Energy consumption, inter-fuel substitution and economic growth in Nigeria

Nigeria's energy mix has been dominated by petroleum with a year on year increase due to huge petroleum subsidy by the government. This study adopts the translog production function to investigate the potential for inter-factor and inter-fuel substitution between capital, labor, petroleum and electricity. Ridge regression has been adopted to estimate the model's parameters due to evidence of multicollinearity in the data. The results show that all input pairs are substitutes; and as such, 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. In addition, the study shows that a 5% and 10% increase of investment in petroleum reduction technologies for the period 2010, 2011 and 2012 would reduce CO2 emissions by 1.13518, 1.8554, 1.2722 and 2.27119, 2.37109, 2.49444 million metric tons respectively. Furthermore, the study points to evidence for convergence in relative technical progress among the various input pairs with electricity registering the fastest rate. These imply that petroleum would gradually lose its dominance in Nigerian energy mix. •We investigate factor and energy substitution in Nigeria.•All inputs employed were found to be substitutes.•Electricity was found have a fastest technical progress.•Switching to electricity use will decrease CO2 emission.