Abstract
Pakistan is a highly energy-dependent country and this dependence further increased primarily due to industrialization that has led to economic growth in recent years. Due to the economy's increased energy demands, domestic hydropower resources were switched to more expensive and greenhouse gas emitting imported petroleum products, thus leaving Pakistan exposed to oil price shocks and environmental degradation. In this article, we use the trans-log production specification to estimate the substitution elasticity of labour, capital, and energy in order to design government policies which will ensure higher economic growth, environmental sustainability, and energy security. To address the issue of multicollinearity, ridge regression is employed to estimate the coefficients of the model. Empirical findings report that labour-energy and capital-energy are substitutes over the period 1980-2017; hence, adopting competitive pricing policies and removal of petroleum subsidies and price ceilings would redirect industries towards an increased use of electricity and increase capital and labor intensiveness. The empirical findings further suggest convergence among input pairs in terms of relative technological progress, with labour recording the highest rate. These results suggest that petroleum would gradually lose its dominance in Pakistan's energy mix.