Interfuel substitution and technical change in the US electricity generating industry under the tradable sulphur allowance scheme: 1990–2004

Working paper

This paper uses monthly firm-level data to characterize fuel choice and technical change in the US electricity generating industry under the tradable sulphur allowance program. We use data covering the years 1990–2004 in a flexible translog cost function model to determine demand and substitution elasticities for the three main fossil fuel inputs (coal, oil, and natural gas) and the rate and direction of technical change. Capital is assumed fixed, implying a short run analysis. Three variable cost models are presented: one including three fuel inputs which incorporates the sulphur allowance price into the fuels’ relative input prices, one with four inputs (three fossil fuels plus sulphur permits) which assumes firms treat allowances as a separate input of their own right, and a third that excludes allowance prices from the cost model. Model 1 is shown to fit the data slightly better, and firm heterogeneity is shown to be present. The interfuel substitution elasticities and technical change estimates presented are therefore based on the fixed effects seemingly unrelated regression (SUR) estimation of Model 1’s restricted variable cost function and associated fuel cost share equations.

Authors: Tuthill, L

• Publication status: Published
• Peer review status: Reviewed (other)
• Publisher: Oxford Institute for Energy Studies
• Series: OIES paper
• Publication date: 2008-01-01
• Edition: Publisher's version
• Paper number: EV40
• ISBN: 9781901795780
• Language: English
• Keywords: electricity generation; electricity firms; OIES; fuel choice; technical change; interfuel substitution; clean air act; emissions; tradable sulphur allowance; USA; sulphur