Capital-energy substitution: Evidence from a panel of Irish manufacturing firms

We use a translog cost function to model production in the Irish manufacturing sector over the period from 1991 to 2009. We estimate both own- and cross-price elasticities and Morishima elasticities of substitution between capital, labour, materials and energy. We find that capital and energy are substitutes in the production process. Across all firms we find that a 1% rise in the price of energy is associated with an increase of 0.04% in the demand for capital. The Morishima elasticities, which reflect the technological substitution potential, indicate that a 1% increase in the price of energy causes the capital/energy input ratio to increase by 1.5%. The demand for capital in energy-intensive firms is more responsive to increases in energy prices, while it is less responsive in foreign-owned firms. We also observe a sharp decline in firms' responsiveness in the first half of the sample period.