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Measuring the possibilities of interfuel substitution

Listed author(s):
  • Bacon, Robert
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    What are the costs of making consumption of production activities use less-polluting fuels? The author reviews how the fuel mix used by different industries has changed over time and examines 2 techniques for estimating the responsiveness of fuel demand to fuel prices: econometric models and the engineering approach. With econometric models, the elasticity of substitution between energy and other inputs determines the costs of making activities less energy-intensive, while the elasticity of substitution between sources of energy (interfuel substitutability) determines the marginal costs of replacing one energy source with another. The engineering approach uses more detailed technical information and can draw a more complete picture, but with less ability to inform about activities with a vast number of different economic agents. Among the author's main conclusions: There are surprisingly large variations in energy and fuel use over time and between countries. Industrial output increased 62 percent in OECD countries between 1971 and 1988, for example, while energy use stayed unchanged. Also, shares of energy sources for industry and electricity vary greatly with local availablity, indicating that these sectors have some flexibility in choice of energy source. A judgment on whether this variability indicates that an economy responds cheaply if energy prices are changed selectively depends on how one reads the more detailed studies in the econometric and engineering literature. Lack of data is the biggest problem in estimating fuel and energy substitutability in non-OECD countries. Engineering studies of fuel switching in industry are rarely available. They exist, however, for the power industry and could be used to estimate the costs of alternative fuel-mixes for particular greenfield sites. The technique could not be used for assessment of economywide policies. Econometric studies are useful inasmuch as they take a sector- or economywide perspective. Econometric techniques are challenging, but often represent the state of the art in providing reliable estimates for elasticies of substitution - particularly when data are scarce and the level of aggregation is high. The issue of whether econometrically estimated structural parameters can be transferred across borders has not been thoroughly investigated.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1031.

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    Date of creation: 30 Nov 1992
    Handle: RePEc:wbk:wbrwps:1031
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    1. Hall, V. B. & Truong, T. P. & Van Anh, Nguyen, 1990. "An Australian fuel substitution tax model: ORANI-LFT," Energy Economics, Elsevier, vol. 12(4), pages 255-268, October.
    2. Nakamura, Shinichiro, 1986. "A Flexible Dynamic Model of Multiproduct Technology for the West German Economy," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 1(4), pages 333-344, October.
    3. Pinto, N. & Besant-Jones, J., 1989. "Demand And Netback Values For Gas In Electricity," Papers 106, World Bank - Technical Papers.
    4. 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.
    5. Sterner, Thomas, 1989. " Factor Demand and Substitution in a Developing Country: Energy Use in Mexican Manufacturing," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(4), pages 723-739.
    6. Diewert, Walter E & Wales, Terence J, 1987. "Flexible Functional Forms and Global Curvature Conditions," Econometrica, Econometric Society, vol. 55(1), pages 43-68, January.
    7. Hughes, Gordon, 1991. "The Energy Sector and Problems of Energy Policy in Eastern Europe," Oxford Review of Economic Policy, Oxford University Press, vol. 7(2), pages 77-98, Summer.
    8. Uri, Noel D., 1979. "Energy demand and interfuel substitution in India," European Economic Review, Elsevier, vol. 12(2), pages 181-190, April.
    9. Thomas Sterner, 1990. "Energy Efficiency and Capital Embodied Technical Change: The Case of Mexican Cement Manufacturing," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 155-167.
    10. Burgess, David F., 1975. "Duality theory and pitfalls in the specification of technologies," Journal of Econometrics, Elsevier, vol. 3(2), pages 105-121, May.
    11. 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.
    12. Halvorsen, Robert, 1977. "Energy Substitution in U.S. Manufacturing," The Review of Economics and Statistics, MIT Press, vol. 59(4), pages 381-388, November.
    13. 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.
    14. 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.
    15. Griffin, James M, 1977. "Inter-fuel Substitution Possibilities: A Translog Application to Intercountry Data," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 18(3), pages 755-770, October.
    16. Mountain, D. & Hsiao, C., 1988. "A Combined Structural And Flexible Functional Approach For Modeling Energy Substitution," Papers m8815, Southern California - Department of Economics.
    17. Larry G. Epstein, 1981. "Duality Theory and Functional Forms for Dynamic Factor Demands," Review of Economic Studies, Oxford University Press, vol. 48(1), pages 81-95.
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