Factors Influencing Energy Intensity in Four Chinese Industries.

AuthorFisher-Vanden, Karen
  1. INTRODUCTION

    Since the onset of economic reforms in 1978, China's economy has experienced rapid growth, with GDP (in constant prices) growing at an average annual rate of 9.7% between 1978 and 2006 (He and Wang, 2007). Such robust rates of economic growth generally drive up energy usage. While China is no exception, its energy intensity, defined as total energy consumption in physical quantities over real GDP, has steadily declined over the years. Overall, during 1993-2005, China experienced an annual average decline of 3.6% (He and Wang, 2007).

    The reasons behind this decline in energy intensity have been widely investigated (see, e.g., Fisher-Vanden, Jefferson, Liu, and Tao, 2004; Garbaccio, Ho, and Jorgenson, 1999: Fan, Liao, and Wei, 2007; Ma and Stern, 2008) and are usually separated into two main contributing factors: structural change and technological change. Structural change refers to a shift in the sectoral composition of the economy; e.g., a shift away from heavy industry to light industry. Technological change, on the other hand, is related to process changes made at the firm level to improve productivity. These studies show that technological change has contributed at least 50% to the reduction in China's energy intensity. Therefore, to understand the factors behind China's impressive decline in energy intensity, it is important to understand what factors are driving improvements in energy efficiency at the firm level.

    A key issue in understanding the factors that have achieved improvements in energy efficiency and which are shaping the potential for further gains in energy efficiency is the extent to which sectors and firms within Chinese industry are relatively homogeneous in the sense that they respond to the relevant range of policy instruments, including pricing, technology development, and enterprise restructuring, in a uniform way or, alternatively, if China's industrial sector represents a highly differentiated, heterogeneous collection of sub-sectors and firms that may be highly variable in their responsiveness to the policy instruments available to the Chinese government for the purpose of enhancing industrial energy efficiency. This paper focuses on this key issue concerning the extent to which various sectors of Chinese industry respond in uniform or notably disparate ways to various policy instruments.

    Specifically, we investigate the factors explaining the decline in energy intensity in four Chinese industries: pulp and paper; cement; iron and steel; and aluminum. The econometric analysis utilizes a unique set of firm-level data from China's most energy-intensive large- and medium-size industrial enterprises in each of these four industries over a six-year period, 1999-2004. We test the extent to which various policies, programs, and development trends specific to the industry or common across industries have contributed to the decline in energy intensity within each of these industries. Among the potential contributing factors included in the analysis are changes in energy prices, technology development expenditures, firm scale, ownership restructuring, and regional differences.

    We find rising energy prices to be the most significant and consistent factor explaining the decline in energy intensity in these industries over our period of study. Scale economies, encouraged by the shut-down of small-scale polluting factories and enterprise restructuring programs, such as "grasping the large, letting go of the small," is another important factor explaining the decline in energy intensity within each industry in varying degrees. However, by comparison, whereas pricing and scale effects impact all four industries, technology development, trade openness, and ownership differences exhibit robust impacts within only one or two of the four industries. Additionally, regional differences exhibit surprisingly different effects. In the case of pulp and paper, firms in the Northern and Eastern regions of China have lower energy intensity than firms in the South. In the cement industry, the energy intensities of firms in the North, East, and South are less than firms in the Southwest. In the iron and steel industry, energy intensity of firms in the South and Southwest is less than firms in the North and East. We explore some possible explanations for these differences.

    This paper is unique in a number of ways. First, unlike past studies that examine policies, programs, and development trends either specific to the industry or common across industries, we consider both. Second, existing studies that focus specifically on Chinese industry (e.g., Wei, Liao, and Fan, 2007; Garbaccio, Ho, and Jorgenson, 1999; Ma and Stern, 2008; Zheng, Qi, and Chen, 2011) employ industry--not firm-level data--and are therefore unable to examine the drivers of changing energy efficiency at the firm-level. By employing firm-level data, this study is able to identify these drivers.

    The paper is organized as follows. Section II describes the relevant energy and development policies in these four industries that might affect firm-level energy intensity and provides a literature review that summarizes previous work on the analysis of China's energy intensity decline, including investigations on specific industries and the overall economy. Section III presents the data set used in this analysis, and section IV describes our estimation approach. Section V discusses the empirical results and offers interpretation, while Section VI describes and reports on the results of various robustness tests. Lastly, Section VII offers concluding remarks.

  2. ENERGY CONSUMPTION AND DEVELOPMENT POLICIES IN FOUR CHINESE INDUSTRIES

    Understanding the factors influencing energy intensity in the four industries in China under study in this paper is important as these industries occupy leading positions in the nation in energy consumption. Combined, they comprise a large share of China's manufacturing output. As shown in Table 1, although these industries do not comprise a large share of manufacturing output, they make up a large share of energy consumption in the manufacturing sector. In recent years, these industries have reduced their energy intensity dramatically. As shown in Table 1, the energy intensities of the pulp and paper and iron and steel industries almost fell by 50% between 1999 and 2004. The energy intensity of the Aluminum industry fell by less while the energy intensity of the Cement industry grew during this period.

    A number of reforms have been instituted in China that have implications for China's industrial energy efficiency. In 1998, 21 ministries--including industrial sector-line ministries that provided macro-planning for each industry sector--were eliminated by the central government (Naughton 2003). In 2003, the National Development and Reform Commission (NDRC) was formed to regulate China's socialist market economy and to shift the government's role more toward market coordination (Naughton 2003). Furthermore, in order to compete with international markets and to capture the benefits of scale economies, China's State Council implemented industrial policies focused on shutting down smaller polluting facilities and rationalizing ownership structure.

    During the latter half of the 1990s, continuing into the 2000s, China's move toward privatization through "grasping the large, letting go the small" led to extensive restructuring both within the state and non-state sectors, including the shutting down or consolidation of many inefficient factories (Sutherland 2003). (1) One goal of this enterprise restructuring strategy was to improve industrial energy efficiency, reduce emissions, eliminate excess capacity, and improve enterprises' technological capabilities. "Grasping the large, letting go off the small" was partially motivated by China's desire to create large state-owned enterprises that can compete with OECD multinationals. A key feature of this policy was to give core enterprises in each of the 57 state-owned industrial groups favored access to state loans and state research institutes (Sutherland 2003).

    As a result of "grasping the large, letting go of the small," the number of enterprises fell dramatically in these industries. In the cement industry, the production share of large-size rotary kilns-based plants reached nearly 62% of total cement production in 2008 (from 21% in 1992) and the share of cement production from the top-10 firms grew from 4% in 2000 to 13.7% in 2005 (Rock, 2011). In the iron and steel industry, the share of production from large firms grew from 60% in 2000 to 84% in 2010 (Rock and Jiang, 2011). In the aluminum industry, "grasping the large, letting go off the small" prohibited the establishment of new small aluminum plants, and small primary aluminum producers with outdated technologies were forced to close. The six largest alumina producers produced almost all of China's 6 million metric tons of alumina in 2003. As for aluminum, the 15 largest aluminum producers accounted for 45% of total production in 2005 with the 10 largest of them accounting for 34% of total production (Rock and Wang, 2011).

    In addition to the policy of "grasping the large, letting go off the small," the Chinese government established energy intensity standards in a wide range of industrial sectors beginning in the early 1980s. Firms that failed to meet the standards were either forced to pay higher prices for energy used in excess of the standard or were forced to close. The Chinese government also created a large number of energy conservation centers to help firms improve energy efficiency (Sinton et al 1998).

    Rising energy costs throughout China have also induced energy savings. By 1999, the allocation of energy through the state plan was substantially reduced (Fisher-Vanden et al. 2004), causing state-owned enterprises at the margin to more closely encounter world energy prices. This shift from...

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