Publication: Interfuel Substitution in the United States
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Published
2010
ISSN
01409883
Date
2012-03-30
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In this paper, we use the locally flexible translog functional form to investigate the demand for energy and interfuel substitution in the United States and to provide a comparison of our results with most of the existing empirical energy demand literature. Motivated by the widespread practice of ignoring theoretical regularity, we follow Barnett's (2002) suggestions and estimate the model subject to theoretical regularity, using methods developed by Diewert and Wales (1987) and Ryan and Wales (2000), in an attempt to produce inference consistent with neoclassical microeconomic theory. Moreover, we use the most recent data, published by the U.S. Energy Information Administration (EIA), and in addition to investigating interfuel substitution possibilities in total U.S. energy demand, we follow Serletis et al. (2009) and also examine interfuel substitution possibilities in energy demand by sector. Moreover, we test for weak separability, with the objective of discovering the structure of the functional form in total energy demand as well as energy demand by sector.
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Publication On Interfuel Substitution : Some International Evidence(2009-08-01)This paper estimates interfuel substitution elasticities in selected developing and industrialized economies at the national and sector levels. In doing so, it employs state-of-the-art techniques in microeconometrics, particularly the locally flexible normalized quadratic functional forms, and provides evidence consistent with neoclassical microeconomic theory. The results indicate that the interfuel substitution elasticities are consistently below unity, revealing the limited ability to substitute between major energy commodities (i.e., coal, oil, gas, and electricity). While the study finds some evidences of larger interfuel substitution potential in high-income economies as compared to that in the middle- and low-income economies in the industrial and transportation sectors, no such evidence is observed in the residential and electricity generation sectors or at the national level. The implication is that interfuel substitution depends on the structure of the economy, not the level of economic development. Moreover, a higher change in relative prices is needed to induce switching toward a lower carbon economy.Publication International Evidence on Aggregate Short-Run and Long-Run Interfuel Substitution(2011)In this paper, we build on recent work by Serletis et al. (2010, in press) and report short- and long-run estimates of aggregate interfuel substitution for a number of OECD and non-OECD countries. In doing so, we use recent pooled intercountry data (since 1980), and state-of-the-art advances in microeconometrics, including duality theory and flexible functional forms. Also, motivated by the widespread practice in the empirical energy demand literature of ignoring theoretical regularity, we estimate our model subject to global curvature (but not monotonicity), using methods developed by Diewert and Wales (1987). We provide inference, and also a policy perspective, using parameter estimates that are consistent with the theoretical regularity conditions of neoclassical microeconomic theory.Publication International Evidence on Sectoral Interfuel Substitution(2010)This paper estimates interfuel substitution elasticities in selected developing and industrialized economies at the sector level. In doing so, it employs state-of-the-art techniques in microeconometrics, particularly the locally flexible normalized quadratic functional form, and provides evidence consistent with neoclassical microeconomic theory. The results indicate that the interfuel substitution elasticities are consistently below unity, revealing the limited ability to substitute between major energy commodities (i.e., coal, oil, gas, and electricity). We find that on average, industrial and residential sectors tend to exhibit higher potential for substitution between energy inputs as compared to the electricity generation and transportation sectors in all countries, with the United States being the only exception. In addition, we find that developed countries demonstrate higher potential for interfuel substitution in their industrial and transportation sectors as compared to the developing economies. The implication is that interfuel substitution depends on the structure of the economy, not the level of economic development. Moreover, higher changes in relative prices are needed than what we have already experienced to induce switching toward a lower carbon economy.Publication Fossil Fuel Producing Economies Have Greater Potential for Industrial Interfuel Substitution(Elsevier, 2015-01)This study analyzes industrial interfuel substitution in an international context using a large unbalanced panel dataset of 63 countries. We find that compared to other countries fossil fuel producing economies have higher short-term interfuel substitution elasticities. This difference increases further in the long run as fossil fuel producing countries have a considerably longer adjustment of their fuel-using capital stock. These results imply lower economic cost for policies aimed at climate abatement and more efficient utilization of energy resources in energy-intensive economies.Publication How Much Could South Asia Benefit from Regional Electricity Cooperation and Trade?(World Bank, Washington, DC, 2015-06)The South Asia region is lagging behind many regions in the world in regional electricity cooperation and trading, despite the huge anticipated benefits. This study uses an electricity planning model that produces optimal expansion of electricity generation capacities and transmission interconnections in the long-term to quantify the benefits of unrestricted cross-border electricity trade in the South Asia during 2015–40. The study finds that the unrestricted electricity trade provision would save US$226 billion (US$9 billion per year) of electricity supply costs over the period. The ratio of the present value of benefits, in the form of reduction of fuel costs, to the present value of increased costs due to generation and interconnection would be 5.3. The provision would reduce regional power sector carbon dioxide emissions by 8 percent, mainly because of substitution of coal-based generation with hydro-based generation, although regional emissions would be well above current levels absent other policy interventions. To achieve these benefits, the region is estimated to add 95,000 megawatts of new cross-border transmission interconnection capacity.
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