IDEAS home Printed from https://ideas.repec.org/a/eee/deveco/v179y2026ics0304387825001658.html

Input substitution in electricity generation and industrial production: Evidence from India

Author

Listed:
  • Aggarwal, Raavi

Abstract

Carbon taxation is suggested as an efficient instrument for the clean energy transition. However, high resulting prices for coal and electricity could adversely impact industrial performance and employment by raising production costs. Integration of renewable energy in the electricity grid could stabilise electricity prices. We estimate the elasticity of substitution between labour and electricity among the formal and informal manufacturing sector in India. The results show labour and electricity are strong complements in manufacturing, with elasticities significantly below one, which suggests a carbon tax that raises electricity prices may reduce employment in firms. On the contrary, we find high substitutability between thermal (coal) and renewable energy-based electricity generation, with the elasticity of substitution estimated at 2.0–3.3. Our results suggest that electricity derived from renewable energy sources and supplied to industry at affordable prices could mitigate the adverse effects of a carbon tax in Indian industry.

Suggested Citation

  • Aggarwal, Raavi, 2026. "Input substitution in electricity generation and industrial production: Evidence from India," Journal of Development Economics, Elsevier, vol. 179(C).
    • Handle: RePEc:eee:deveco:v:179:y:2026:i:c:s0304387825001658
    DOI: 10.1016/j.jdeveco.2025.103614
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304387825001658
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jdeveco.2025.103614?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Hirofumi Uzawa, 1962. "Production Functions with Constant Elasticities of Substitution," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 29(4), pages 291-299.
    2. Stephen Broadberry & Bishnupriya Gupta, 2009. "Lancashire, India, and shifting competitive advantage in cotton textiles, 1700–1850: the neglected role of factor prices1," Economic History Review, Economic History Society, vol. 62(2), pages 279-305, May.
    3. Robin Burgess & Michael Greenstone & Nicholas Ryan & Anant Sudarshan, 2020. "The Consequences of Treating Electricity as a Right," Journal of Economic Perspectives, American Economic Association, vol. 34(1), pages 145-169, Winter.
    4. Daron Acemoglu, 2002. "Directed Technical Change," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(4), pages 781-809.
    5. Mensah, Justice Tei, 2024. "Jobs! Electricity shortages and unemployment in Africa," Journal of Development Economics, Elsevier, vol. 167(C).
    6. Philippe Aghion & Antoine Dechezleprêtre & David Hémous & Ralf Martin & John Van Reenen, 2016. "Carbon Taxes, Path Dependency, and Directed Technical Change: Evidence from the Auto Industry," Journal of Political Economy, University of Chicago Press, vol. 124(1), pages 1-51.
    7. Jorgenson, Dale W, 1984. "The Role of Energy in Productivity Growth," American Economic Review, American Economic Association, vol. 74(2), pages 26-30, May.
    8. Greve, Hannes & Lay, Jann & Negrete, Ana, 2023. "How vulnerable are small firms to energy price increases? Evidence from Mexico," Environment and Development Economics, Cambridge University Press, vol. 28(1), pages 89-109, February.
    9. Paolo Malanima, 2020. "The limiting factor: energy, growth, and divergence, 1820–1913," Economic History Review, Economic History Society, vol. 73(2), pages 486-512, May.
    10. Ama Baafra Abeberese, 2017. "Electricity Cost and Firm Performance: Evidence from India," The Review of Economics and Statistics, MIT Press, vol. 99(5), pages 839-852, December.
    11. Williams, Martin & Laumas, Prem S, 1981. "The Relation between Energy and Non-Energy Inputs in India's Manufacturing Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 30(2), pages 113-122, December.
    12. Gilbert E. Metcalf & James H. Stock, 2023. "The Macroeconomic Impact of Europe's Carbon Taxes," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(3), pages 265-286, July.
    13. Kirill Borusyak & Peter Hull & Xavier Jaravel, 2022. "Quasi-Experimental Shift-Share Research Designs," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(1), pages 181-213.
    14. Charles Blackorby & R. Robert Russell, 1981. "The Morishima Elasticity of Substitution; Symmetry, Constancy, Separability, and its Relationship to the Hicks and Allen Elasticities," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(1), pages 147-158.
    15. Singer, Gregor, 2024. "Complementary inputs and industrial development: can lower electricity prices improve energy efficiency?," LSE Research Online Documents on Economics 122365, London School of Economics and Political Science, LSE Library.
    16. Paul Goldsmith-Pinkham & Isaac Sorkin & Henry Swift, 2020. "Bartik Instruments: What, When, Why, and How," American Economic Review, American Economic Association, vol. 110(8), pages 2586-2624, August.
    17. Stephie Fried & David Lagakos, 2023. "Electricity and Firm Productivity: A General-Equilibrium Approach," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(4), pages 67-103, October.
    18. Luis E. Gonzales & Koichiro Ito & Mar Reguant, 2023. "The Investment Effects of Market Integration: Evidence From Renewable Energy Expansion in Chile," Econometrica, Econometric Society, vol. 91(5), pages 1659-1693, September.
    19. Morgan Kelly & Joel Mokyr & Cormac Ó Gráda, 2023. "The Mechanics of the Industrial Revolution," Journal of Political Economy, University of Chicago Press, vol. 131(1), pages 59-94.
    20. Bretschger, Lucas & Jo, Ara, 2024. "Complementarity between labor and energy: A firm-level analysis," Journal of Environmental Economics and Management, Elsevier, vol. 124(C).
    21. Daron Acemoglu & Philippe Aghion & David Hémous, 2014. "The environment and directed technical change in a North–South model," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 30(3), pages 513-530.
    22. repec:ces:ceswps:_10944 is not listed on IDEAS
    23. Michael Greenstone & Rohini Pande & Nicholas Ryan & Anant Sudarshan, 2025. "Can Pollution Markets Work in Developing Countries? Experimental Evidence from India," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 140(2), pages 1003-1060.
    24. Jo, Ara & Miftakhova, Alena, 2024. "How constant is constant elasticity of substitution? Endogenous substitution between clean and dirty energy," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    25. David Popp, 2002. "Induced Innovation and Energy Prices," American Economic Review, American Economic Association, vol. 92(1), pages 160-180, March.
    26. Timothy Besley & Robin Burgess, 2004. "Can Labor Regulation Hinder Economic Performance? Evidence from India," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 91-134.
    27. Chris Papageorgiou & Marianne Saam & Patrick Schulte, 2017. "Substitution between Clean and Dirty Energy Inputs: A Macroeconomic Perspective," The Review of Economics and Statistics, MIT Press, vol. 99(2), pages 281-290, May.
    28. R. C. Allen, 2011. "Why the industrial revolution was British: commerce, induced invention, and the scientific revolution," Economic History Review, Economic History Society, vol. 64(2), pages 357-384, May.
    29. Devesh R. Raval, 2019. "The micro elasticity of substitution and non‐neutral technology," RAND Journal of Economics, RAND Corporation, vol. 50(1), pages 147-167, March.
    30. Alan Fernihough & Kevin Hjortshøj, 2021. "Coal and the European Industrial Revolution," The Economic Journal, Royal Economic Society, vol. 131(635), pages 1135-1149.
    31. repec:aen:journl:1984v05-03-a02 is not listed on IDEAS
    32. Montek S Ahluwalia & Utkarsh Patel, 2024. "How India can reach net zero: a strategy for 2025–35," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 40(2), pages 350-365.
    33. Robin Burgess & Michael Greenstone & Nicholas Ryan & Anant Sudarshan, 2020. "The Consequences of Treating Electricity as a Right," Journal of Economic Perspectives, American Economic Association, vol. 34(1), pages 145-169, Winter.
    34. Ghani, Ejaz & Goswami, Arti Grover & Kerr, William R., 2014. "Spatial dynamics of electricity usage in India," Policy Research Working Paper Series 7055, The World Bank.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Singer, Gregor, 2024. "Complementary inputs and industrial development: can lower electricity prices improve energy efficiency?," LSE Research Online Documents on Economics 122365, London School of Economics and Political Science, LSE Library.
    2. Ara Jo, 2025. "Substitution Between Clean And Dirty Energy With Biased Technical Change," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 66(2), pages 883-902, May.
    3. repec:ces:ceswps:_10944 is not listed on IDEAS
    4. Inoue, Emiko & Taniguchi, Hiroya & Yamada, Ken, 2022. "Measuring energy-saving technological change: International trends and differences," Journal of Environmental Economics and Management, Elsevier, vol. 115(C).
    5. Eugenie Dugoua & Jacob Moscona, 2025. "The Economics of climate innovation: technology, climate policy, and the clean energy transition," CEP Discussion Papers dp2135, Centre for Economic Performance, LSE.
    6. Yang, Jun & Yang, Dingjian & Cheng, Jixin, 2024. "The non-rivalry of data, directed technical change and the environment: A theoretical study incorporating data as a production factor," Economic Analysis and Policy, Elsevier, vol. 82(C), pages 417-448.
    7. Lazkano, Itziar & Nøstbakken, Linda & Pelli, Martino, 2017. "From fossil fuels to renewables: The role of electricity storage," European Economic Review, Elsevier, vol. 99(C), pages 113-129.
    8. Lazkano, Itziar & Pham, Linh, 2016. "Do Fossil fuel Taxes Promote Innovation in Renewable Electricity Generation?," Discussion Paper Series in Economics 16/2016, Norwegian School of Economics, Department of Economics.
    9. Frattini, Federico Fabio & Vona, Francesco & Bontadini, Filippo & Colantone, Italo, "undated". "The Local Job Multipliers of Green Industrialization," FEEM Working Papers 358792, Fondazione Eni Enrico Mattei (FEEM).
    10. Adrien Bilal & James H. Stock, 2025. "A Guide to Macroeconomics and Climate Change," NBER Working Papers 33567, National Bureau of Economic Research, Inc.
    11. Federico Fabio Frattini & Francesco Vona & Filippo Bontadini & Italo Colantone, 2025. "The Local Job Multipliers of Green Industrialization," CESifo Working Paper Series 11939, CESifo.
    12. Lin, Yatang & Kassem, Dana, 2025. "The environmental cost of power outages: Evidence from Delhi," Journal of Public Economics, Elsevier, vol. 242(C).
    13. Óscar Afonso & Liliana Fonseca & Manuela Magalhães & Paulo B. Vasconcelos, 2021. "Directed technical change and environmental quality," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 20(1), pages 71-97, January.
    14. Eugenie Dugoua & Jacob Moscona, 2025. "The Economics of Climate Innovation: Technology, Climate Policy, and the Clean Energy Transition," CESifo Working Paper Series 12267, CESifo.
    15. Zhangsheng Liu & Liuqingqing Yang & Liqin Fan, 2021. "Induced Effect of Environmental Regulation on Green Innovation: Evidence from the Increasing-Block Pricing Scheme," IJERPH, MDPI, vol. 18(5), pages 1-15, March.
    16. Wang, Yafei & Shi, Ming & Zhao, Zihan & Liu, Junnan & Zhang, Shiqiu, 2025. "How does green finance improve the total factor energy efficiency? Capturing the mediating role of green management innovation and embodied technological progress," Energy Economics, Elsevier, vol. 142(C).
    17. Martinsson, Gustav & Sajtos, László & Strömberg, Per & Thomann, Christian, 2022. "Carbon Pricing and Firm-Level CO2 Abatement: Evidence from a Quarter of a Century-Long Panel," HoSS Working Paper Series 2022-10, Stockholm School of Economics, House of Sustainable Society (HoSS).
    18. Patricia Laurens & Christian Le Bas & Stéphane Lhuillery & Antoine Schoen, 2017. "The determinants of cleaner energy innovations of the world’s largest firms: the impact of firm learning and knowledge capital," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 26(4), pages 311-333, May.
    19. Philippe Aghion & Antonin Bergeaud & Matthieu Lequien & Marc J. Melitz, 2024. "The Heterogeneous Impact of Market Size on Innovation: Evidence from French Firm-Level Exports," The Review of Economics and Statistics, MIT Press, vol. 106(3), pages 608-626, May.
    20. Wendler, Tobias & Töbelmann, Daniel & Günther, Jutta, 2021. "Natural resources and technology - on the mitigating effect of green tech," VfS Annual Conference 2021 (Virtual Conference): Climate Economics 242416, Verein für Socialpolitik / German Economic Association.
    21. Montrone, Lorenzo & Steckel, Jan Christoph & Kalkuhl, Matthias, 2022. "The type of power capacity matters for economic development – Evidence from a global panel," Resource and Energy Economics, Elsevier, vol. 69(C).

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:deveco:v:179:y:2026:i:c:s0304387825001658. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/devec .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.