Green Growth, Carbon Intensity Regulation, and Green Total Factor Productivity in China.

• Author: Shen, Xiaobo

1. INTRODUCTION

   Green growth is often defined as environmentally sustainable economic growth. In a report entitled "Towards Green Growth", the OECD argues that green growth is about promoting growth and development while ensuring that natural assets continuously provide resources and environmental services for our welfare (Ho and Wang, 2014). A relevant concept emerging in the context of dealing with climate change is low-carbon economy, which originates from the British energy white paper "Our Energy Future-Creating a Low Carbon Economy" in 2003. Generally, low carbon economy is considered as a kind of economic development mode, which seeks to simultaneously achieve economic growth and reduce greenhouse gas emissions through technological innovations (such as renewable energy technologies) and industrial transformation. Obviously, although low-carbon economy emphasizes more on reducing carbon emissions, there are many overlaps between low-carbon economy and green economy. As the world's largest C[O.sub.2] emitter, in the past decade China has regarded low-carbonization as an important tool to achieve economic transformation and upgrading. Especially, since anthropogenic carbon emissions is largely related to the sheer volume of fossil energy consumption, therefore achieving green development requires the transformation of current energy model, and in the transformation process, the core lies in improving energy efficiency and deploying low-carbon energy technologies (Costa-Campi, et al., 2019).

   In other words, reducing carbon emissions related to fossil energy consumption is no different than two approaches: First, optimize the energy consumption structure, gradually shifting from fossil energy consumption to clean energy and new energy consumption; second, improve energy efficiency, reducing energy consumption per unit of economic output. However, reducing carbon emissions through these two channels is not so easy. It requires not only the transformation of the entire energy system, and the revolutionary transformation of energy production and consumption, but also the technical change and organizational innovation in industries, construction, utilities, infrastructure, etc. In sum, the "low carbonization" of the economy means revolutionary changes in the energy system and entire economic system. Therefore, "low-carbonization" is an effective way to eliminate the close relationship between economic growth and fossil energy use, C[O.sub.2] emissions and other pollutants emissions under the traditional growth pattern.

   As the largest developing country, China has long faced the urgent task of developing economy and improving people's living standards. It must also face tremendous pressures such as environmental degradation, ecological damage and resource shortages accumulated during the rapid economic growth. Meanwhile, China has to reduce its C[O.sub.2] emissions and contribute to the efforts of the international community to address climate change. Huge primary energy consumption and coal-based energy consumption structure make China the world's largest emitter of C[O.sub.2], and the total emissions continue to grow. Therefore, instead of reducing the total amount of emissions, lowering C[O.sub.2] emissions per unit of GDP (C[O.sub.2] intensity) is set as an important C[O.sub.2] emissions control target by the Chinese government. Meanwhile, the C[O.sub.2] intensity constraint is used to act as a major policy tool for controlling C[O.sub.2] emissions. In 2009, the Chinese government first proposes its own C[O.sub.2] intensity control target: compared with the 2005 level, the C[O.sub.2] emissions per unit of GDP in 2020 will fall by 40%-45%. In 2011, the State Council issues the "Work Plan for Controlling Greenhouse Gas Emissions during the Twelfth Five-Year Plan Period", which required that the national C[O.sub.2] emissions per unit of GDP falls by 17% from the 2015 level. The work plan also set targets of C[O.sub.2] intensity decline during the Twelfth Five-Year Plan period for each provinces. In order to ensure the realization of C[O.sub.2] intensity control target, the State Council has formulated the "Measures for the Assessment and Evaluation on the Responsibility of Reduction Target of Carbon Dioxide Emission per Unit GDP". Under the assessment method, each provincial government must formulate an annual reduction target according to its C[O.sub.2] intensity reduction target during the 12th Five-Year Plan period, and decompose the annual reduction target to its prefectures, municipalities and counties, and this reduction target is also decomposed to different industries within this province. Further, the State Council will evaluate the completion of the provincial government's C[O.sub.2] intensity target responsibility, and the result of performance evaluation of a provincial government in fulfilling the responsibility is an important part of the comprehensive assessment of the government leadership team.

   Since the assessing results of C[O.sub.2] intensity responsibility targets are linked to the performance assessment of government officials, the C[O.sub.2] intensity reduction target responsibility is both a binding carbon emissions control target and a powerful instrument of reducing emissions. According to the 2016 Annual Report on China's Policies and Actions on Climate Change, during the 12th Five-Year Plan period, China's carbon dioxide emissions per unit GDP falls by 20%, exceeding the original target of declining by 17%. In 2016, the Chinese government again formulated the "Work Plan for Controlling Greenhouse Gas Emissions during the 13th Five-Year Plan Period", which required a reduction of 18% in the C[O.sub.2] intensity by 2020, compared with the 2015 level. If this reduction target can be successfully completed, China will fulfil its commitment of reducing C[O.sub.2] emissions per unit of GDP by 40

   Compared with economic instruments such as carbon tax and carbon emissions trading, the carbon intensity standard, as a command-and-control instrument, is a relatively reliable tool under uncertainty condition, ensuring the smooth realization of an established emission control target, although the cost efficiency to achieve the target is relatively poor. However, considering the importance of total factor productivity to economic growth, the question is more about whether the C[O.sub.2] intensity constraint policy promotes the growth of China's green total factor productivity. In theory, carbon intensity constraint, as a policy tool for environmental regulation, will force companies to reduce carbon emissions in several ways. The first is to reduce output. In fact, some local governments have to temporarily shut down some firms with large C[O.sub.2] emissions in certain industries in order to meet the annual carbon intensity reduction targets set by the central government. As a result, local GDP growth slowed down. The second is to resort to structural adjustment. Either adjust the output structure, shifting from the production of products with large emissions to the production of products with low emissions, or adjust the input structure, replacing dirty inputs with clean inputs, for example, replacing coal with clean energy in production. The third is end-of-pipe treatment. For instance, using carbon capture and storage technology reduces carbon emissions at emissions terminals. These choices either reduce the company's revenue or increase the operating cost, thus reducing producer's total factor productivity. On the other hand, emission regulations may make firms to engage more in innovation and thus have a positive impact on productivity. The Porter hypothesis challenges the traditional view that environmental regulation imposes additional costs on companies to erode their global competitiveness (Porter, 1991). In this way, the policy of carbon intensity constraint potentially has both positive and negative effects on productivity, and the overall effect depends on which effect is greater and more significant.

   Based on the input-oriented Malmquist productivity index and parametric decomposition method, this paper measures the green total factor productivity and its growth sources using a data-set of input, output and C[O.sub.2] emissions of China mainland's 30 provinces (excluding Tibet) from 1997 to 2014, and assesses the impact of the carbon intensity regulation on China's green total factor productivity. Although the OLS estimates indicate that the C[O.sub.2] intensity constraint policy has a positive impact on China's green total factor productivity, after controlling for potential endogenous biases by the two-stage least squares (2SLS) estimation, we find that the policy may prevent the growth of green total factor productivity. Of course, the results show that there exists heterogeneity in the impact of the C[O.sub.2] intensity constraint policy on the green TFP. Specifically, this policy has a positive contribution to the growth of green TFP in eastern regions, while it does not have a significant effect in both central and western regions.

   The paper is organized as follows. Section 2 provides a review of the relevant literature. Section 3 introduces the input-oriented Malmquist productivity index and its parametric decomposition method. Section 4 measures the green TFP index and its growth sources of the Chinese economy based on the above method. Section 5 uses the 2SLS method to assess the impact of the carbon intensity regulation on China's green total factor productivity. Section 6 summarizes the main conclusions.

2. LITERATURE REVIEW

   2.1 Literature on measurement and decomposition of green total factor productivity

   Researchers typically measure TFP based on the Malmquist Productivity Index concept and identify sources of productivity growth using decomposition approaches. The concept of Malmquist productivity index was first proposed by Caves et al.(1982). Fare et al...