Inter-Fuel Substitution, Technical Change, and Carbon Mitigation Potential in Pakistan: Perspectives of Environmental Analysis

Abstract

Currently, Pakistan is in a stage of urbanization and industrialization, raising its energy demand and supply and carbon dioxide emissions (CO2Es) due to the excessive use of fossil fuels. In meeting future demand and supply predictions, much emphasis should be given to both energy consumption and the level of inter-factor and inter-fuel substitution possibilities. Specifically, future outcomes for energy demand are more valid when production models contemplate substitution elasticity occurring during the period. To analyze the potential for little reliance on fossil fuels and diminish CO2Es, the present research has examined the potential for the substitution of energy and non-energy factors (i.e., natural gas, electricity, petroleum, labor, and capital) by using translog productions function over the period between 1986–2019. The ridge regression method is applied to evade the multicollinearity issue in the data. The model analyzes the output elasticity, substitution elasticity, technical progress, and carbon emission scenarios. The results show that the output elasticities are growing, presenting that the contribution of all factors adds to economic growth. The inputs between capital-petroleum, capital-electricity, labor-electricity, capital-natural gas, and natural gas-electricity are extreme substitutes. These substitutes are increasing capital growth and production sizes. The relative difference in technical progress shows a small positive change between 3–7% with convergence evident. Lastly, the investment scenarios under 5% and 10% investment in petroleum reduction are evidence that the CO2Es would reduce by 7.5 Mt and 10.43 Mt under scenario 1 and 7.0 Mt and 10.9 Mt under scenario 2. The results have broader suggestions for energy-conserving policies, particularly under the China–Pakistan Economic Corridor.