An econometric analysis of inter-fuel substitution in energy sector of Pakistan

Hydroelectricity is playing a significant role in lowering CO2 emissions as it contributes a desirable platform to fulfill the growing energy demand while releasing fewer GHGs in comparison to other fossil fuels. Utilizing the trans-log production model, this study is an endeavor to investigate the potential inter-fuel substitution by estimating the substitution elasticity between pairs of coal, natural gas, petroleum, and hydroelectricity to suggest policy for Pakistan to achieve higher economic growth, environmental sustainability, and increased energy access by its citizens. Over the period 1980–2013, the ridge regression was approved to estimate the model’s parameters. The findings show that the output elasticity of hydroelectricity is the highest and all the factor inputs are substitutes; whereas, the elasticity of substitution between coal vs. natural gas is the highest, thus suggesting an increased focus on the coal extraction to switch from the alternative usage of gas. Moreover, encouragement of energy subsidy programs, coupled with taxes and infrastructural developments, can be adapted to redirect technology towards hydroelectricity. Hence, the result that hydroelectricity is substituted for all fuels submit that Pakistan has the potential to switch from petroleum to cleaner energy; therefore, reducing the adverse environmental implications and to retain the ability to fuel its energy sector.