Possibilities of coal-gas substitution in East Asia: A comparison among China, Japan and South Korea

Natural gas is currently playing an increasingly significant role in low carbon development, as it provides a credible pathway to meet rising energy demand while emitting fewer greenhouse gases than from using other fossil fuels such as coal and oil. In this paper, a log linear trans-log production function model is established to investigate inter-fuel elasticity of substitution between coal, oil, natural gas and electricity in China, Japan and South Korea, respectively. In order to overcome the problem of multicollinearity, the ridge regression approach is therefore adopted to estimate the parameters of the function. Results show elasticity estimates of both coal-gas substitution and coal-electricity substitution to be positive over 1985-2012, suggesting that these two energy input pairs are substitutes at least to some extent. It also reveals that relatively higher substitution possibilities between coal and natural gas, and less opportunities to substitute coal with other fuels in China. In addition, the model results also suggest the elasticities of coal-gas substitution in China are much larger than that in Japan and South Korea, indicating there is higher possibilities of coal-gas substitution in China.