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Firm-level Estimates of Fuel Substitution: An Application to Carbon Pricing

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. The carbon tax results in a small reduction in CO2 emissions from oil and gas use, but this reduction is partially offset by an increase in emissions due to increased electricity consumption by some firms.

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Energy Specializations: Electricity – Markets and Prices ; Petroleum – Markets and Prices for Crude Oil and Products; Natural Gas – Markets and Prices; Energy and the Environment – Policy and Regulation

JEL Codes: Q40: Energy: General, Q41: Energy: Demand and Supply; Prices, Q35: Hydrocarbon Resources

Keywords: Fuel substitution, Firm-level data, Environmental taxation

DOI: 10.5547/01956574.39.6.mhyl

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Published in Volume 39, Number 6 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.