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Capital Adjustment and the Optimal Fuel Choice

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  • Marie Hyland
  • Jevgenijs Steinbuks

Abstract

We propose a novel approach to analyze interfuel substitution that explicitly incorporates heterogenous fuel-using capital stocks in the estimation of the optimal fuel choice. Our econometric framework structurally estimates the frictionless level of fuel-using capital stocks and employs non-parametric analysis to reveal information on the form of adjustment costs facing firms. To illustrate this approach we use a large panel of Irish manufacturing firms over the period 2004-2009. The econometric estimates show a large variation in the optimal response of capital to changing fuel prices across different fuel-using technologies and imply substantial costs to capital adjustment. These results underscore the significance of the frequently ignored link between capital adjustment and the choice of fuels used by manufacturing firms.

Suggested Citation

  • Marie Hyland & Jevgenijs Steinbuks, 2019. "Capital Adjustment and the Optimal Fuel Choice," The Energy Journal, , vol. 40(5), pages 73-96, September.
    • Handle: RePEc:sae:enejou:v:40:y:2019:i:5:p:73-96
    DOI: 10.5547/01956574.40.5.mhyl
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    References listed on IDEAS

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    Keywords

    Capital adjustment; Fuel choice;

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