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Abstract
Meta-analyses of interfuel and capital-energy elasticities of substitution show that
elasticity estimates are dependent on the type of data – time series, panel, or crosssection
– and the estimators used. Econometric theory suggests that the between
estimator might generate the best estimates of long-run elasticities but no existing
estimates of elasticities of substitution have used it. Alternatively, Chirinko et al. argued in
favor of estimating long-run elasticities of substitution using a long-run difference
estimator. We provide estimates of China’s interfuel and interfactor elasticities of
substitution using the between and long-run difference estimators. To address potential
omitted variables bias, we add province level inefficiency and national technological
change terms to our regression model. The results show that demand for coal and
electricity in China is very inelastic, while demand for diesel and gasoline is elastic. With
the exception of gasoline and diesel, there are limited substitution possibilities among the
fuels. Substitution possibilities are greater between energy and labor than between
energy and capital. The results are quite different to some previous studies for China but
coincide well with the patterns found in meta-analyses for long-run estimates of
elasticities of substitution.