Fossil Fuel Producing Economies Have Greater Potential for Interfuel Substitution∗

This study extends the literature on interfuel substitution by investi-gating the role of transactions costs and technological adjustment, focus-ing specifically on differences across countries with different potential for fossil fuel production. We find that fossil fuel producing economies have higher elasticities of interfuel substitution. Our simulations show that, compared to the baseline case of uniform elasticities, energy and climate policies result in a greater substitution among different sources of energy for countries with larger potential to produce fossil fuels. These results are important because they imply lower economic cost for policies aimed at climate abatement and more efficient utilization of energy resources in energy-intensive economies