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Firm-level Estimates of Fuel Substitution: An Application toCarbon Pricing

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  • Marie Hyland
  • 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.

Suggested Citation

  • Marie Hyland & Stefanie Haller, 2018. "Firm-level Estimates of Fuel Substitution: An Application toCarbon Pricing," The Energy Journal, , vol. 39(6), pages 71-98, November.
    • Handle: RePEc:sae:enejou:v:39:y:2018:i:6:p:71-98
    DOI: 10.5547/01956574.39.6.mhyl
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    References listed on IDEAS

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    Cited by:

    1. Fetzer, Thiemo & Palmou, Christina & Schneebacher, Jakob, 2024. "How do firms cope with economic shocks in real time?," The Warwick Economics Research Paper Series (TWERPS) 1517, University of Warwick, Department of Economics.
    2. Lu, M. & Pollitt, M. G., 2025. "Will High Carbon Prices Reduce Fossil Fuel Use in China? Evidence from Price Elasticity Estimates using Firm Data," Cambridge Working Papers in Economics 2527, Faculty of Economics, University of Cambridge.
    3. Mardones, Cristian & Henríquez, Valentina, 2025. "Estimating elasticities of substitution and price elasticities of industrial demand using different levels of aggregation for energy inputs," Energy, Elsevier, vol. 336(C).
    4. 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.
    5. 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.

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    Keywords

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    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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