Elasticity of factor substitution and driving factors of energy intensity in China’s industry

Abstract

Based on the translog cost function and factor substitution theory, the input and output data from China’s industrial sector and the three sub-sectors during the period 1984–2011 are firstly used to calculate substitution elasticity among capital, labor, energy, and intermediate input. And then from the perspective of factor substitution, the driving factors of energy intensity in China’s industry are explored. The main findings introduced in this paper are listed as follows: firstly, the production of China’s industrial sector is sensitive to changes of energy and labor prices; secondly, except the complementary relationships between energy and labor in the manufacturing industry, and between energy and intermediate input in electricity, gas, and water industry, substitution relationships exist among all other factors; thirdly, the budget constraint of energy consumption is the most effective impetus to the reduction of energy intensity in industrial sector, and factor substitution especially the substitution of capital and labor for energy has an important role in the reduction of energy intensity; fourthly, the rapid expansion of economic scale causes output effect to become the biggest factor of impeding the reduction of energy intensity; fifthly, technical progress has different effects on energy intensities in different industrial sub-sectors, but generally speaking, technical progress does not promote the reduction of energy intensity.