This study uses time series econometric methods to estimate a translog cost function for different energy types (coal, gas, electricity and oil) in Nigeria. This is used to explore whether there are substitution possibilities among the different energy types and among the factors of production. The study also looks at the impact of technical change on energy mix in Nigeria. The purpose of the analysis is to aid in formulating energy policies and policies for carbon dioxide mitigation policy for Nigeria.
The results indicate that the demands for fuels vary according to the type of industry with respect to their own prices. For example, demand is elastic in all the industries except fabricated metal (oil), chemicals (electricity, food and beverages (electricity), textile (coal and gas), wood (coal and gas), other manufacturing industries (oil and coal) and gas in the manufacturing industry as a whole. In terms of technical change, coal, oil and electricity have energy using bias in the industrial sector. This implies that production technology set up increases the use of inputs at each point in time. On the other hand, gas has input saving bias, which indicates that technological changes in the industrial sector led to relative decrease in the use of gas over time due to improved input utilization efficiency. Higher efficiency is because of a change in the production technique towards more energy saving production technique in some industries.
In terms of aggregate inputs, there is capital-using bias in all the nine industries and four industries (non-metal, basic metal food and beverages and other) show labour using while the remaining industries are labour saving. However, non-metal, basic metal, fabricated metal, chemicals, textile and other manufacturing sectors show energy using biases. This implies that with constant relative fuel prices, the value shares of energy increases over time.
The study shows that there is energy substitution possibility in the industrial sector of the Nigerian economy. It can thus be inferred from the study that there is a potential for price incentive mechanisms to induce fuel switch from dominant petroleum to other alternative energy resources like gas, electricity and coal. The elasticities estimated can be used to determine the amount of tax needed to meet the reduction in oil consumption and hence meet the energy demand management objective. However, the low responses in some industries could be an indication that mere price based policies to encourage energy conservation might not be optimal in these industries. An alternative policy is a change of technology specific policies directed towards investment into improvement in technical efficiency and acquisition of specific improved technologies. These could provide capital accumulation and additional incentives towards the reduction in petroleum products (oil) consumption and be able to achieve the objective of energy conservation, thereby achieving the aim of carbon mitigation.
© University of Pretoria 2006
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