1. Introduction
Many researchers have proposed that energy consumption is imperative for global economic growth (EG). Energy is also imperative for human life, social development, and daily life; however, the related carbon dioxide emissions (CO
2Es) from huge energy consumption have become a matter of interest, particularly as global warming remains [
1]. Indeed, the International Energy Agency (IEA) describes that global EG in developed countries averaged 1.7% in 2019, but overall, energy-related CO
2Es fell by 3.2%. The power-sector-related CO
2Es were counted by 36% across the advanced economies, down from a maximum of 42% in 2012. The average CO
2E intensity of electricity generation was reduced by almost 6.5% in 2019 because of the generation of coal-fired plants in advanced economies, which reduced by approximately 15%. The record growth of renewable electricity generation was found by 28% and 12% of wind energy in advanced countries [
2]. Moreover, due to industrialization and urbanization, many countries are expected to raise a larger proportion of energy-related CO
2Es [
3].
There are ‘3′ noticeable ways through which countries could lessen the share of CO
2Es. First, energy efficiency measures, for example, renewable energy technologies (RETs), high-efficiency furnaces, little energy-consuming machines, and home appliances, can lessen CO
2Es. These technologies can help in reducing CO
2Es and improve society [
4]. Gurrib et al. [
5] reported that various countries in Europe have started to use blockchain technologies to benefit more from solar energy and reduce their reliance on imported fossil fuels such as oil and natural gas. The following method of mitigation might be via a huge investment in renewable energy, for example, solar, wind, biomass, hydro, geothermal, nuclear, etc. The third approach is that governments could implement tools, for example, carbon taxes, emissions trading systems, storage and carbon capture, etc. [
6].
In Asia, Pakistan is the 12th largest energy-consuming country and uses primary energy by 85 million tons of oil equivalent (Mtoe), which has risen by 5% in 2019 [
7]. As an alternative for a growing open economy in transition, Pakistan is not an exclusion from this discussion. As given in
Figure 1, the level of energy use and CO
2Es have climbed with the growth ratio and EG. It is also evident from
Figure 1 that energy utilization and CO
2Es have a direct correlation between increasing and decreasing at the same breakpoints. These breakpoints are observable from 2003 to 2008 and 2009 to 2013. This relationship is not amazing, seeing that Pakistan is the 12th largest energy-consuming economy, with a very low electricity growth of around 11.6% because of a shortage of energy reserves and political administration. In the last decade, Pakistan faced a severe energy disaster and growing CO
2Es, as presented in
Figure 1. The reason is that Pakistan is currently reliant on oil by 25.7%, coal by 15.4%, and gas by 35%, of which oil consumption decreased significantly by 22.1%, gas consumption in the domestic sector increased by 9.7%, and coal consumption increased by 9.7% [
8]. However, Pakistan contributes 0.8% of worldwide emissions [
9]. These situations make Pakistan an appropriate case for analyzing the mitigation potential of inter-fuel substitution and how energy utilization and technical substitution impact EG.
As discussed in the next section, the issue concerned with energy use and EG has been considered by applying many techniques, for example, regression analysis, co-integration analysis, bounds testing, decomposition analysis, autoregressive distributive lag model, and bootstrap empirical distribution [
11,
12]. Many contributions to the literature with various modeling reported mixed findings, which has made literature inclusive and become a matter of concern, particularly seeing the arbitrary nature in which variables are used for these methods. Simply, the commonly applied methods of production analysis as output elasticity, substitution elasticity among the pairs of factors, and technical substitution in the energy economics literature, especially for Pakistan, do not state a certain theoretic association. Moreover, substitutability effects, among the pair of factors that impact due to ecological regulations, costs, and demand variations, are ignored. Due to these motives, different visions on the basis of enhanced modeling would give opportunities.
Hence, we develop a translog production method for energy-economy modeling to investigate the inter-fuel substitution, technological progress, and output elasticity among different energy forms and economic progress to address such issues. However, it also establishes a definite relationship between the selected factors. Afterwards, existing outcomes are employed to measure the substitution possibilities of different kinds of energy and the mitigation potential coming from energy substitution. Paradoxically to these backdrops, the present study supports amplifying the literature, not just in the context of Pakistan’s energy policy, but also as it concerns the methodological problems innate in the literature of energy economics. Consequently, the current study motivates us to research input factors, output elasticities, and the pair of substations between factors, technical progress, and mitigation potential using the production model. Thus, the novelty of the current research has produced a gap between the prior research.
Conducting this research for Pakistan will put forward a very imperative contribution, particularly in the context of the energy economy. (1) The dominance of oil, natural gas, and petroleum products in the energy mix must be the main matter, and seeing the energy demand and factor inputs, there is an obvious sign that the demand for these inputs will rise as the economy of the country develops over future [
13]. The present study’s consequences can be used to enable future predictions that will equate the energy demand–supply inputs that are not only reliant on overall energy use but classified into clean energy, electricity, natural gas, and petroleum products. (2) Familiarity with which kind of energy is close to substitution, analysis of their relative differences in technical progress over time will give helpful insights on which sources of energy should Pakistan prioritize for the expansion of renewable energy and also to be definite of the achievement of any energy transformation policy adapted to the up-gradation renewable energy and control over CO
2Es. (3) The applicability of the energy-oriented translog production model for Pakistan not only limits aggregation bias, but also helps as an imperative basis for various sectors’ energy planning and forecasting. Moreover, with the rising demand for energy inputs, as industrialization and urbanization increase or expand, forecasts must be made to compare this demand with the required supply. These forecasts are not only based on the tendency of energy use but also on the degree of inter-factor, inter-fuel substitution, and technical advancements happening in the future. Simply, for future energy, employing production methods can be more authentic if the output elasticities and substitution elasticities are deliberated. Furthermore, controlling CO
2Es in Pakistan seems to propose a need for the utilization of renewable resources, which means that policy-makers see which resources are more substitutable. This is a major concern. Finally, few studies for developed and developing countries have been seen, for example, China, United States, Europe, Africa, and Pakistan, such as [
14,
15,
16,
17]; to the best of our understanding, there has been no relevant direct study which estimated the inter-factor and inter-fuel substitution, technical progress (among the energy and non-energy factors), and energy-capital investment scenarios, especially for Pakistan. Consequently, only a few studies used old data on electricity, renewable electricity, fossil fuels, and gas for various sectors or regions; therefore, this study is useful for policy-makers to establish whether available clean and fossil fuel resources could be utilized as a substitute. Thus, this study provides a helpful insight into the literature and will benefit in covering the literature gap that subsists in Pakistan.
The major objective is to analyze differences in technological progress and a factor’s substitutability, energy consumption, and economic growth. Firstly, the research analyzes the mechanisms of these effects using the translog production function. Secondly, technological progress and economic progress (output) would affect each other (for example, the biased technical progress), and this action has also influenced CO
2 emissions and the economy (see
Figure 2).
Further study is arranged as:
Section 2 provides the literature review and discusses how the key issues have been addressed.
Section 3 presents the data information and their sources.
Section 4 introduces the methods and estimation of different variables.
Section 5 discusses the empirical outcomes and their description, and
Section 6 gives the conclusion and policy recommendations.
2. Literature Review
Two major aspects of literature are important for the debate; research on Energy Consumption (EC) and Economic Growth (EG), and contributions supporting the elasticity of energy substitution. Overall, the literature on the EC and EG relationship is wide, with numerous studies of advanced and emerging nations. Various techniques have been employed in a current analysis by Omri [
11] related to EC and EG (i.e., ECM, ARDL bounds, VAR, Granger causality, Causality analysis, Sim’s method, Toda-Yamamoto, and Bootstrap distribution) in the literature. Numerous modeling techniques coupled with various substitutive variables for EC have provided mixed outcomes, as revealed in the past. Thus, a summary of the related studies based on various outcomes is provided. At the same time, interested researchers referred to Omri [
11] because of multiple supports using multiple methods in the context of two aspect relationships. In his study, Omri indicates that 29% of studies are in favor of the growth hypothesis, and most of the studies applied co-integration and error correction methods. It is found that some studies support the hypothesis, for example, Menyah and Wolde-Rufael [
18] on the United States (US); Siddiqui [
19] on Pakistan; Zahid [
20] on five South Asian countries; Shahbaz et al. [
21], Komal and Abbas [
22], Ahmed et al. [
23], Zhang et al. [
24], Raza and Shah [
25] on Pakistan; and Lin and Wesseh [
26] on South Africa. They emphasize that EC and EG are the imperative influences in the production process, which means that energy plays an imperative part in the EG. Consequently, the conservation of energy policies has a negative impact on EG.
Conflicting to the development hypothesis, only 27% of studies help the feedback hypothesis; for example, Payne and Taylor [
27], Sari et al. [
28], Payne [
29], and Yildirim et al. [
14] determine that there is two-way causation between EC and EG. This proves that both (EC and EG) are correlated and might help to complement one another. Additionally, the outcomes show that energy resources (i.e., coal, oil, gas, and renewable) are the long-run forcing variables that are producing employment and production. Moreover, only 23% of the literature supported the conservation hypothesis and concluded that there is a unidirectional causality between EG and EC [
15], which clears that the rise in EG raises the EC. Simply, it can be said that the country’s economy and infrastructure increase the EC; however, negligence of domestic resources could also produce inadequacy in EC. Finally, only 21% of EC and EG literature have shown a neutral association between EC and EG, which infers that a country carries out plans to save energy, thereby lessening CO
2Es without a negative influence on EG, for example, Altinay and Karagol [
30], Jobert and Karanfil [
31], Halicioglu [
32] for Turkey; Payne and Taylor [
27], and Yildirim et al. [
14] for the US. They concluded that there is no causal association between the EC and EG.
In connection with the energy and factor substitution literature, the translog production or cost function has been broadly employed because of its flexibility, ease of use, and adaptability. Thus, numerous studies have been done on this topic (For example, Berndt and Wood [
33]; Shankar and Pacauri [
34]; Fuss [
35], and Prywes [
36]. They estimated that there is a substitution possibility between energy and capital inputs. Moreover, energy fuels could be substituted at a lower level or higher level of substitution possibilities. In addition, many of the latest studies analyzed the substitutability among various energy and non-energy elements at sectorial, national, and regional levels. For this, few studies supported capital and energy substitutability, for example, Lin and Wesseh [
37] for the chemical sector of China Lin and Xie [
38] for China’s transport industry, and Lin et al. [
39] for Ghana’s energy economy. Furthermore, to support the substitution possibility between capital and energy inputs, Raza et al. [
16] applied the translog production method and examined the substitution influence on economic progress and the chemical sector in Pakistan. They further proved that there is a large substitution possibility among capital and energy input factors. Similarly, Lin et al. [
39] and Lin and Atsagli [
15] used the translog production model to inspect the substitution possibilities among energy and non-energy factors for Ghana and Nigeria. Actually, these studies found conclusions linked to capital, labor, and literature. In addition, Stern [
40] investigated empirical studies in the capital and energy hypothesis results based on 47 countries. Stern decided that changes in the consequences of different studies on the substitution of energy and capital inputs are an outcome of the differences in statistics set applied in different research (i.e., time series, cross-sectional, pooled data, etc.), methods applied in different studies (i.e., national, regional, and sectorial), data sample, and economic situation of the country on which research is done. Similarly, Smyth and Narayan [
41] claimed that Stern’s work was before 1990 and again proved the mixed results.
Thus, due to huge pressure on countries to bind their energy selections and make a conversion towards renewable energy sources, it has become compulsory, particularly when only several studies are available, to analyze the impact of energy alternatives in lessening energy poverty, reducing CO2Es, and encouraging EG. Additionally, the provided mixed results in the past studies draw more profound visions from more robust techniques. These attempts would give value in concluding the causation between EC and EG and suggest openings for coming research and framework.
Finally, the literature based on the US, Europe, Africa, China, Pakistan, and other mixed countries found an exact and mixed relationship that proves that countries rely on EC. Remarkably, very little research on all energy factors, their substitution, and technical progress have been conducted in Pakistan, notwithstanding the common consensus that Pakistan needs to control huge fossil fuels and imported oil, coal, gas, mitigate CO
2Es, and switch towards cleaner fuels. As per the author’s understanding, only two published research for Pakistan are found that analyzed the potential for energy (i.e., fossil fuels and gas) and non-energy factors (i.e., capital and labor) [
16,
42]. Both studies ignore the output elasticity and substitutability among electricity, petroleum, and gas, which is very important to debate. Therefore, the current research contributes to this literature by seeing other factors as well as the country’s energy and environmental influence over the future. Consequently, substitutions between different inputs used in the current research have never been applied. Additionally, the association between labor, capital, electricity, gas, petroleum, and the mitigation potential of substitution, among all the inputs, has never been investigated in Pakistan. Thus, existing research gives novel insights into the literature.
3. The Data
Annual data on electricity consumption, petroleum, and natural gas are utilized to indicate energy inputs. Aggregate output, gross capital formation, and labor designate ‘3′ other non-energy inputs used in the present research. The sample period of all factors starts from 1986–2019 from the country’s available sources. All the influences used in this research are set appropriately to verify the robustness of the results. For example, to satisfy the production model’s conditions, overall, the time series in the current research has been standardized by natural logarithm (ln). For this, we divided all the time series using their sample means [
42]. All the data information is as follows: (1) data related to energy, including electricity, petroleum, and natural gas is collected from Pakistan Energy Yearbook [
8]. (2) CO
2Es statistics are composed by the World Bank [
7]. (3) Data based on labor, capital, and output are gathered from the World Bank [
7] and Pakistan Economic Survey [
10]. The capital stock information is derived from the statistics of the gross capital formation using the following relationship.
where
Kt is capital stock,
Kt−1 is the capital stock of the last year,
It is the current capital investment, and
δt is the depreciation rate of capital. Seeing Pakistan’s investment characteristics and literature, a 5% depreciation rate (A 5% capital depreciation rate is estimated by taking the average value of Pakistan’s capital depreciation in 2016. The state bank of Pakistan considered the depreciation rate by 6% [
43], and the Pakistan Economic Survey [
10] examined this rate as 5% for Pakistan, which has been considered in Pakistan literature, for instance, Lin and Ahmad [
42]; Lin and Raza [
44]. Moreover, a similar rate is in the practice of some other emerging countries, for instance, Wesseh and Lin [
12] for Egypt and Lin and Atsagli [
15] for Nigeria) is considered. The equation used to measure the capital stock is provided in Equation (2).
where
K0 and
I0 are the initial capital stock and capital investments. ‘
g’ is the average growth rate of capital investment from 1986–2019.
6. Conclusions and Policy Recommendations
This research tried to examine the inter-factor and inter-fuel substitution between capital, labor, electricity, natural gas, and petroleum in Pakistan using the log-linear translog production function method. In order to reduce the multicollinearity issue in the data, ridge regression was employed to handle this problem. This technique was used to an annual data of each factor from 1986–2019. The study’s outcomes are employed to measure the substitution possibilities of numerous energy resources and compute the CO2Es’ mitigation potential coming from the substitution among the resources. This model does not merely state the elasticity and substitutability, but also provides the interaction among pairs of factors and the level of technical progress among them. Findings based on the model are provided below.
- (1)
All the output elasticities are showing positive and rising returns to scale. The output elasticities of capital (1.13–1.43), labor (1.14–1.54), electricity (0.90–1.31), natural gas (1.03–1.43), and petroleum (0.74–1.05) are all rising over 1986–2019. The output elasticity of labor () is the only factor with the highest influence, followed by capital, natural gas, electricity, and petroleum. The significant growth presents that country’s economy is progressively rising, and the proportion of technology is gently rising. Overall, the optimistic and growing trend of all inputs is a sign of enhancing the economy in the country.
- (2)
As per the model’s substitution elasticity estimation, all the pair of energy and non-energy factors are estimated. The outcomes propose high substitutability between capital-petroleum, capital-electricity, labor-electricity, capital-natural gas, and natural gas-electricity, as well as petroleum-natural gas. This substitution clears that by raising the capital and energy production capacities; Pakistan has the potential to raise its energy security, economy, and environmental sustainability. The clean energy resources and production-controlled policies, including renewable energy vision-2025, vision-2035, CPEC, and INDC can lessen fuel import and significantly impact the economy. Moreover, the huge reserves of Pakistan’s coal and gas (28th and 29th in the world) are evidence of greater productivity and labor efficiency. This will benefit energy security, enhance the living standard, reduce costs, and increase employment. Moreover, the substitutability between capital and energy proposes that there is a growth in energy and technology, which will further lessen the subsidies for enhancing capital and labor. This will encourage investors to invest in lower energy-utilizing appliances, conserving energy, and supporting capital growth. Additionally, labor-electricity substitutability proved that the skills of labor and knowledge would grow energy conservation. Consequently, the outcomes of capital, electricity, labor, and natural gas are evident and there are further motivations for capital and labor in Pakistan.
- (3)
Technical progress (
) is mainly input-driven and looks quite slow-changing between 3% and 7%. This presents that
between inputs factors (see
Figure 4) could become efficient contributors to the economic development of Pakistan. Thus, from the future viewpoint, current results provide an optimal trend in
, which is also consistent with the studies of Pakistan and China. Therefore, enhancing the relative differences in
of a particular input may control each factor.
- (4)
Conclusively, there seem to be significant CO2E mitigation advantages of inter-fuel substitution in Pakistan in the range of 7.5 and 10.43 Mt under scenario 1 and 7.0 and 10.9 Mt under the 10% investment scenario 2. The results further present that employing huge domestic energy resources could benefit living standards and balance the economy. Thus, based on the results, a few important policies for Pakistan are as follows.
First, energy-saving policies on various kinds of fuel would affect the higher use of kinds of fuel (i.e., petroleum to renewable or natural gas), and this will have no negative impact on the level of economic progress. This is why: Pakistan has abundant domestic energy reserves, for example, 3000–3300 sunshine hours in a year, 28th and 29th world’s largest coal and natural mines. As per Visions 2025–2035, Pakistan has dedicated China to enhancing energy using domestic resources, such as coal, solar, wind, bio, and gas. This is because Pakistan comes in the top 25 countries to enhance economic growth, which is increasing its energy accessibility from 60–90% to its population and mitigating pollution by 2025. Simply, policy-makers in Pakistan have the leverage of imposing taxes and a small share of fossils to the huge fuel consumers without a negative impact on the economy.
Second, the commercial and industrial size (based on fossil fuels) should be made smaller. Smaller industries should be brought into the market (based on modern technology) to raise production capacity with lower energy consumption.
Finally, slower TP and biased nature of technical variation suggest that Pakistan has vast productivity for lessening CO2Es by improving energy proficiency via novelty in different energy technologies, particularly gas, electricity, and petroleum. Overall, this study, based on the production function, provides energy substitution and the TP in enhancing the economic situation of Pakistan. Furthermore, the model has provided vast ecological advantages through substitution possibilities and suggested maximum mitigation potential for the future if technical advancements are implemented using different energy-related techniques.