Reducing coal overcapacity in China: a new perspective of optimizing local officials' promotion system.

Abstract

Reducing coal overcapacity is an important strategy to achieve carbon peak and carbon neutralization in China. Determining the drivers of coal overcapacity is the first step toward this strategy. The existing literature focuses mainly on the macro determinants of coal overcapacity. Micro factors such as local officials’ intervention motivation also plays a role, but has received less attention in the literature. Using data from 25 coal-producing provinces in China, we demonstrate that local officials’ promotion pressure under the GDP-based promotion system significantly leads to coal overcapacity. Mediation effect analysis suggests that factor market distortion is one important channel through which local officials’ promotion pressure affects overcapacity in the coal sector, and the distortion in the capital market plays a more dominant role than distortion in the labor market. To alleviate the negative effect of officials’ promotion pressure on capacity utilization rate, we build a diversified promotion system incorporating environmental indicators. Results show that when the environmental pressure index accounts for at least 50% of the weights in the diversified promotion system, the negative effect of promotion pressure disappears. Our results suggest that to reduce coal overcapacity problem, policymakers may wish to weaken the GDP-based political promotion incentive by adding environmental and ecological indicators and reducing interventions on factor allocation. Results from the present paper has implications for resource-dependent countries facing similar overcapacity problems, especially in the context of the open economy and green recovery in the post-COVID-19 period.