Evaluating the economic impacts and feasibility of China's energy cap: Based on an Analytic General Equilibrium Model

Abstract

China has introduced the energy cap policy to slow down its rapid growth in energy consumption, release the increasing pressure on its energy security and control greenhouse gas emissions. Based on an Analytic General Equilibrium Model (AGEM), this study simulates the impacts of Gradually Strengthened Energy Cap (GSEC) on China's production sectors, households and price system. The results show that, firstly, GSEC can lead to “contractionary effect” and “crowding-out effect” in the fossil fuel production sector, which transfers part of labor and energy inputs from fossil fuel production sector to non-fossil-fuel production sector. Secondly, if the growth rates of total capital and labor inputs in the whole economy can be maintained above certain levels, the non-fossil-fuel production sector will keep growing under the GSEC. Thirdly, energy cap policy will not reduce residential consumption. Fourthly, the prices of labor, energy and intermediate inputs will rapidly grow along with the GSEC. Fifthly, policymakers should improve the investment- and employment-related policies to reduce the constraint of energy cap on China's economy. In conclusion, collaborated with investment and employment policies, energy cap policy will not hinder the economic development or harm the consumption in residential sector.