Energy and Non-Energy Inputs Substitution Possibilities in Nigeria's Manufacturing Sector: A Translog Cost Function Approach

Abstract

This study investigates the substitution possibilities between energy and non-energy inputs in Nigeria's manufacturing sector from 1981 to 2023. Utilizing a transcendental logarithmic (translog) cost function estimated via iterated Seemingly Unrelated Regression (iSUR), we compute both Allen and Morishima elasticities of substitution to analyze factor relationships. Results reveal significant substitution possibilities: capital and energy are substitutes with a Morishima elasticity (MES) averaging 3.66, while energy and labor show substitutability with an MES of 2.32. Conversely, capital and labor emerge as complements (MES = -1.94), suggesting that technological upgrading in this context requires simultaneous investments in human capital. These findings have crucial implications for energy and industrial policy, particularly in the context of energy price reforms and carbon taxation. We demonstrate that the Morishima elasticity provides more policy-relevant information than conventional Allen elasticities by capturing changes in input ratios rather than partial adjustments.