Abstract
This study examines the energy consumption-growth nexus in China based on prefectural city level data during the period from 2005 to 2012. Causal linkage between energy consumption and economic growth is investigated using instrumental variable method rather than Granger-causality approach. We exploit exogenous variations in the proximity to coal mines and global coal price, constructing an instrument (the interaction between preexisting coal production and the NEWC index) for coal consumption to identify its impact on economic growth. Our findings reveal that a 1percent increase in coal consumption corresponds to a 0.145 percentage points increase in real GDP. The estimation results indicate that energy serves as an important driving factor of China's economic growth, thus a prudent energy policy should be considered.
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