Delving into Liberia's energy economy: Technical change, inter-factor and inter-fuel substitution

Abstract

The industrial energy mix of Liberia is dominated by petroleum products. This has generated serious environmental problems, contributing immensely to CO2 emissions and other pollutants in the country. This study has attempted to investigate the potential for inter-factor and inter-fuel substitution between capital, labor, petroleum and electricity in Liberia by employing a translog production and cost function approach. Ridge regression procedure has been adopted to estimate the parameters of the function due to multicollinearity in the data. Estimation results show that all inputs are substitutes. These suggest that price-based policies, coupled with capital subsidy programs can be adopted to redirect technology use towards cleaner energy sources like electricity; hence, retaining the ability to fuel the economy, while also mitigating greenhouse gas (GHG) emissions. Substitution between energy and labor and energy and capital implies that removal of price ceilings on energy in Liberia would tend to reduce energy use and increase capital and labor intensiveness. Notwithstanding, the study seems to show no evidence of convergence in relative technological progress of the four inputs implying that petroleum will continue to play a dominant role in the energy consumption mix of Liberian industry while labor investment will continue to outweigh capital inputs. Finally, the findings of this study provide general insights and underscore the importance of policies that focus on installed capacity of renewable electricity, energy intensity targets as well as merger of enterprises.