Market Segmentation and Energy Efficiency: Evidence from China's Regional Economies.

AuthorNie, Liang

    Since launching its open-door policy and economic reforms in late 1978, China has experienced spectacular economic growth. In this course, China has been heavily dependent on dirty-burning coal to power its rapidly expanding economy, and has consumed two to three times the energy that the United States, Germany and Japan produce per unit of GDP in 2019 (BP, 2020). Until recently, China prioritized economic growth over environmental protection. A combination of these factors has given rise to unprecedented environmental pollution across the country (Ho and Nielsen, 2007; World Bank, 2007; Zhang, 2010 and 2014). Specifically, China overtook the United States as the world's largest carbon emitter in 2006, and surpassed the combined carbon emissions of the United States and the European Union in 2013 (Choi et al., 2012).

    The extensive energy use and its resulting carbon pollution not only put China under tremendous pressure from the international community, but also threatened its sustainable development. In order to promote energy efficiency and pursue a low-carbon transition, the Chinese government incorporated Green Development as one of the "Five Major Principles" into the 13th Five-Year Plan. At the 75th UN General Assembly held in 2020, China committed to capping its carbon emissions before 2030 and achieving carbon neutrality before 2060. Hence, the idea of saving energy and controlling carbon emissions has increasingly become a key theme in China's economic and social development for some time to come (Zhang, 2014, 2015 and 2017).

    On the related research front, scholars have studied ways to improve China's energy efficiency from the perspectives of urbanization, industrial structure, foreign direct investment, and energy mix (Feng et al., 2009; Guo et al., 2011; Elliott et al., 2013; Li and Hu, 2012; Zhou et al., 2013; Li and Lin, 2014; Tian et al., 2014; Ma, 2015; Yan, 2015; Elliott, et al., 2017). Overall, these studies have focused primarily on categories of energy use and consumption for residents and businesses--what is usually referred to as the energy demand side of the economy. In recent years, with the transformation of China's economy, scholars have found that the pulling effect of demand-side factors on energy efficiency is limited, and supply-side factors are increasingly becoming the key to driving China's energy efficiency. For example, if the factor market is unable to allocate resources rationally, i.e., some low-efficiency economic entities are provided with considerable amounts of energy, while many high-efficiency ones are not supplied adequately, then energy will be used inefficiently. As a result, scholars have begun to move their emphasis from the demand to supply side, and have arrived at a consensus that inefficient resource allocation in the factor market is currently the key to restricting China's energy performance (Li and Lin, 2015; Ouyang and Sun, 2015; Dai and Cheng, 2016; Yang et al., 2018). However, suboptimal resource allocation is merely a phenomenon created by delayed reforms in China's energy markets. To the best of our knowledge, there is still a lack of in-depth research to explore the origin of this phenomenon and its impact on energy efficiency.

    In fact, it is widely recognized that the Chinese fiscal reforms implemented since the 1980s have played a positive role in promoting the country's rapid economic growth (Lin and Liu, 2000; Qiao et al., 2008). Before any reform, local fiscal revenue must be handed over to the central government and then uniformly allocated as planned. During that period, local governments were less motivated to grow the economy, because both their expenditure and revenue powers belonged to the central government. Given this, China launched decentralization reforms in the early 1980s, with the goal of giving local governments some fiscal powers that would allow them to operate more efficiently. Specifically, if a local government's revenue exceeded its expenditure, the surplus amount was owned by the local government and should not be handed over to the central government. Similarly, if a local government's expenditure exceeded its revenue, the excess amount was not subsidized by the central government. Through a series of reforms, local governments were increasingly driven to grow the economy in pursuit of a larger tax base. Particularly after the 1994 tax-sharing reform, the fiscal powers of local government further matched its administrative responsibilities (He, 2015; Yang, 2016).

    However, as the reforms progressed, some of the drawbacks of Chinese-style decentralization became apparent. Specifically, in order to broaden the tax base, governments frequently employ administrative measures to restrict the outflow of resources from their jurisdictions and purposefully depress factor prices to safeguard local businesses (Poncet, 2005; Shao et al., 2019). This type of market segmentation strategy allows some low-efficiency businesses to endure severe market competition because of their vast contribution to local finance. Consequently, high-efficiency enterprises that are not protected by governments in other regions are forced to leave the market owing to the loss of competitive advantages. In terms of mechanisms, market segmentation may affect energy efficiency through the following three channels. First, market segmentation distorts the price signal, making optimal allocation of factor resources improbable. Local governments have a significant incentive to decrease energy prices within their jurisdiction in order to provide businesses a cost advantage on the input side. In this external circumstance, enterprises would invest large amounts of energy to replace capital, labor and other factors, resulting in excessive energy use and a loss of efficiency. Second, local protection would prevent enterprises from essentially competing in the open market. Protected enterprises can earn excess profits by establishing rent-seeking links with local officials, but this hurts their innovative impetus and energy efficiency. Third, market segmentation restrains cross-regional industrial agglomeration that has been proven to reduce transaction costs and improve energy efficiency in the cluster. When governments adopt a segmentation strategy, they artificially divide the entire market into tiny components. Enterprises with similar or associated businesses find it difficult to concentrate geographically and must search for resources and markets locally, which limits economies of scale and scope and reduces energy efficiency.

    Clearly market segmentation is an important underlying reason for inefficient resource allocation in the factor market and further magnifies the loss of energy efficiency in China. Unfortunately, few studies have examined this issue from the perspective of market segmentation driven by competition among local governments. Li and Lin (2017) and Shao et al. (2019) pointed out that market segmentation may have a negative impact on energy and environment in China, but what they have actually explored is the segmentation of commodity markets. In China, due to government controls on critical resources, energy markets are more segmented than commodity markets. As a result, energy market segmentation has become a far more substantial and direct influence on China's energy efficiency. Unfortunately, there has been little theoretical or empirical research on energy market segmentation.

    Given the shortcomings of previous research, we collect data on absolute prices for China's energy products to construct a market segmentation index and innovatively study the impact of energy market segmentation on energy efficiency. The contributions of this paper are reflected in three aspects when compared to previous studies. First, we employ an epsilon-based measure (EBM) model that combines the strengths of radial and non-radial Data Envelopment Analysis (DEA) to estimate energy efficiency accurately and improve upon the price index method frequently used in recent literature to assess market segmentation in China. Second, based on a systematic theoretical analysis, Fractional Regression Models (FRMs) are employed to study the impact of energy market segmentation on energy efficiency, which has not been investigated in the existing literature. Additionally, the heterogeneity of this impact is further explored. Third, we use a mediating effect model to investigate the internal mechanism through which market segmentation affects energy efficiency.

    The rest of this paper is organized as follows. Section 2 is a brief review of prior literature. Section 3 puts forward the theoretical hypothesis for this research. Section 4 describes variable selection, model specifications and data sources. In Section 5, we empirically examine the impact of market segmentation on energy efficiency and the heterogeneity of this effect; furthermore, the internal mechanism between the two is also discussed. Section 6 concludes with the policy implications.


    With widespread local air pollution across China and an urgent need to address global climate change, increasing energy consumption and C[O.sub.2] emissions have made China's energy efficiency the focus of a growing number of studies. For example, Li and Hu (2012), Ma (2015) and Yan (2015) argued that urbanization is conducive to promoting China's energy efficiency. Elliott et al. (2017) drew a similar conclusion and further explored the intrinsic impact mechanism. Zhou et al. (2013), Li and Lin (2014) and Tian et al. (2014) studied the impact of industrial infrastructure on China's energy efficiency, and pointed out that an effective way to improve China's energy efficiency is to upgrade and optimize industrial infrastructure to meet the needs of the domestic economy. Guo et al. (2011) and Feng et al (2009) studied the relationship between energy mix and energy efficiency. From a...

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