beverages and tobacco (ISIC sectors 15 and 16); pulp, paper products, paper, and publishing (ISIC sectors 21 and 22); chemical, rubber, plastics, and fuel products (ISIC sectors 23, 24, and 25); basic metals, and fabricated metal products (ISIC sectors 27 and 28); and electrical and optical equipment (ISIC sectors 30, 31, 32, and 33).<sup>18</sup> The use of disaggregated data reduces measurement error and improves the quality of the estimates, as different sectors use energy for different purposes, which affects their ability to substitute between energy and other inputs.<sup>19</sup> Due to data limitations on capital stocks the analysis was not possible for other sectors as well as at a less aggregate level.

The main data source for empirical analysis is the EU KLEMS database, which is constructed based on the methodology of Jorgenson et al. (1987) and Jorgenson et al. (2005).<sup>20</sup> The EU KLEMS database comprises data on production inputs, labor and capital input prices<sup>21</sup> , and output at the industry level for the European Union, the United States, the Republic of Korea, and Japan. The relatively small number of available observations makes it necessary to assume that each country’s manufacturing industry has the same production function. Though restrictive, this is a standard assumption made in inter-country studies of energy demand. To the best of our knowledge there is no study addressing this issue, and doing so is beyond the scope of this paper. However, we exclude non-manufacturing industries (e.g., agriculture, commerce and transportation), where the assumptions of identical production functions and rational cost minimizing firms are less likely to be satisfied.<sup>22</sup> A full list of variables, countries and the descriptive statistics for the final dataset are shown in Tables A.1-A.7 (technical appendix, section A.2).

Based on the estimates from Timmer et al. (2007, Appendix 1) we set economic depreciation rates at 11 percent in the food processing industry, and 10 percent in all other industries. Because we do not have estimates for the rate for

> 18To preserve space in the text these industries are further referred to as food processing, pulp and paper products, petrochemical, metals, and electrical industries.

> 19For example, manufacturing of steel and aluminum is based on high temperature heating and electrochemical processes that have few (if any) available substitutes for energy. On the other hand, energy- and / or capital- intensive processes can be substituted for labor intensive processes in light manufacturing industries.

> 20For more details, see Timmer et al. (2007) and O’Mahony and Timmer (2009).

> 21Data on the price of capital services were not available for some countries. For these countries following Andrikopoulos et al. (1989) and Cho et al. (2004) we computed the capital input prices (available from IMF International Financial Statistics Database) as a sum of the nominal interest rate on short-term government papers, and the capital depreciation rate. 22This is because manufacturing industries are globally interconnected, internationally competitive, less distorted by national policies, and have large cross-border flows of know-how. In a separate paper we estimate the vintage capital model for non-manufacturing industries.

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