The Relationship Between Climate Factors, Hydropower Production and Economic Growth in Ethiopia: A Nonlinear and Asymmetric Approach

Ethiopia has enjoyed remarkable growth over the last decade, averaging an 11 percent increase in GDP every year between 2010 and 2017. One factor that threatens this growth is the country's reliance on dams for hydroelectric power production, as water levels are vulnerable to changes in precipitation and temperature. In this paper, we investigate the long- and short-run effects of precipitation and temperature on Ethiopia's hydroelectric power production. We assess the long- and short-run linkages between weather fluctuations and economic growth, before investigating whether the country's energy portfolio drives carbon dioxide emissions. Our empirical assessment involves examining potential asymmetric relationships between these variables, as positive and negative changes may lead to differential responses. We employ the non-linear autoregressive distributed lag model recently developed by Shin et al. (2014) to examine the data related to the first two objectives, and a vector error correction model to test causality between macroeconomic variables and emissions. Annual data between 1971 and 2015 from a variety of sources are used for the analysis. Results suggest the presence of an asymmetric association between the series. Long-run results show that a positive shock in temperature increases hydroelectric power production, and a positive shock to GDP has a negative and significant effect on hydroelectric power production. Short-run results reveal that within the same period, a surge in economic development may outweigh demand causing reduced electricity production from hydroelectric power sources. We also find that negative growth in GDP in the most recent preceding period is accompanied by negative hydroelectric power production in the present period, while positive growth in GDP in the most recent preceding period is accompanied by growth in electric power production. Surprisingly, precipitation has no effect on hydroelectric power production in Ethiopia, while temperature changes have asymmetric effects. Given that 88-percent of all power in Ethiopia is derived from hydroelectric plants which are susceptible to changes in weather and precipitation, continuous new sources of power will likely be necessarily to meet surges in demand. Policies that also ensure a stable climate and limit dramatic swings in population may decrease the likelihood of higher polluting alternatives being used to meet increased electricity demand.