Ž .
Energy Economics 22 2000 569]586
The demand for energy in Greek manufacturing
Dimitris K. Christopoulos
U Department of Economics and Regional De
¨
elopment, Panteion Uni
¨
ersity, Syngrou A
¨
e. 136, 17671 Athens, Greece
Abstract
This paper considers an econometric approach to measuring substitutability of three types of energy, i.e. crude oil, electricity and diesel with capital and labour in the manufacturing
sector of Greek industry during the period 1970]1990. A general dynamic framework is developed under the assumption that the structure of the production process is weakly
separable in capital, labour and energy aggregates. The translog total cost function is used to represent the production technology. The main advantages of the proposed dynamic
structure are that it is both disaggregated in energy components and consistent with the neo-classical theory of production. Q 2000 Elsevier Science B.V. All rights reserved.
JEL classifications: C51; D24; Q41
Keywords: Energy; Separability; Dynamic structure
1. Introduction
Greek industry has undergone considerable restructuring during the last two decades, bringing great changes in the inputs used, especially of energy. On the
one hand, the cost share of capital dropped in every two-digit industry under Ž
. consideration Palaskas et al., 1999 . On the other hand, the problem of labour
Ž .
scarcity that emerged in the late 1960s and early 1970s see Lianos, 1975 has been
U
Fax: q30-1-9229-315. Ž
. E-mail address:
Christodpanteion.gr D.K. Christopoulos . 0140-9883r99r - see front matter Q 2000 Elsevier Science B.V. All rights reserved.
Ž .
PII: S 0 1 4 0 - 9 8 8 3 9 9 0 0 0 4 1 - 9
D.K. Christopoulos r Energy Economics 22 2000 569]586 570
Ž .
eliminated see Christopoulos, 1995 . The rate of unemployment in 1972 was 1.8 and the emigration rate was still quite high. At the same time, energy emerged as
an important input in the production process of Greek manufacturing. The share of the three main sources of energy, crude oil, diesel and electricity, increased
significantly during the last two decades, as a percentage of the total cost in the
Ž .
sector Palaskas et al., 1999 . Given these changes in the Greek industrial sector in recent years a number of
Ž authors Samouilidis and Mitropoulos, 1982; Vlachou and Samoulidis, 1986; Do-
natos and Mergos, 1989; Kintis and Panas, 1989; Caloghirou et al., 1997; Palaskas .
et al., 1999 have focused attention on the degree of substitution among energy Ž
. sources and primary inputs of production capital and labour . The question of the
degree of energy substitutability is of great importance in predicting economic disruptions arising from energy shortages and it has important implications for
public policy. For example, higher energy prices induce cost-minimising firms to substitute toward capital and labour, and higher electricity prices induce firms to
substitute towards some combination of capital, labour and alternative energy types. This will have important industrial effects and it will affect capital utilisation,
employment, etc. In addition, energy substitutability can assist in addressing important issues, including the feasibility of various energy demand profiles, the
evaluation of alternative environmental policies, and the impact of carbon or energy-use taxes.
All previous empirical studies of energy substitution in Greek manufacturing suggest that energy and labour, and energy and capital are substitutes, with the
Ž .
exception of Kintis and Panas 1989 who found that energy and capital are complements. However, these studies have some shortcomings. All approaches are
static and hold only in equilibrium. More specifically, none of the previous studies takes into account the static misspecification errors that arise when an instanta-
neous adjustment process is not appropriate. The static versions of the models neglect the dynamics of adjustment, which results in inadequate knowledge of the
adjustment path and the long-run structure. Knowledge of the adjustment process is important in addressing policy issues arising from alternative tax structures or
exogenous energy price shocks. Therefore, under the static specification the estimators will not provide reliable computed elasticity for policy design and policy
making. Thus, by assuming a static production model the applied researcher may be led to misguided conclusions.
Given the drawbacks of the static models in terms of estimation, hypothesis Ž
. testing and analysis, a different approach is adopted here. Following Fuss 1977
Ž .
and Pindyck 1979 we assume that the structure of production is weakly separable in capital, labour and energy aggregates. With this restriction it is possible to
estimate a production structure with producers choosing cost-minimising factor inputs in two stages. First, an energy sub-model is derived from the separability
restrictions, and is estimated optimising the mix of crude oil, diesel and electricity and generating an aggregate energy price index. Second, the model optimising the
cost of aggregate inputs and explaining the demand for those inputs is estimated.
D.K. Christopoulos r Energy Economics 22 2000 569]586 571
To incorporate dynamic adjustments, a general dynamic demand framework is constructed using the translog cost-function. Thus, a dynamic structure of the
demand for energy in Greek manufacturing is obtained, which is both disaggre- gated in energy components, consistent with the neo-classical theory of production,
and flexible enough to accommodate a rich pattern of dynamic behaviour.
The paper is organised as follows. In Section 2 the theoretical model is pre- sented. The dynamic formulation of the adopted model is contained and analysed
