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Interfuel Substitution and Energy Use in the U.K. Manufacturing Sector

Jevgenijs Steinbuks

Year: 2012
Volume: Volume 33
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol33-No1-1
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Abstract:
This paper investigates interfuel substitution, separately accounting for different types of energy use in the U.K. manufacturing sector. Econometric models of interfuel substitution are applied to aggregate energy use, as well as to a specific energy use process--thermal heating--where interfuel substitution is technologically feasible. Compared to the aggregate data, the estimated own-price elasticities for all fuels and the cross-price elasticities for fossil fuels are considerably higher for thermal heating processes. Nonetheless, electricity is found to be a poor substitute for other fuels based on both aggregate data and, separately, for the heating process. An increase in real fuel prices from the Climate Change Levy in 2001 resulted in higher substitution elasticities based on aggregate data, and lower substitution elasticities for the thermal heating process. The results of a counterfactual decomposition of change in the estimated elasticities indicate that technological change was the major determinant of the differences in observed elasticities before and after the energy price increase.

Keywords: Climate change levy, Elasticities, Energy use, Interfuel substitution, Manufacturing sector, United Kingdom



Capital Adjustment and the Optimal Fuel Choice

Marie Hyland and Jevgenijs Steinbuks

Year: 2019
Volume: Volume 40
Number: Number 5
DOI: 10.5547/01956574.40.5.mhyl
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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.





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