Energy substitution possibilities and technological progress in Pakistan's industrial sector

Considered high-energy intensive, Pakistan's industrial sector has seen an upwelling in its energy use, reaching 19.74 million tons of oil equivalents in 2021, which is about 37% of Pakistan's total energy consumption. This has made the industry a major contributor to CO2 emissions and related contaminants. This research has tried to analyze the possibilities for factor substitution between energy and non-energy factors in the industrial sector by applying a trans-log production function. For the multicollinearity problem, ridge regression was used. The results show that (i) all the inputs are increasing return to scale; (ii) the measured substitution elasticity between gas-coal and oil-gas is about 0.901 and 0.953, while capital-oil, capital-gas, capital-coal, and labor-oil stands at 1.231, 1.088, 1.045, and 1.404. This is a strong sign that allocating more capital and labor to Pakistan's industrial sector instead of energy will be dynamic for sustainable development. (iii) oil-electricity consumption and electricity add to only a little share of energy by 0.378 because oil import has declined (about 15%) as a whole and imported electricity increased (5.53%), which gives the potential for primary interest, and (iv) technological progress is estimated between −0.051 and + 0.03 between energy inputs. The input of coal vs gas is a faster substitute with their relative difference in technological progress, while coal vs electricity also presents evidence of convergence. Our findings recommend robust policies, technological advancements, and industrial engagement for fostering energy efficiency towards a sustainable production system and contributing to an environmentally aware and efficient economy.