Interfuel Substitution and Energy Use in the UK Manufacturing Sector

This paper investigates interfuel substitution in the UK manufacturing sector. Econometric models of inter-fuel substitution are applied to energy inputs aggregated by their energy use, and separately for thermal heating processes, where interfuel substitution is technologically feasible. Compared to aggregate data, estimated own-price fuel demand elasticities for all fuels and cross-price elasticities for fossil fuels are considerably higher for thermal heating processes. Nonetheless, electricity is found to be a poor substitute for other fuels based on both aggregate data and separately for the heating process. This study also …nds that an increase in real fuel prices resulted in higher substitution elasticities based on aggregate data, and lower substitution elasticities for the heating process. The results of counterfactual decomposition of change in the estimated elasticities indicate that technological change was the major determinant of the di¤erences in observed elasticities before and after the energy price increase. Keywords: climate change levy, elasticities, energy use, interfuel substitution, manufacturing sector, United Kingdom. JEL Classi…cation: H23, Q41.