Abstract
Energy intensive industries (EIIs) in China are predominantly reliant on fossil fuels. Consequently, such high fossil fuel dependency has amplified carbon emission levels and blocked the low-carbon transition. It is inappropriate to discuss the solution of the dependency before investigating fossil-fuel price distortion and its impact on the industrial energy consumption. Therefore, this paper built a dynamic trans-log cost function model based on provincial panel data of China’s Ells between 2004 and 2016, to investigate inter-fuel substitution effects caused by own price elasticities and cross price elasticities, and analyzed the impact of fossil-fuel price distortions on low-carbon transition. The level of price distortions in coal, gasoline and diesel was evaluated, based on which the CO2 mitigation potentials in China’s EIIs were estimated. Results show that: 1) in each EII sector, the own price elasticities of all fuels were negative while the cross price elasticities among coal, oil and electricity were positive, suggesting substitution effect exists; 2) the average level of price distortions in coal, gasoline and diesel is 7.48, 11.1 and 32.19%, respectively, which means the prices of coal tend to be more market- oriented than the other two fuels; 3) removing coal price distortions can potentially reduce CO2 emissions in China’s EIIs by 905.78 million tons, while the effects of removing oil price distortions were uncertain, unless the substitution of coal for oil was restrained. Therefore, there is still much room for improvement in China’s fossil-fuel market reform. Possible policies are required to improve the production in EIIs and the low-carbon transition by adopting cleaner energy resources to substitute fossil-fuels.
Highlights
Energy Intensive Industries (EIIs) in China have maintained high-speed growth for over 3 decades since China’s reform and opening-up
This paper focuses on the rest four industries and main contributions include three aspects; 1) The degree of fossil-fuel price distortions is measured; 2) A dynamic economic model is built to study the relationship between energy inputs and the output and analyze fuel substitution effects in China’s EIIs; 3) The impact of fossil-fuel price distortions on carbon emissions and the low-carbon transition is further evaluated
Based on the abovementioned model results on the level of price distortions and price elasticities for fossil-fuels, we further look into carbon mitigation potential by removing fossilfuel price distortions
Summary
Energy Intensive Industries (EIIs) in China have maintained high-speed growth for over 3 decades since China’s reform and opening-up. In 2016, the total industrial value of the EIIs reaches 9,849 billion yuan, 42 times of the level in 1985, which represents one third of the total industrial value of all sectors. Energy consumption from the EIIs has increased almost 9 times from 222 Mtce in 1985–2158 Mtce in 2016, accounting for 70.0% of energy consumption in all sectors (Figure 1). From the perspective of energy input structure, coal-related fossil-fuels are 71.7% of total energy sources, followed by electricity and oil-related fossil-fuels (Figure 2). According to Wang et al (2019a), CO2 emitted by China’s EIIs takes up 79.7% of total emissions
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