Abstract:
This study applies the translog production function to investigate technical change and energy
substitution possibilities among petroleum, coal and electricity over the period 1980-2012.
Ridge regression technique is introduced to correct for multicollinearity in the data. The study
documents several findings: first, electricity and coal are found to be the major drivers of South
African output and also have a faster technological progress over petroleum. Second, all energy
inputs were found to be substitutes; therefore removing all price ceilings and subsidies on
petroleum will decrease the demand for petroleum in effect protecting South African economy
from external petroleum price shocks while reducing CO2 emissions. This will also increase the
demand for electricity from renewable sources; however the success of this substitution will
depend on policies geared towards large scale electricity production to meet demand. Third and
finally, this study points to evidence that, even though coal dominates as the main energy source
of South Africa, enhancement in research and development of renewable energy technologies
could present opportunities for electricity as a potential replacer of coal; and as such,
accelerating the CO2 mitigation effort of the South African government.
