The Implications of Industrial Development for Diversification of Fuels

The central role of energy in economic growth and development is substantiated by both theory and data. Much of the analysis of energy in economics has focused on the study of the aggregate output. Here, we deviate from this approach and study the role of fuel diversification in industrial development. We build the energy space describing the space of energy technologies, which a country can use in the production of manufacturing goods. As countries grow, they diversify their industries, producing more diverse products over time. We show that the process is accompanied by diversification of fuels, which countries use in the manufacturing sector. In particular, countries move in the energy space by adopting novel fuels, while their movements can be linked to structural changes in the industry. Over time, countries build unique production capabilities, which drives divergence in fuel diversity between countries. Our results provide insight into the limits of fuel substitution in the manufacturing sector, as well as they carry important implications for the assessment of potential reductions in CO2 emissions in the future.