IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v40y2013icp81-89.html
   My bibliography  Save this article

Asymmetric substitutability between energy and capital: Evidence from the manufacturing sectors in 10 OECD countries

Author

Listed:
  • Kim, Jihyo
  • Heo, Eunnyeong

Abstract

This paper investigates the substitutability between energy and capital in the manufacturing sectors of ten OECD countries since 1980 by applying a cost function approach that has been widely used to analyze industrial energy demand. First, we attempt to determine the source of the disagreement in the literature on the substitutability between energy and capital and reach a conclusion regarding the substitutability between energy and capital. Dividing energy and capital into sub-inputs, we analyze their substitutability. The empirical results indicate that fuel tends to complement capital in most countries, whereas electricity and capital are substitutes. Thus, this study confirms that heterogeneity in energy sources is a primary component of the systematic variation in the substitutability between energy and capital. Second, we examine asymmetric substitutability between energy and capital by estimating the Morishima elasticity of substitution. The estimates of the Morishima elasticity of substitution demonstrate that the substitution of energy for capital has dominated the substitution of capital for energy. This asymmetric substitutability is natural from the producer perspective because capital costs are much greater than energy costs in most countries. These results imply that the adoption of energy-saving technologies has not been induced in response to increased energy prices.

Suggested Citation

  • Kim, Jihyo & Heo, Eunnyeong, 2013. "Asymmetric substitutability between energy and capital: Evidence from the manufacturing sectors in 10 OECD countries," Energy Economics, Elsevier, vol. 40(C), pages 81-89.
    • Handle: RePEc:eee:eneeco:v:40:y:2013:i:c:p:81-89
    DOI: 10.1016/j.eneco.2013.06.014
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988313001278
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2013.06.014?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 search for a different version of it.

    References listed on IDEAS

    as
    1. Truong, Truong P, 1985. "Inter-fuel and Inter-factor Substitution in NSW Manufacturing Industry," The Economic Record, The Economic Society of Australia, vol. 61(174), pages 644-653, September.
    2. de Groot, Henri L. F. & Verhoef, Erik T. & Nijkamp, Peter, 2001. "Energy saving by firms: decision-making, barriers and policies," Energy Economics, Elsevier, vol. 23(6), pages 717-740, November.
    3. Caloghirou, Yannis D. & Mourelatos, Alexi G. & Thompson, Henry, 1997. "Industrial energy substitution during the 1980s in the Greek economy," Energy Economics, Elsevier, vol. 19(4), pages 476-491, October.
    4. Griffin, James M & Gregory, Paul R, 1976. "An Intercountry Translog Model of Energy Substitution Responses," American Economic Review, American Economic Association, vol. 66(5), pages 845-857, December.
    5. Chambers,Robert G., 1988. "Applied Production Analysis," Cambridge Books, Cambridge University Press, number 9780521314275.
    6. Thompson, Peter & Taylor, Timothy G, 1995. "The Capital-Energy Substitutability Debate: A New Look," The Review of Economics and Statistics, MIT Press, vol. 77(3), pages 565-569, August.
    7. Berndt, Ernst R & Wood, David O, 1979. "Engineering and Econometric Interpretations of Energy-Capital Complementarity," American Economic Review, American Economic Association, vol. 69(3), pages 342-354, June.
    8. Christopoulos, Dimitris K., 2000. "The demand for energy in Greek manufacturing," Energy Economics, Elsevier, vol. 22(5), pages 569-586, October.
    9. Griffin, James M, 1981. "Engineering and Econometric Interpretations of Energy-Capital Complementarity: Comment," American Economic Review, American Economic Association, vol. 71(5), pages 1100-1104, December.
    10. Iqbal, Mahmood, 1986. "Substitution of Labour, Capital and Energy in the Manufacturing Sector of Pakistan," Empirical Economics, Springer, vol. 11(2), pages 81-95.
    11. Hesse, Dieter M & Tarkka, Helena, 1986. " The Demand for Capital, Labor and Energy in European Manufacturing Industry before and after the Oil Price Shocks," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(3), pages 529-546.
    12. Pindyck, Robert S, 1979. "Interfuel Substitution and the Industrial Demand for Energy: An International Comparison," The Review of Economics and Statistics, MIT Press, vol. 61(2), pages 169-179, May.
    13. Chang, Kuo-Ping, 1994. "Capital-energy substitution and the multi-level CES production function," Energy Economics, Elsevier, vol. 16(1), pages 22-26, January.
    14. Gasper A. Garofalo & Devinder M. Malhotra, 1988. "Aggregation of Capital and Its Substitution with Energy," Eastern Economic Journal, Eastern Economic Association, vol. 14(3), pages 251-262, Jul-Sep.
    15. Morrison, Catherine J, 1988. "Quasi-Fixed Inputs in U.S. and Japanese Manufacturing: A Generalized Leontief Restricted Cost Function Approach," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 275-287, May.
    16. Fuss, Melvyn A., 1977. "The demand for energy in Canadian manufacturing : An example of the estimation of production structures with many inputs," Journal of Econometrics, Elsevier, vol. 5(1), pages 89-116, January.
    17. Ilmakunnas, Pekka & Torma, Hannu, 1989. " Structural Change in Factor Substitution in Finnish Manufacturing," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(4), pages 705-721.
    18. Jan Velthuijsen, 1993. "Incentives for investment in energy efficiency: an econometric evaluation and policy implications," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 3(2), pages 153-169, April.
    19. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February.
    20. Bentzen, Jan, 2004. "Estimating the rebound effect in US manufacturing energy consumption," Energy Economics, Elsevier, vol. 26(1), pages 123-134, January.
    21. Welsch, Heinz & Ochsen, Carsten, 2005. "The determinants of aggregate energy use in West Germany: factor substitution, technological change, and trade," Energy Economics, Elsevier, vol. 27(1), pages 93-111, January.
    22. Feng, Guohua & Serletis, Apostolos, 2008. "Productivity trends in U.S. manufacturing: Evidence from the NQ and AIM cost functions," Journal of Econometrics, Elsevier, vol. 142(1), pages 281-311, January.
    23. Reghubendra, J. & Murty, M.N. & Paul, S. & Rao, B.B., 1992. "An Analysis of Technological Change, Factor Substitution and Economies of Scale in Manufacturing Industries in India," Papers e9214, Western Sydney - School of Business And Technology.
    24. Nguyen, Hong V., 1987. "Energy elasticities under Divisia and Btu aggregation," Energy Economics, Elsevier, vol. 9(4), pages 210-214, October.
    25. Medina, J. & Vega-Cervera, J. A., 2001. "Energy and the non-energy inputs substitution: evidence for Italy, Portugal and Spain," Applied Energy, Elsevier, vol. 68(2), pages 203-214, February.
    26. Considine, Timothy J., 1989. "Separability, functional form and regulatory policy in models of interfuel substitution," Energy Economics, Elsevier, vol. 11(2), pages 82-94, April.
    27. Berndt, Ernst R & Wood, David O, 1975. "Technology, Prices, and the Derived Demand for Energy," The Review of Economics and Statistics, MIT Press, vol. 57(3), pages 259-268, August.
    28. Koetse, Mark J. & de Groot, Henri L.F. & Florax, Raymond J.G.M., 2008. "Capital-energy substitution and shifts in factor demand: A meta-analysis," Energy Economics, Elsevier, vol. 30(5), pages 2236-2251, September.
    29. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
    30. Prywes, Menahem, 1986. "A nested CES approach to capital-energy substitution," Energy Economics, Elsevier, vol. 8(1), pages 22-28, January.
    31. Berndt, Ernst R & Khaled, Mohammed S, 1979. "Parametric Productivity Measurement and Choice among Flexible Functional Forms," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1220-1245, December.
    32. Jones, Clifton T, 1995. "A Dynamic Analysis of Interfuel Substitution in U.S. Industrial Energy Demand," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(4), pages 459-465, October.
    33. V. Eldon Ball & Robert G. Chambers, 1982. "An Economic Analysis of Technology in the Meat Products Industry," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 64(4), pages 699-709.
    34. Field, Barry C & Grebenstein, Charles, 1980. "Capital-Energy Substitution in U.S. Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 62(2), pages 207-212, May.
    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. He, Yongda & Lin, Boqiang, 2019. "Heterogeneity and asymmetric effects in energy resources allocation of the manufacturing sectors in China," Energy, Elsevier, vol. 170(C), pages 1019-1035.
    2. Koetse, Mark J. & de Groot, Henri L.F. & Florax, Raymond J.G.M., 2008. "Capital-energy substitution and shifts in factor demand: A meta-analysis," Energy Economics, Elsevier, vol. 30(5), pages 2236-2251, September.
    3. Lin, Boqiang & Xie, Chunping, 2014. "Energy substitution effect on transport industry of China-based on trans-log production function," Energy, Elsevier, vol. 67(C), pages 213-222.
    4. Lin, Boqiang & Ahmad, Izhar, 2016. "Energy substitution effect on transport sector of Pakistan based on trans-log production function," Renewable and Sustainable Energy Reviews, Elsevier, vol. 56(C), pages 1182-1193.
    5. Khalid, Waqar & Özdeşer, Hüseyin & Jalil, Abdul, 2021. "An empirical analysis of inter-factor and inter-fuel substitution in the energy sector of Pakistan," Renewable Energy, Elsevier, vol. 177(C), pages 953-966.
    6. Lagomarsino, Elena, 2020. "Estimating elasticities of substitution with nested CES production functions: Where do we stand?," Energy Economics, Elsevier, vol. 88(C).
    7. Lin, Boqiang & Atsagli, Philip & Dogah, Kingsley E., 2016. "Ghanaian energy economy: Inter-production factors and energy substitution," Renewable and Sustainable Energy Reviews, Elsevier, vol. 57(C), pages 1260-1269.
    8. David I. Stern, 2012. "Interfuel Substitution: A Meta‐Analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 26(2), pages 307-331, April.
    9. Dong Hee Suh, 2015. "Declining Energy Intensity in the U.S. Agricultural Sector: Implications for Factor Substitution and Technological Change," Sustainability, MDPI, vol. 7(10), pages 1-14, September.
    10. Elena Lagomarsino & Karen Turner, 2017. "Is the production function Translog or CES? An empirical illustration using UK data," Working Papers 1713, University of Strathclyde Business School, Department of Economics.
    11. Valeria Costantini & Francesco Crespi & Elena Paglialunga, 2019. "Capital–energy substitutability in manufacturing sectors: methodological and policy implications," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 9(2), pages 157-182, June.
    12. 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.
    13. Pablo-Romero, María del P. & Sánchez-Braza, Antonio, 2015. "Productive energy use and economic growth: Energy, physical and human capital relationships," Energy Economics, Elsevier, vol. 49(C), pages 420-429.
    14. Papageorgiou, Chris & Saam, Marianne & Schulte, Patrick, 2013. "Elasticity of substitution between clean and dirty energy inputs: A macroeconomic perspective," ZEW Discussion Papers 13-087, ZEW - Leibniz Centre for European Economic Research.
    15. Hepburn, Cameron & Teytelboym, Alexander & Cohen, Francois, 2018. "Is Natural Capital Really Substitutable?," INET Oxford Working Papers 2018-12, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.
    16. Suh, Dong Hee, 2015. "Identifying Factor Substitution and Energy Intensity in the U.S. Agricultural Sector," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205264, Agricultural and Applied Economics Association.
    17. Valeria Costantini & Elena Paglialunga, 2014. "Elasticity of substitution in capital-energy relationships: how central is a sector-based panel estimation approach?," SEEDS Working Papers 1314, SEEDS, Sustainability Environmental Economics and Dynamics Studies, revised May 2014.
    18. Thompson, Henry, 2006. "The applied theory of energy substitution in production," Energy Economics, Elsevier, vol. 28(4), pages 410-425, July.
    19. Dargay, Joyce M., 1980. "The Demand for Energy in Swedish Manufacturing," Working Paper Series 33, Research Institute of Industrial Economics, revised Aug 1982.
    20. Miguel A. Tovar and Emma M. Iglesias, 2013. "Capital-Energy Relationships: An Analysis when Disaggregating by Industry and Different Types of Capital," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).

    More about this item

    Keywords

    Cost function; Capital-energy substitution; Morishima elasticity of substitution; Asymmetry;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

    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:eneeco:v:40:y:2013:i:c:p:81-89. 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/eneco .

    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.