Sectoral Interfuel Substitution in Canada: An Application of NQ Flexible Functional Forms

This paper focuses on the aggregate demand for electricity, natural gas, and light fuel oil in Canada as a whole and six of its provinces - Quebec, Ontario, Manitoba, Saskatchewan, Alberta, and British Columbia - in the residential, commercial, and industrial sectors. We employ the locally flexible normalized quadratic (NQ) expenditure function (in the case of the residential sector) and the NQ cost function (in the case of the commercial and industrial sectors), treat the curvature property as a maintained hypothesis, and provide evidence consistent with neoclassical microeconomic theory. We find that the Morishima interfuel elasticities of substitution are in general positive and statistically significant. Our results indicate limited substitutability between electricity and natural gas, but strong substitutability between light fuel oil and each of electricity and natural gas in most cases.