Korean Energy Economic Review ISSN:1599-7057(Print) 에너지경제연구

The more substitutable energy is with capital, the easier it is to achieve the goal of sustainable development in highly energy intensive Korean industrial sector. This paper estimates a restricted cost function, which is derived given the optimal level of capital stock, and measures elasticities of substitution between fossil fuels and capital in the Korean thermal power generation. Empirical results show that capital is strongly substitutable with oil. The effect on the demand for oil of price subsidy for capital is simulated with the estimated price elasticities of demand. The use of oil would be reduced by more than the extent to which the use of capital would be increased, suggesting that a subsidy for investment on improving boiler fuel-efficiency would be likely to be effective in reducing some degree of CO2 emissions.