Directed Technical Change, Capital Intensity Increase and Energy Transition: Evidence from China

Abstract

This paper analyses the causes of China’s energy transition since the economic reform policy launched in 1978. We propose a conceptual framework to determine if increasing capital intensity (capital deepening) of the Chinese economy is driving a shift in the energy mix towards modern energy sources due to technical change biases to capital. The empirical investigation is based on national level time series data from 1978 to 2015. The results of a Granger causality test show that increasing capital intensity causes transition to modern energy in the long run, but not vice versa. The impulse-response analysis, based on Johansen cointegration modelling and vector error-correction model (VECM), verifies that capital intensity determines energy transition in the long run and the adjustment period to the exogenous shock from capital deepening is around five years. This is in line with China’s National Five-year Plans, which often introduce major shifts in energy and industrial policy. We conclude that China’s energy transition is driven by capital deepening and the biased technical change towards capital-intensive modern energy in the long run. The rate of change can be spurred on by exogenous investment shocks partly as a result of policy initiatives as part of the China’s Five-year Plans.