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Firm-level Estimates of Fuel Substitution: An Application to Carbon Pricing

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  • Marie Hyland and Stefanie Haller

Abstract

We estimate partial and total own and cross price elasticities between electricity, gas and oil, using firm-level data. We find that, based on the partial elasticity measure, electricity is the least-responsive fuel to changes in its own price and in the price of other fuels. The total elasticity measure, which adjusts the partial elasticity for changes in aggregate energy demand induced by individual fuel price changes, reveals that the demand for electricity is much more price responsive than the partial elasticity suggests. Our results illustrate the importance of accounting for the feedback effect between interfactor and interfuel elasticities when considering the effectiveness of environmental taxation. We use the estimated elasticities to simulate the impact of a €15/tCO2 carbon tax on average energy-related CO2 emissions. The carbon tax results in a small reduction in CO2 emissions from oil and gas use, but this reduction is partially offset by an increase in emissions due to increased electricity consumption by some firms.

Suggested Citation

  • Marie Hyland and Stefanie Haller, 2018. "Firm-level Estimates of Fuel Substitution: An Application to Carbon Pricing," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6).
    • Handle: RePEc:aen:journl:ej39-6-hylan
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    Cited by:

    1. Benoît Chèze, Julien Chevallier, Nicolas Berghmans, and Emilie Alberola, 2020. "On the CO2 Emissions Determinants During the EU ETS Phases I and II: A Plant-level Analysis Merging the EUTL and Platts Power Data," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 153-184.
    2. Magdalena Zachlod-Jelec & Jakub Boratyński, 2016. "How large and uncertain are costs of 2030 emission reduction target for the European countries? Sensitivity analysis in a global CGE model," EcoMod2016 9449, EcoMod.
    3. Thiemo Fetzer & Christina Palmou & Jakob Schneebacher, 2024. "How Do Firms Cope with Economic Shocks in Real Time?," ECONtribute Discussion Papers Series 337, University of Bonn and University of Cologne, Germany.
    4. Mei Lu & Michael G Pollitt, 2025. "Will high carbon prices reduce fossil fuel use in China? Evidence from price elasticity estimates using firm data," Working Papers EPRG2508, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    5. Magdalena Zachlod-Jelec & Jakub Boratynski, 2016. "How large and uncertain are costs of 2030 GHG emissions reduction target for the European countries? Sensitivity analysis in a global CGE model," MF Working Papers 26, Ministry of Finance in Poland.
    6. Cao, Jing & Ho, Mun S. & Ma, Rong, 2020. "Analyzing carbon pricing policies using a general equilibrium model with production parameters estimated using firm data," Energy Economics, Elsevier, vol. 92(C).

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    JEL classification:

    • F0 - International Economics - - General

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