21 676 DEVELOPMENT BRIEF Number 31 The World Bank March 1994 to a low of 3.3 in Colombia. One im- Scope for fuel substitution mediate implication of these rela- tively small shares is that, overall, Fiscal policies such as commodity taxes, subsidies, and manufacturing subsectors could ab- price reforms can complement direct pollution abatement sorb substantial fluctuations in fuel instruments and encourage fuel substitution prices without large changes in op- erating profits. But a handful of T o anyone who has visited determinants of air pollution, selec- subsectors (copper, cement, paper, Mexico City, Santiago, tive fuel taxes would be candidates petroleum, industrial chemicals, Beijing, or Bangkok, the for such-rather blunt-indirect and iron and steel) are much more problem of industrial pollution is instruments. dependent on energy than the aver- obvious. But despite increasing con- To learn more about this perspec- age numbers suggest. cern, effective strategies for emis- tive, Bank consultants Diana Moss Overall, 16 of the 28 Chilean in- sions control have yet to be and James Tybout used plant-level dustries (in 1979-85) and 16 of the designed and implemented. Here data from manufacturing industries 26 Colombian industries (in 1977- are some of the barriers to efficient in Chile and Colombia to address 88) showed at least some reduction abatement policies: two sets of issues.* over the sample period in energy i Public sector budget con- * What do recent experiences in use per unit of output. These straints (which inhibit public these countries suggest about the changes are caused in part by ca- spending on monitoring, enforce- latitude for energy conservation pacity utilization effects, but it may ment, and cleanup). and fuel substitution? Is producer be that longer-term shifts in the fuel - Uncertainty about abatement flexibility linked with the sector of mix occurred during the sample pe- costs and benefits (which compli- activity, capital vintage, or rates of riod. Moreover, that adjustment cates the evaluation of net social re- new capital formation? patterns are very country-specific turns to alternative policies). * When adjustments in energy for some industries (paper, rubber, * Distributive concerns (which use take place, are they accom- and ceramics) suggests that local make it difficult to impose signifi- plished through changes in factor economic conditions can play a po- cant adjustment burdens). proportions for individual produc- tentially large role in determining * The influence of private inter- ers, changes in the output shares of energy efficiency. est groups (which can lead to seri- producers within an industry, or Changes in the composition of en- ous loopholes and windfalls for changes in the relative production ergy sources are also substantial politically powerful agents). levels of different manufacturing within some industries. This is true Given these problems with spe- industries? What do these adjust- for apparel in Chile, wood products cific controls, researchers have re- ment patterns suggest about the ef- in Colombia, and for nonmetallic cently focused increased attention fect of energy policy on the mineral production in both coun- on indirect fiscal policies. The ad- structure of production? tries. In all these examples a shift is vantage of such policies is that they made toward less energy-intensive, can generate revenue, they are Sources of adjustment or cleaner, production. less subject to political manipula- To gain a general sense of the levels A look at energy intensities by tion, and they are relatively easy to of, and variability in, fuel intensi- subsector over time reveals that en- administer. Because energy inten- ties, the researchers present time ergy savings have been accom- sity and fuel choice are important trajectories of the share of energy plished in both countries without spending in total variable costs and scaling back the energy-intensive in gross output. Real fuel use as a industries. Such industries as in- TFor more details, see Diana L. Moss and James R. Tybout. percentage of real variable costs dustrial chemicals and glass have 'The Scope for Fuel Substitution in Manufacturing Indus- varies from a high of 5.7 to a low of apparently gained market share tries: A Case Study of Chile and Colombia,' World Bank Economic Review, vol. 8, no. 1, January 1994. 4.5 in Chile and from a high of 3.8 while there has been a secular trend toward increasing energy efficiency electricity was met through a secu- the observed overall reductions in within industries. Energy-intensive lar trend toward self-generation; energy intensity within plants. subsectors have saved the most, self-generation is not easily accom- Second, although in Chile the cost possibly because they reap a rela- plished without new equipment. of electricity rose less than the ag- tively high return from doing so. Second, new plants differed system- gregate energy price index, in Co- According to the researchers, atically in their energy use from lombia the cost of electricity rose changes in industrial energy use others of comparable size in the substantially more than the aggre- can be thought of as coming from same industries. In both Chile and gate energy price index. Thus, the one of three sources: changes in the Colombia new firms tended to rely intraplant adjustment away from interindustry mix of goods pro- more on electricity and much less electricity in Colombian manufac- duced, changes in the intraindustry on petroleum than incumbents did. turing was probably caused in part output shares of the producers, or This suggests that new technologies by a rapid increase in the price of changes in the energy intensity of were becoming embodied in the electricity; the adjustment toward individual producers. Decompos- manufacturing capital stock electricity in Chile was probably ing adjustment in the energy-inten- through new investment. due in part to a fall in the price of sive sectors, they found substantial electricity in relation to fossil fuel energy savings in many instances, Price trends prices. Relative price changes for most of it coming from within-plant Looking at temporal trends in other fuels also matched changes in adjustments (see the table). prices, several general observations fuel intensities with little lag. Overall, the high level of adjust- can be made. First, in Chile the cost ment within plants suggests ample of energy rose almost 30% more To sum up scope for fuel substitution without than output prices for manufactur- At the aggregate level, Chilean hampering competitiveness. ers during 1979-85. Similarly, in Co- manufacturers managed to mildly In Chile there is evidence that lombia the cost of energy rose 36% reduce the energy intensity of their new capital equipment has embod- in relation to the wholesale price in- production during 1979-85. Colom- ied technologies that use electricity. dex during 1977-88. These relative bian manufacturing was less en- First, much of the new demand for price changes may largely explain ergy-intensive on the whole, and its energy intensity decreased as well, Industry-specific decomposition of changes in energy though by a smaller amount than in intensity in Chile, 1979-85, and Colombia, 1977-88 Chile, during 1977-88. (expressed as change in percentage of output) Chilean manufacturers shifted Within-plant Output Total change i .n away from fossil fuels and toward Country and sector effect share effect energy intensity electricity. These adjustments were primarily within plants rather than Chile due to changes in the mix of manu- Paper 0.25 0.15 0.40 facturing goods produced. A differ- Industrial chemicals -3.05 0.11 -2.94 ent pattern emerges in Colombia, Ceramics 4.33 -0.18 4.16 e in plants m to Glass -5.48 -0.14 -5.62 where individual plants tended to Cement -0.83 0.20 -0.63 become less electricity-intensive, Iron and steel -3.12 3.37 0.25 but where changes in the output Nonferrous metals -0.44 0.55 0.11 mix offset this tendency to econo- All industries -0.47 0.20 -0.27 mize on electricity. Generally, Colombia intraindustry and intraplant reduc- Paper 0.25 -0.35 -0.10 tions in the use of fossil fuels and Industrial chemicals -2.26 -1.36 -3.62 energy tended to dominate changes Ceramics -4.03 -0.11 -4.15 in the manufacturing output mix. Glass -7.05 -0.42 -7.47 Thus, substantial energy savings Cement -0.13 -0.86 -0.99sempsilwthufocn Iron and steel -0.02 0.57 0.56 seem possible without forcing Nonferrous metals 0.60 -0.23 0.31 widespread shutdowns among All industries -0.39 0.21 -0.18 energy-intensive producers. 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