Energy substitution effect on transport sector of Pakistan based on trans-log production function

Transport sector, because of the growing industrialization and urbanization of Pakistan, is one of fastest growing sector in terms of output, energy consumption and CO2 emission. Its current performance and future outlook has the potential to leave behind problems related to the global issues of energy security and environmental sustainability. The extents to which energy and non-energy inputs are substitutable are the core issue in planning and designing of energy policies. For this purpose we establish a trans-log production function for Pakistan transport sector and the input factors capital, labor and energy are included. Output elasticities of each factor and the substitution elasticities between these factors have been estimated and analyzed for the sample period of 1980-2013. The results show higher output elasticity and that all pairs of factor inputs are substitutes because of the higher level of substitution elasticities. The results suggest that by allocating more capital in the transport sector, the relevant energy saving technology could be promoted, thereby realizing the substitution between capital and energy and reduction of CO2 emission as a result. It further suggest that by continuous upgrading of the capital, substitution between energy and labor can also be achieved and the transition of Pakistan transport sector from labor intensive to capital intensive can be realized.