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Report No. 4/95

Energy and Non-Energy Input Substitution in Agriculture:  A Case Study of the Prairie Provinces.  By Tulay Yildirim and Varghese Manaloor. June 1995, Saskatoon, Saskatchewan.

Interest in agricultural energy use in the late 1970's occurred mainly because of rising energy prices.  During the 1990's environmental concerns were added on to the debate. Increased crop production in Canada, as in the rest of the developed world, has been achieved through technical change, that is, through the expanded use of increasingly sophisticated inputs, such as farm machinery, fertilizers, herbicides, and irrigation, and through the clearing of new lands, which all involved the use of commercial energy.  And the substitution of capital for labour has also increased the reliance of agriculture on non-renewable energy resources.

Canada has made a commitment to the international community to stabilize CO2 emissions at 1990 levels.  The Climate Change Task Group recommended that voluntary measures should be given priority, yet acknowledged that the option for stabilization may have to involve the use of economic instruments, such as energy taxes, carbon taxes, and the removal or redirection of subsidies.  These measures are proposed as tools to change the current incentive structure and, hence, the energy-use patterns.

The removal of the current provincial tax rebates to farm fuel consumption, or the introduction of a new energy or carbon tax are expected to affect both the cost of production, and farm energy use.  These impacts largely depend upon the possibility of substitution between energy and other farm inputs, which in turn, is determined by the current production technology.  In order to assess the potential impacts of such policies, the elasticity of substitution between input pairs, and the price elasticities of demand for inputs were estimated in this study.

The estimated elasticities indicate that all inputs are price inelastic, with the exception of indirect energy. Direct energy is the least responsive to own-price changes.  The implication of this is that the removal of provincial tax rebates on farm fuel use or the introduction of a new energy tax would not reduce energy use in agriculture significantly.  Therefore, these policy changes are not expected to affect the sectors' contribution to CO2 emissions in the Prairies significantly.  An interesting result of this analysis is the high elasticity of substitution between direct and indirect energy inputs, which shows that any measure that may cause the direct/indirect energy price ratio to increase would result in an increase in indirect energy use vis-à-vis direct energy use.  Thus, it is possible to reduce direct energy use in agriculture by introducing economic instruments.  This, however, would result in increased use of chemicals and fertilizers, that is, indirect energy, and would negate the impacts of policy changes on gross CO2 emissions partially.

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