Factor and fuel substitution in China's iron & steel industry: Evidence and policy implications

Abstract

Climate change which is induced from energy consumption and CO2 emissions has got people's attention; hence, many strategies and ways are being adopted to mitigate CO2 emissions. Energy substitution is crucial to the promotion of energy conservation and CO2 emissions reduction. The purpose of this paper is to estimate both inter-factor and inter-fuel substitution in China's iron & steel industry during the period 1985–2011. Empirical results show several conclusions for China's iron & steel industry: (1) own-price elasticity of energy is negative, so increase in energy price will reduce energy input; (2) energy and capital, and energy and labor are substitutes, and the substitution in energy/capital is relatively stronger; (3) though coal, oil and electricity are also substitutes, the substitution effect is not so obvious because of pricing distortions in China. The driving forces of energy efficiency change are further discussed and the results show that technology progress is the key factor determining energy intensity. Therefore, market-oriented reforms in terms of energy prices, improvement in energy substitution (including inter-factor and inter-fuel substation) and promotion of energy saving technologies are important means for ensuring future energy conservation and CO2 emissions reduction practices in China's iron & steel sector.