11.3.3.2 The effects of rising energy prices on mitigation

Price responses to energy demand can be much larger when energy prices are rising than when they are falling, but responses in conventional modelling are symmetric. The mitigation response to policy may therefore be much larger when energy prices are rising. This phenomenon is addressed in literature about asymmetrical price responses and the effects of technological change (Gately and Huntington, 2002; Griffin and Shulman, 2005). Bashmakov (2006) also argues for asymmetrical responses in the analysis of what is called the economics of constants and variables: the existence of very stable energy costs to income proportions, which can be observed over the longer period of statistical observations in many countries. He argues that there are thresholds for total energy costs such as a ratio of GDP or gross output, and energy costs by transportation and residential sector as shares of personal income. If rising energy prices push the ratios towards the given thresholds, then the dynamics of energy-demand price responses are changed. The effect on real income can become sufficient to reduce GDP growth, mobility and the level of indoor comfort. Carbon taxes and permits become more effective the closer the ratio is to the threshold, so the same rates and prices generate different results depending on the relationship of the energy costs to income or of the gross output ratio to the threshold.