Inter-fuel substitution and dynamic adjustment in input demand: Implications for deforestation and carbon emission in Malawi

This study estimates inter-fuel substitution elasticities and long-run substitution elasticities between energy and non-energy aggregate inputs used by production sectors in Malawi. All fuels are Morishima substitutes but there are significant sectoral variations in the magnitude of the elasticities. This indicates that economic instruments should be considered for energy policy but such policies should take into account not only differences in technology used across sectors but also the systematic distribution of costs when the relative prices of fuels change. Estimates of long-run elasticities for aggregate input demands indicate that energycapital input ratios adjust faster than labor-capital input ratios. This suggests that investment policy should take into consideration tradeoffs between environmental gains and employment implicit in the production structure of the Malawian economy, as both capital and labor demands have dynamic interactions with energy in the long run, with potential significant cumulative impacts on the environment.