26 Pages

The Scope for Fuel Substitution in Manufacturing Industries: A Case Study of Chile and Colombia

WithDiana L. Moss, James R. Tybout

This chapter analyzes plant-level panel data from Chile and Colombia to assess how manufacturers might respond to carbon taxes and other policies that induce substitution between clean and dirty fuels. It describes the three sources of changes in industrial energy use. The chapter develops a simple error components model to evaluate sources of variation in patterns of fuel use across plants within each industry. It then introduces industry-specific variables such as location, plant entry, and size, and attempt to account for any unexplained variation in expenditure shares and energy prices across plants. Changes in industrial energy use can be thought of as coming from one of three sources: changes in the interindustry mix of goods produced, changes in intra-industry output shares of the producers, or changes in the intrafirm energy intensity of individual producers. Colombian manufacturing was less energy intensive on the whole, and its energy intensity decreased as well, albeit by a smaller amount than in Chile, during 1977–88.