Industrial fuel demand and production technologies: evidence from emerging economies

The role of fuel substitution in production structure has been the focus of several previous studies, but empirical evidence on the theme remains inconclusive. We offer new insights on the subject matter using disaggregated industry level data across seven emerging economies over the period 2000–2014. The results provide mixed evidence that demand for specific energy sources exhibits higher price sensitivity. Production technologies across these economies are found to be heterogeneous and characterized by inefficiency, as indicated by decreasing returns to scale and low output elasticities. Furthermore, the findings reveal that ignoring asymmetric demand responses in conventional long-run models may lead to an underestimation of producers’ sensitivity to energy price changes, though not necessarily of fuel substitution effects. We argue for the need for appropriate incentive mechanisms which align with fuel- and sector-specific needs to address inefficient production technologies and effective price adjustment strategies. The price adjustments must be implemented in line with unequal demand responses and limited substitution possibility. Overall, our findings strengthen the need for radical cleaner production techniques without compromising sustainable production and energy security.