ous technical progress and a gradual increase in the price of fuels as global demand grows. The rate of decline is highest in those countries with initially the highest energy use, leading to a slight convergence in energy efficiency in the long run. This pattern is not mirrored in the cost share of energy in GDP however, because of the different taxes levied on fuels in each country. Figure 4.2 shows the share of fossil energy costs in GDP over the simulation period.
Fossil energy's cost share declines in all countries except Canada and Italy, but at a lower rate than energy volume measured in toe. This is because the international price of energy rises over time and even when combined with exogenous technical progress none of the long run price elasticities of energy is greater than one. Energy costs rise in Italy because its currency devalues relative to the US dollar due to its lower economic growth rate (see Chapter 5). This makes all fuels more expensive as they are related to the dollar price of oil. Energy costs rise in Canada because over time it substitutes into gas which has a higher cost per toe; this substitution is a feature of the share equations estimated below.
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