Energy Prices and Investment in Energy Efficiency: Evidence from Chinese Industry 1997-2004

Abstract

This paper develops and implements a methodology for assessing the role of energy prices in reducing energy intensity in Chinese industry. For the short run, the paper estimates contemporaneous energy price elasticities; for the long run, the paper examines the impact of energy prices on energy-saving investment. A central approach of the paper is to identify those subsets of China’s industrial firms that are the largest energy consumers and likely to be the principal potential sources of energy conservation. Analyzing a unique panel data set which reports firm-level energy consumption and energy prices, the paper shows three stylized facts: (i) real energy prices, which are regulated by government, are typically lowest for state-owned enterprises (SOEs), followed by domestic non-SOEs, and highest for foreign-funded firms; (ii) energy prices tend to be lowest for the most energy-intensive industries; and (iii) in the short run, SOEs tend to be somewhat less responsiveness than their domestic non-SOE counterparts and foreign-funded firms. However, over the long-run, by investing in new energy-efficient capital, SOEs tend to be more responsive to rising energy prices; the same price-investment channels are less robust for non-SOEs or foreign-funded firms. The key policy implication is that to achieve substantial energy conservation across the full range of enterprises, the Chinese Government needs to be cognizant of the ways in which investment behavior and incentives interact with energy prices in for the purpose of achieving China’s industrial energy objectives.