increase in coal dependency and a decrease in energy efficiency improvement efforts. Since 1987 (the start of Japan's so-called 'bubble economy') energy efficiency improvement efforts have significantly decreased, also leading to higher carbon emissions. Although carbon emissions decreased again after 1991, this was due solely to a decrease in the GDP as a result of the collapse of the 'bubble economy.' Meanwhile energy efficiency improvement efforts have continued to decline.

As stated earlier, dramatic improvement in energy efficiency in Japan from the late 1970s can be attributed largely to technological innovation. To analyze this situation more thoroughly we need an economic description of technological innovation. Hogan and Jorgenson (1991) stressed the significance of the description of technology change in energy-economic models and made extensive efforts to endogenize technological change using the trans-log production function. However, their efforts to explain technical change in terms of base year prices were unsatisfactory for several reasons, including the lack of a theory of technological change. Nevertheless, they suggested that the common economic growth model assumption of constant technology, or even exogenous technological change (Solow 1957), could be de-emphasized or even eliminated in energy-economic models. A number of authors have investigated such models, using a production function in which energy is incorporated in a standard production function together with capital and labor (for example, Hannon and Joyce 1981; K├╝mmel 1982b). Such functions have yielded quite good 'explanations' of GNP growth, although most economists do not like them because they seem to contradict the economic theory of income distribution which implies that energy resource owners 'should' be receiving a large fraction of the national income (comparable to returns to labor and capital). This is clearly not the case.

Up to now, no economic growth model in the economics literature has incorporated an explicit theory of technical change. The model described hereafter attempts to fill this gap. As a starting point, note that the change in energy efficiency (AE/ Y) reflects a dynamic relationship between changes in energy consumption (or demand) (AE) and aggregate production (AY). Technology (T), defined as a stock of knowledge, obviously has a significant impact on changes in both energy demand and aggregate production: improved technology contributes to increasing production while reducing energy consumption. Hereafter, technology is subdivided into non-energy technology (TnE) and energy technology (TE). While the former aims primarily at increasing either the quantity or quality of goods and services produced, the latter aims at both energy conservation and supply-oriented technologies. In the Japanese case, it focuses primarily on minimizing dependence on imported oil.

In order to undertake a quantitative model analysis, we need a quantifiable measure of both energy technology and non-energy technology. This has been obtained by calculating the 'stock' of knowledge resulting from accumulated expenditures on energy R&D and non-energy R&D, subject to depreciation losses (due to obsolescence). The specific scheme employed is as follows (Watanabe 1992a, 1996a). Let

i where Tt is the technology knowledge stock in the period t, Rt is the R&D expenditure in the period t, mt is the time lag of R&D to commercialization in the period t and pt is the rate of obsolescence of technology in the period t.

Next, using equation (20.2), trends in the technology knowledge stock of both energy R&D and non-energy R&D in the Japanese manufacturing industry over the period 1965-94 were measured, as summarized and illustrated in Table 20.5 and Figure 20.3. From the table and figure it can be seen that the priority of R&D shifted from non-energy R&D to energy R&D from the beginning of the 1970s, in the Japanese manufacturing industry. This trend reflects the economic impact of the energy crises in 1973 and 1979, and expenditure on energy R&D rapidly increased, particularly between 1974 and 1982. However, after international oil prices started to fall in 1983, energy R&D expenditure decreased dramatically.

Corresponding to these trends, with a certain amount of time lag, the technology knowledge stock of energy R&D increased dramatically during the period 1974-82. It continued to increase in the period 1983-6, but changed to a sharp decline from 1987 on.

The rapid increase in the technology knowledge stock of energy R&D over a limited

Table 20.5 Trends in change rate of R&D expenditure and technology knowledge stock in the Japanese manufacturing industry, 1970-94 (% per annum)

R&D expenditure (fixed price) Technology knowledge stock

Stock of Stock of

R&D expenditure (fixed price) Technology knowledge stock

Stock of Stock of

Table 20.5 Trends in change rate of R&D expenditure and technology knowledge stock in the Japanese manufacturing industry, 1970-94 (% per annum)

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