Can China's Energy Intensity Constraint Policy Promote Total Factor Energy Efficiency? Evidence from the Industrial Sector.

• Author: Shao, Shuai

1. INTRODUCTION

   The world has witnessed the miracle of China's economic development over the past four decades. However, the extensive growth mode associated with high investment, high energy consumption, and high pollution has not been fundamentally changed. As such, energy constraints have gradually appeared as a backdrop to China's rapid economic growth. Especially given the acceleration of industrialization and urbanization in recent years, China's economic development is increasingly faced with growing pressure to save energy and reduce emissions. The energy bottleneck has become a significant problem that threatens to the sustainable development of China's economy. It is predicted that, from 2010 to 2030, the demand for new energy in China will account for 33% of total global demand. These demand pressures will be accompanied by a rising dependency on oil from external sources. Without any control, by 2030, China's oil consumption will surpass 800 million tons per annum, and approximately 75% of this oil will be imported. (1) At the same time, various environmental problems will continue to accompany China's rapid economic development, and these problems (such as heavy haze pollution, excessive carbon dioxide emissions, and frequent extreme weather phenomena) are becoming increasingly serious.

   To achieve the green transformation of China's economic development, the Chinese government should improve energy restriction and strengthen environmental governance as soon as possible. Improving energy efficiency is generally regarded as the key to resolving the abovemen-tioned problems. Indeed, such thinking has been introduced into the medium- and long-term planning of China's national economic and social development. In particular, at the beginning of 2006, the Chinese government launched the 11th "Five-Year Plan" (FYP). For the first time, a mandatory energy-conservation target was added into the FYP, i.e., the energy consumption per unit of gross domestic product (GDP) should decline by 20% from the 2005 level. In other words, by 2010, the energy consumption per GDP ([10.sup.4] RMB) was expected to drop to approximately 0.98 tons of coal equivalent (tce), from 1.22 tce level in 2005. This was also the first time an energy-saving target was introduced into the local government's performance evaluation systems.

   China's central and local governments then implemented a series of relevant measures to execute the new energy intensity constraint policy (EICP). For instance, in June 2007, the Chinese State Council issued a circular entitled the Comprehensive Work Plan for Energy Saving and Emission Reduction. This document claims that local governments should fully realize the importance and urgency of saving energy and reducing emissions. Close attention should be paid to the government's responsibilities and its law-enforcing supervision of energy saving and emission reduction policies and regulations. In short, China's government should fully implement and oversee key energy-saving projects. In October 2007, the Standing Committee of the Chinese People's Congress validated the Energy Conservation Law of the People's Republic of China. This law makes it clear that improving energy efficiency should be the basic purpose of the law's implementation. In August 2008, the Chinese National Development and Reform Commission issued a notice regarding the implementation of the Energy Conservation Law of the People's Republic of China. This notice proposes strengthening energy-conservation management in key projects, enterprises, and areas through related economic policies. In May 2009, the Chinese Ministry of Finance and National Development and Reform Commission issued a circular entitled Energy-saving Product Projects for Benefiting the People. This publication suggests speeding up the popularization of low-energy-use products and improving the energy efficiency of high-energy-use products through financial subsidies.

   To respond to such institutional arrangements, local governments began to implement a series of related auxiliary energy-saving policies and measures. These steps included, but are not limited to the following: supporting key energy saving and emission reduction projects, widely distributing efficient energy-saving products and new energy-saving technologies, improving energy-saving management capabilities, implementing tax policies to encourage energy savings and emission reductions, reducing corporate income tax for energy-saving projects, strengthening financial services for projects that could show elements of energy saving and environmental protection, encouraging and guiding financial institutions to increase and improve the availability of credit support for energy-conservation and emission-reduction projects, and preferentially providing direct financing services to specific and eligible energy saving and emission reduction projects.

   In terms of the background just described, we raise the following questions: What is the actual effect of these policies and measures that focus on energy saving and emission reduction? Has the EICP achieved any quantifiable success in improving energy efficiency? Unfortunately, existing studies have paid little attention to these issues. To answer these questions, we first observe the trend of the energy intensity of China's industrial sector in recent years in Figure 1.

   The reason we choose the industrial sector as our research object is due to the following considerations. Since the Industrial Revolution in the mid-19th century, the rapid development of the industrial sector has led to huge demand for the use of fossil fuels. This has caused a corresponding sharp rise in greenhouse gas emissions, including carbon emissions. Industrial sector is the largest energy consumer in the entire world. The energy consumption of industrial sector alone accounts for more than 40% of the world's total energy consumption. Going even further, the industrial sector's carbon emissions account for as much as 61% of the world's total carbon emissions (IEA, 2009). China is also still in an accelerated industrialization process, which is mainly characterized by rapid energy consumption. Reducing the rigid and intense demand for energy in China's industrial sector is going to be difficult in the short term. According to data from the China Energy Statistics Yearbook, the proportion of China's industrial energy consumption has remained at approximately 70% of the country's total energy consumption over nearly two decades. As a result, the industrial sector has become the primary object of energy saving and emission reduction strategies. The energy-saving and emission-reduction performance of the industrial sector will undoubtedly play a crucial role in achieving the energy-saving and emission-reduction targets of the entire national economy.

   As shown in Figure 1, since 2001, the energy intensity of China's industrial sector (at the 2000 constant price) has presented a continuous downward trend. Thus, in terms of single factor energy efficiency (the reciprocal of energy intensity), China's EICP has an evident mitigation effect on energy intensity. Such a preliminary result contrasts with those of a number of previous studies that argue that China's public policy is ineffective in EICP's implementation (e.g., Zhang et al., 2017). However, it is noteworthy that, because the single factor energy efficiency fails to consider other production factors (and thus reflect those factors' substitution relationships), single factor energy efficiency is not energy efficiency in a strict sense (Patterson, 1996; Li and Hu, 2012). Therefore, it is still necessary to perform a more detailed and rigorous investigation of EICP's actual effectiveness in improving energy efficiency based on the rational measurements of energy efficiency. Unfortunately, existing studies have paid little attention to this issue.

   To fill this gap in existing research, this paper performs the following exploratory research. First, we use a fixed-effect stochastic frontier analysis (SFA) model based on a Translog production function to calculate the total factor energy efficiency growth (TFEEG) (2) rates of China's 36 industrial sub-sectors over 2001-2014. This method is used to avoid the defects of adopting the single factor energy efficiency. Second, for the very first time, we use the difference-in-differences (DID) method to investigate the EICP's (marginal) effect on the TFEEG. Furthermore, we estimate the superposition effect caused by the introduction of China's carbon intensity constraint policy (CICP) on the TFEEG, through the difference-in-difference-in-differences (DDD) method. Finally, through counterfactual, re-grouping and quasi-DID analyses, we conduct a series of robustness tests of the empirical results. Some previous studies have demonstrated that the implementation effectiveness of China's policies is not satisfactory (e.g., Zhang et al., 2017); we provide additional evidence to support those findings in this paper. We find that, after the implementation of the EICP, the total factor energy efficiency (TFEE) significantly declines. Thus, China's mandatory energy-saving policy can actually have a detrimental effect on productivity growth.

   The remainder of this paper is organized as follows: Section 2 provides a related literature review; Section 3 introduces the methodology and data, including the estimation model of the TFEEG and the DID model of investigating the effect of the EICP; In Section 4, we report and discuss the estimation results of the TFEEG and the DID model, as well as the superposition effect; In Section 5, we perform a series of the robustness tests of the estimation results; and Section 6 draws main conclusions and provides some policy implications.

2. LITERATURE REVIEW

   2.1 How to Measure Energy Efficiency

   Depending on the measurement methods used, energy efficiency can be divided...