An empirical analysis of inter-factor and inter-fuel substitution in the energy sector of Pakistan

Energy consumption in Pakistan has increased considerably over the last two decades particularly due to industrialization, urbanization, and population growth. To keep pace with the economic growth, the growing energy demands have been fulfilled at the cost of switching from abundant, cheap, and environmentally friendly domestic hydropower to expensive, imported, and higher GHG emitting petroleum products, thus leaving Pakistan at the mercy of global oil crises and environmental degradations. While employing the trans-log production framework, this study has investigated the potential inter-fuel and inter-factor substitution among energy vs. non-energy factors in calculating substitution elasticities between pairs of labour, capital, petroleum, coal, natural gas, and hydroelectricity in order to design policy for Pakistan on how to ensure secure energy and environmental protection. Using the time-series data covering the period 1980–2017, the ridge regression technique was adopted to calculate parameter estimates. The findings show that labour-energy and capital-energy are substitutes, thus signifying the need for greater focus on technological progress and skilled employment creation to save energy and mitigate CO2 emissions. The gradual removal of energy subsidies is suggested to discourage inefficient energy use and stimulate capital-intensive production approaches. The findings also advocate the significance of a diversified energy-mix consisted of hydroelectricity and natural gas.