Factor substitution and rebound effect in China’s food industry

Abstract

Energy efficiency improvement can reduce the energy consumption of an industry, and thus promote energy conservation. However, the reduction of effective energy prices caused by energy efficiency improvement will lower energy costs for enterprises, making them substitute energy for other input factors. Therefore, energy conservation brought about by efficiency improvement will be partly offset. This offset is called the energy rebound effect of an industry. This paper estimates the system of cost share equations in China’s food industry, analyzes the substitution relationship between each input factor, and calculates the direct rebound effect. The results show that: there exist substitution relationships between energy and other input factors, among which the substitution elasticity between energy and labor is the biggest, and the substitution of energy for capital dominates that of capital for energy. The direct rebound effect is approximately 34.39%, which means that about 34.39% of energy conservation caused by energy efficiency enhancement in the industry has been offset by the rebound effect. The paper proposes some policy suggestions on energy conservation according to the results of substitution relationship among input factors and the rebound effect of the industry. The policy suggestions include reducing the capital and labor costs of the food industry by decreasing financing costs of small businesses, optimizing personnel management, and rationalizing the energy pricing mechanism to form a reasonable energy price.