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Energy Substitution Effect on China’s Heavy Industry: Perspectives of a Translog Production Function and Ridge Regression

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  • Boqiang Lin

    (School of Management, China Institute for Studies in Energy Policy, Collaborative Innovation Center for Energy Economics and Energy Policy, Xiamen University, Xiamen 361005, China)

  • Kui Liu

    (The School of Economics, China Center for Energy Economics Research, Xiamen University, Xiamen 361005, China)

Abstract

A translog production function model with input factors including energy, capital, and labor is established for China’s heavy industry. Using the ridge regression method, the output elasticity of each input factor and the substitution elasticity between input factors are analyzed. The empirical results show that the output elasticity of energy, capital and labor are all positive, while the output elasticities of energy and capital are relatively higher, indicating that China’s heavy industry is energy- and capital-intensive. Simultaneously, all the input factors are substitutes, with the substitution between labor and energy having the highest degree of responsiveness. The substitution elasticity between labor and energy is decreasing, while the substitution elasticities of capital for energy and labor are increasing. More capital input can help to improve energy efficiency and thus accomplish the goal of energy conservation in China’s heavy industry.

Suggested Citation

  • Boqiang Lin & Kui Liu, 2017. "Energy Substitution Effect on China’s Heavy Industry: Perspectives of a Translog Production Function and Ridge Regression," Sustainability, MDPI, vol. 9(11), pages 1-15, October.
    • Handle: RePEc:gam:jsusta:v:9:y:2017:i:11:p:1892-:d:116375
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    References listed on IDEAS

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