The study examined the impact of economic growth, economic growth squared, import, aid, industrialization and urbanization on energy intensity in Ethiopia using time series data from 1974 to 2014.
Clemente, Montanes and Reyes (1998) and Zivot and Andrews (1992) unit root tests which take structural breaks into account in the series were applied in order to produce a result that is not biased towards non-rejection. We applied the ARDL bounds test approach to cointegration and FMOLS methods in order to test the existence of cointegration among the variables under consideration. TY approach to Granger causality was also applied to examine the direction of causal relationship among the variables. To explore the dynamic relationship and timing of energy intensity and its determinants, generalized impulse response and generalized forecast error decomposition were employed.Analysis based on ARDL and FMOLS approach to cointegration shows the existence of long-run equilibrium relationship among the variables which implies that the variables exhibit common deterministic trend. The effect of economic growth on energy intensity is positive and statistically significant. This means that economic growth which a result of increased economic activities leads to higher energy intensity because it requires more energy consumption.
On the other hand, economic growth squared has negative and statistically significant effect on energy intensity implying that economic growth at higher stage of development helps reduce energy intensity. The implication is that economic growth has a threshold effect on energy intensity change.The result also reveals that urbanization has positive and statistically significant impact on energy intensity. This happens due to the fact that urbanization encourages economic activities which are energy intensive. Moreover, urbanization increases energy intensity by increasing amount of motorized traffic into and out of cities, by increasing demand for infrastructure, by changing private consumption patterns and by spurring industrialization.
The result further shows that import has negative and statistically significant impact on energy intensity. Import reduces energy intensity by increasing productivity gains through firms’ competition. It increases productivity, it intensifies economic integration, it creates productivity spillovers (technology transfer effect) and it intensifies economic integration of the economy into the world economies which in turn facilitates the transfer of energy saving technologies.
As policy implication, Ethiopian energy policy should focus on energy conserving strategies. More specifically, economic growth of Ethiopia which has been taking place at an alarming rate requires higher energy consumption. Currently, Ethiopia’s energy consumption is predominantly dominated by biomass (traditional) energy sources which are not efficient as compared to the modern one. Therefore, policymakers should device policies through which the country’s energy intensity can be reduced. More specifically, the country’s energy source should be shifted from traditional energy sources to the modern ones. Energy conservation strategies should be developed; energy efficiency should be increased; and utilization of cleaner energy should be increased.
In addition, the government of Ethiopia should implement sound environmental policies which encourages the import of cleaner and energy saving (efficient) technologies for reducing energy intensity. As far as urbanization is concerned, the government should pay due attention to public infrastructure at phase of design, construction and operation to be more energy saving and efficient. Moreover, transportation technologies should be energy efficient and the government should pay due attention to improve public awareness of energy saving so as to change the urban residents’ consumption pattern and lifestyle.Future research should focus on the impact of trade structure, foreign direct investment, energy price, structural change and economic integration on energy intensity. Moreover, cointegration tests that consider several structural breaks should be to advance the knowledge relating to factors affecting energy intensity in the case of Ethiopia.
