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

Marie Hyland and Stefanie Haller

Year: 2018
Volume: Volume 39
Number: Number 6
DOI: 10.5547/01956574.39.6.mhyl
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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.



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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