Assessing Wood-Energy Pricing Policies in Urban Ouagadougou (Burkina Faso)

by Monkgogi Bonolo Otlhogile

Burkina Faso is a landlocked, energy-dependent country, which relies heavily on firewood as its primary household fuel. In an effort to mitigate deforestation, air pollution, and lung-related illnesses caused by wood burning, the Burkinabe government has attempted many energy interventions in the hopes of transitioning the country to cleaner fuels such as LPG and kerosene. Ouedraogo (2013) used an AIDS model to explain why wood-energy pricing and substitutions policies have failed in Burkina Faso. The author calculated fuel-related income, own- and cross-price elasticities for households in Ouagadougou to determine household’s dependency on wood energy in Burkina Faso. Ouedraogo found that there was a relative inelasticity for wood-energy demand compared to the fuel price and each household’s income. This confirmed that the growing population of Ouagadougou is dependent on wood-energy. In addition, the cross-price elasticities between wood-energy and other fuels showed that there was very little substitutability between wood-energy and other fuels. These two factors have led to the failure of wood-energy pricing policies in urban Ouagadougou. However, the author argues that the use of these elasticities could allow for the Burkinabe government to identify the most cost-effective policy. Ouedraogo identifies LPG as a possible substitute for wood-energy as it exhibits the greatest cross-price elasticity and urges the government to supplement wood-energy pricing policies with the promotion of LPG cooking equipment, as it is the greatest barrier to energy transition in Burkina Faso.

Ouedraogo used a dataset collected by an extensive survey on household expenditure in Ouagadougou during a consumer price indices project in the seven member countries of the West African Economic and Monetary Union (WAEMU). The surveys took place in 1996 when the dominant source of household cooking energy in Ouagadougou was wood-energy, which was used by 70.1% of the households. The author used an Almost Ideal demand system (AIDS) model to evaluate Ouagadougou households’ energy demand preferences by calculating price and income elasticities using assumptions from consumer theory. Consumer theory states that given a budget, consumers will always strive to purchase a bundle of products that will bring them the most ‘happiness’. Therefore, consumers will act accordingly if there are changes to their income and/or to the price of a good and its substitutes. The author choose to use the AIDS model as it can derive Hicksian demand functions and can be reduced to Engel curves which explain the relationship between the income of a household and the quantity of the good demanded and allows for commodities to be classified as inferior goods, necessities or luxuries. The author also used Frisch parameters to compute the own- and cross-price elasticities of fuel in Ouagadougou. Own- and cross-price elasticities explain the relationship between the price of a fuel and its substitutes and the quantity demanded. The author used the AIDS model to observe the changes in demand for firewood, charcoal, liquefied petroleum gas (LPG), and kerosene in urban Ouagadougou.

Ouedraogo found that for all cooking energies’ Engel curves decrease while households’ total expenditure increases, which suggests that cooking fuels are primary or necessity goods for all the households of Ouagadougou. Using the Engel curves, the authors found that for the households belonging to the first 20 percentile, the budget shares of firewood are between 3% to 10% of household total expenditure, from the 20–76th percentile, the budget shares ranged from 0.04% to 3% and beyond the 77th percentile, the budget shares of firewood became negative. Ouedraogo also found that a 1% increase in the households’ total expenditure resulted in an increased expenditure of 0.16% for firewood, 0.16% for kerosene, 0.43% for charcoal, and 0.78% for LPG. The decline in the budget shares of firewood and increased expenditure on other fuels suggest that households tended to shift towards cleaner fuels as the household’s income increased. Ouedraogo found that a 1% increase in own fuel prices corresponded to a decline in demand of 0.150% for kerosene, 0.206% for firewood, 0.447% for charcoal, and 0.754% for LPG. This suggested that cooking fuels’ demand is relatively inelastic compared to their own price and consumers continue to buy the fuel despite price changes because it is a necessity. The author also found very weak substitution effects between the fuels, which suggests that the price of one fuel did not affect the consumer demand of another. However, the strongest substitution effect was between LPG and wood-energy, which suggests that households were moving up and down the ‘energy ladder’ in response to prices of those two substitutable fuels.

Consumer theory and the energy ladder hypothesis state that a household’s energy consumption moves from traditional sources to modern sources as the income of the household increases. In 2007, the wood-energy use had dropped to 53.2% but remained the dominating cooking fuel for urban households despite numerous energy interventions. This proves that Burkina Faso is making its way up the energy ladder. However, the Burkinabe energy sector is heavily regulated and we would expect a greater shift away from wood-energy. The author argues that wood-energy policies will continue to be unsuccessful because the demand of wood-energy is relatively insensitive to its own price and the demand for cooking fuels is relatively inelastic. Ouedraogo believes that the high costs of LPG cooking supports are the greatest barrier to its use and will continue to prohibit the substitution of wood-energy for LPG. Ouedraogo suggests that using his calculations could help the Burkinabe make targeted substitution energy policies that could aid Burkina Faso in moving towards cleaner fuels.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s