Energy substitution effect on transport sector of Pakistan: A trans-log production function approach

Abstract

Abstract Transport sector of Pakistan is one of the highest fossil fuel consumption and carbon dioxide (CO2) emission sector. As a key user of fossil fuel energy, Pakistan’s transport sector has created many problems i.e. noise, air pollution, CO2 emissions and environmental problem. In this study, trans-log production function model for Pakistan’s transport sector is established and input factors of labor, capital, and energy consumption are comprised. The output elasticity of an individual, input elasticity between a pair of factors, and elasticity of substitution between input factors are analyzed. To manage the multicollinearity issue, ridge regression is applied at different values of K. From 1991 to 2018, the outcomes show that output elasticities and a pair of input factor’s elasticities are increasing. The elasticities of substitutions between labor-energy consumption and capital-energy consumption show higher outcomes because of the more elevated amount of substitution elasticities. The substitution elasticity between labor and capital starts from 0.9797 to 0.9326 with slightly decreasing trend. The outcomes suggest that maximum output can be achieved by increasing capital and energy technologies. By allocating the maximum capital in the transport industry, energy-saving technologies, substitution between energy and capital, and substitution among capital-labor can enhance environmental protection. In the above’s view function, the present study estimates the level of energy-saving and CO2 emissions reduction under the different scenarios from 2015 to 2018. The policy suggestions of the results are given below.