Impacts of China's differential electricity pricing on the productivity of energy-intensive industries

Abstract

Using China's Industrial Enterprise Database (CIED) from 1998 to 2007, this paper investigates how the differential electricity pricing (DEP) policy affects the total factor productivity (TFP) of energy-intensive industries in China. Based on the TFP of energy-intensive industries estimated through the Olley-Pakes (OP) and Levinston-Petrin (LP) approaches, this paper estimates the treatment effects of the DEP policy through the method of propensity score matching and difference in differences (PSM-DID). The results indicate a significant negative effect of the DEP on the TFP of energy-intensive industries shortly after the DEP implementation. This finding could be explained by the rapidly increasing costs for energy-saving technologies that occurred within firms over a short time. Moreover, the estimated dynamic marginal effects demonstrate that the policy effect became positive in the following years, implying that the role the DEP policy plays shifted from increasing costs to stimulating technology improvement for energy-intensive industries. Heterogeneity analysis suggests that the treatment effects remain large and statistically significant for regions less dependent on energy-intensive industries, regions with better policy enforcement, and small-sized firms. The results remain robust in the counterfactual test, in the robustness check that takes account of the lagging effect of policy and in the robustness checks that considers more control variables or extends the time period of analysis. Based on these findings, this paper provides important policy implications for better design of the mechanisms to improve the productivity in China.