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Do manufacturing firms react to energy prices? Evidence from Italy

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  • Bardazzi, Rossella
  • Oropallo, Filippo
  • Pazienza, Maria Grazia

Abstract

The reaction of energy demand to price changes is a key policy issue as it describes the economy's response to changes in market conditions or to policy interventions. The issue is even more important for the Italian economy, highly exposed to energy price changes, given its almost complete fossil fuel-related energy dependence, environmental sensitivity and highly fragmented industrial structure. Besides the policy issue, there is also an important methodological debate, concerning the best way to evaluate energy demand elasticities, looking at alternative models, data and elasticity definitions. After a discussion of the main methodological issues and the related empirical literature, this paper presents an estimation of factor and fuel demand elasticities for Italian industrial firms, by using a microeconomic panel in a two-stage translog model. Using cross-price and Morishima elasticities, we obtain information on the magnitude and asymmetry of firms' responses to price changes. Moreover, the use of a micro-dataset allows the high heterogeneity of Italian firms to be considered: the results are discussed according to technology intensity, sector and firm size. Our findings show that energy is the most elastic input for all sectors and that capital and energy are substitutes in the low technology sector and weak complements in all others. Estimated interfuel elasticities show a high degree of demand sensitivity to fuel price changes and the vast majority of cross-price elasticities exhibit substitutability. Appropriate fiscal policies can thus be identified to give an effective impulse in influencing the industrial energy mix by changing relative prices. These findings constitute an important foundation for analysing energy demand by Italian industrial firms, given that empirical literature is particularly rare on the Italian case study.

Suggested Citation

  • Bardazzi, Rossella & Oropallo, Filippo & Pazienza, Maria Grazia, 2015. "Do manufacturing firms react to energy prices? Evidence from Italy," Energy Economics, Elsevier, vol. 49(C), pages 168-181.
  • Handle: RePEc:eee:eneeco:v:49:y:2015:i:c:p:168-181
    DOI: 10.1016/j.eneco.2015.01.014
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    References listed on IDEAS

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    Cited by:

    1. Wang, Yong & Li, Lin, 2016. "Critical peak electricity pricing for sustainable manufacturing: Modeling and case studies," Applied Energy, Elsevier, vol. 175(C), pages 40-53.
    2. Lutz, Benjamin Johannes & Massier, Philipp & Sommerfeld, Katrin & Löschel, Andreas, 2017. "Drivers of energy efficiency in German manufacturing: A firm-level stochastic frontier analysis," CAWM Discussion Papers 99, University of Münster, Center of Applied Economic Research Münster (CAWM).
    3. Knaut, Andreas & Paulus, Simon, 2016. "When are consumers responding to electricity prices? An hourly pattern of demand elasticity," EWI Working Papers 2016-7, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI), revised 16 Mar 2017.
    4. Llop Llop, Maria, 2017. "Measuring the influence of energy prices within the price formation mechanism," Working Papers 2072/290764, Universitat Rovira i Virgili, Department of Economics.

    More about this item

    Keywords

    Capital–energy substitution; Fuel substitution; Microdata; Panel estimation;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D2 - Microeconomics - - Production and Organizations
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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