The impacts of energy prices on energy intensity Evidence from China

Energy Policy 35(2007)2978–2988

The impacts of energy prices on energy intensity:Evidence from China

Leiming Hang ?,Meizeng Tu

Shanghai Jiaotong University,200030Shanghai,China Received 24April 2006;accepted 22October 2006

Available online 8December 2006

Abstract

In this paper,we present a review of the deregulation of energy prices in China between 1985and 2004and assess the impacts of changes in energy prices on aggregate energy intensity and coal/oil/electricity intensity.We used time series data to provide estimates of energy price elasticities.Empirical results showed that:(1)The own-price elasticities of coal,oil,and aggregate energy were negative in periods both before and after 1995,implying that higher relative prices of different energy types lead to the decrease in coal,oil,and aggregate energy intensities.However,the positive own-price elasticity of electricity after 1995probably indicates that the price effect was weaker than other factors such as income effect and population effect.(2)The impacts of energy prices were asymmetric over time.(3)Sectoral adjustment also drove the decrease in aggregate energy intensity.Although raising energy prices to boost ef?ciency of energy use seems to be an effective policy tool,other policy implications concerned with energy prices,such as energy supply security and fuel poverty,must also be considered.

Keywords:Energy prices;Energy intensity;China

1.Introduction

In recent years,China’s energy ef?ciency has received increasing attention from scholars.In 2004,China’s GDP accounted for only 4%of global output,while it accounted for 8%,10%,and 31%of the global consumption of crude oil,electricity,and coal,respectively (Zhang 2005).If environmental damage is considered,China’s energy inef?ciency is even greater.For example,in 2003China had the highest SO 2emissions in the world:21.59million tones,90%of which were from excessive use of coal.That same year,China’s CO 2emissions were the second largest in the world,lower only than those of the United States.Moreover,China’s energy elasticity (i.e.,the ratio of energy consumption growth rate to GDP growth rate),which was below 0.7in the 1990s,has increased rapidly in recent years to reach 1.61in 2003and 1.60in 2004(see Appendix Table A1).

Most literature attributes China’s inef?cient use of energy to its energy pricing system.Research on China’s

energy use has been based mainly on either cross-national comparison of energy prices or cost analysis.First,in terms of real energy prices,statistics show that both wholesale prices and retail prices of oil products (such as gasoline and diesel)in the domestic market are lower than they are in the global market.Second,in terms of relative energy prices,the ratio of the price of coal to the price of oil is 1:1.5abroad and 1:4in China,and the ratio of the price of natural gas to the price of oil is 1.05:1abroad and 0.4:1in China.These ratios imply that the relative prices of coal and natural gas are lower than that of oil (Zhang 2005).Third,cost analysis based on data published by the State Power Corporation (SPC)indicated that electricity prices in China were highly subsidized and below the average total costs of generation and transmission (Lam,2004).Overall,China’s energy prices have been publicly criticized by scholars for being too inexpensive.

Currently,the concern of policy makers is to raise energy prices to promote higher energy ef?ciency in China.Energy ef?ciency is the critical parameter for policies that aim to reduce energy consumption while maintaining or even boosting economic growth (Birol and Keppler,2000).This aim requires that the links between energy prices and

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energy ef?ciency are well understood.Previous studies about energy ef?ciency have focused on the dramatic decline in the aggregate energy intensity(i.e.,energy consumption per unit of GDP)in China over the last two decades(Zhang2003;Fisher-Vanden et al.,2004).When China initiated its economic reform program in the late 1970s,China’s energy intensity was double that of the United States and triple that of Japan.By1999,China’s energy intensity had fallen to levels more comparable to those of the United States and Japan(Crompton and Wu, 2005).Although many factors have been identi?ed as causes of this decline,such as technical and structural changes,the impacts of energy prices on energy intensity have rarely been considered.

One study of several transition countries in Central and Eastern Europe and the former Soviet Union concluded that energy price is one of the most important drivers for more ef?cient energy use(Cornillie and Fankhauser,2004). This study was based on qualitative comparisons among different countries.Another study,conducted empirically using?rm-level data sets from1997to1999,reported that energy price effects accounted for54.4%of the decline in the measured aggregate energy intensity in China(Fisher-Vanden et al.,2004).

In this study,we used macro-level time series from1985 to2004to examine the links between energy prices and energy intensity in the transition context of China.In contrast to Fisher-Vanden et al.(2004),who examined the short-term effects of energy prices on energy intensity,we focused on the long-term price effects,as well as their variability over time.Herein,we considered the following factors:First,as documented in many studies,changes in relative prices of energy lead to interfuel substitution.This substitution adjustment process is not instantaneous; rather,it might be characterized as having a slow response (Cho et al.,2004).Consequently,improvements in energy intensity induced by changes in relative prices will also be a long process,implying that there may exist signi?cant differences between long-term price elasticity and short-term price elasticity.Second,energy price impacts on energy intensity may be asymmetric over time.Renou-Maissant(1999)found asymmetric effects of interfuel substitution in the industrial sector of seven major OECD countries,and Cho et al.(2004)reported that the substitutability/complementarity relationships among fac-tors and fuels exhibited substantially different patterns before and after1989in Korea.Likewise,the impacts of energy prices on energy intensity may also change with time.Given the drastic changes in energy price policy over time in China(see Section2),especially in the early-to mid-1990s,it made sense to use aggregate data that allowed us to identify the differences in energy price effects between two time periods:prior to1995and after 1995.By introducing a time dummy variable,which interacted with the price variables,we did?nd asymmetric energy price impacts on energy intensity over time(see Section6).

Considering China’s vast energy demands in the future—total energy consumption is expected to rise from1678 million tonnes coal equivalent(MtCE)in2003–2173MtCE in2010(Crompton and Wu,2005)—we expect that the decline in energy intensity will be of great importance to China’s economic growth.Although great improvements have been made in energy use over the past two decades, further improvements will be more dif?cult with the aggregate energy intensity closing with the world average level.As Birol and Keppler(2000)noted,raising the price of energy via economic instruments is a main option for in?uencing energy ef?ciency.Thus,understanding the links between energy prices and energy intensity is important to China,not only because it will provide policy makers with knowledge about the impacts of the pricing policies that have been implemented,but also because it will help to formulate future projections for further energy price reform.

The remainder of this paper is organized as follows. Sections2and3present China’s energy price deregulation and the evolution of energy intensity over the past20years, respectively.After a description of the econometric model in Section4and the relevant data in Section5,the results are presented in Section6.Finally,Section7offers our conclusions.

2.Energy price deregulation in China

The price of energy was fully state controlled in China until the beginning of economic reform in late1978.After the initiation of the two-tiered pricing system in1982, prices set by the central plan were gradually replaced with market-mediated prices.In the early1990s,for almost all goods,the market replaced the plan as the primary means of allocation.However,price reform in energy sectors(e.g., coal and crude oil),which had long been heavily subsidized,lagged behind.In1990,approximately46% of coal and80%of crude oil was plan allocated (Garbaccio,1995).In1992,energy price reform accelerated and large quantities of coal and oil were moved from plan to market allocation.This trend did not last long,and price controls were reimposed on coal and oil in1994as in?ation emerged in1993.After years of suspension,energy price reform regained its momentum in1996.By1999,plan allocations of energy had been largely eliminated. Energy price deregulation differed substantially for different types of energy.The paths of price reform for coal,oil,and electricity are discussed below.

2.1.Coal price deregulation

Historically,coal prices were kept low in China.Coal was sold to the power sector at subsidized prices, sometimes at half or even less than half of the costs of production(Lam,2004).In the early1990s,the state accelerated price reform for the state-owned energy sectors. About20%of coal sold by the China National Coal

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Corporation,which produces about one third of the country’s output,was released from price controls in 1992(Goldstein,1992).The momentum for price reform continued into1993,and large quantities of coal became controlled by market regulation.By1996,coal prices were entirely deregulated.The continuous rise of coal prices caused by deregulation led to an excess supply of coal, which became a serious problem in1996.Consequently, driven by the shrinking demand for coal,coal prices continued to decrease for4years.

The stagnation of coal prices changed in2000,when China’s economic growth brought about a strong increase in energy demand.In fact,the inadequacy of the coal

supply made power shortage a serious problem throughout China in2002and2003.Stimulated by the increasing demand for coal,coal prices rose so sharply that the relative price index of coal outpaced that of electricity in 2004—for the?rst time after1997—inducing intense bargaining between coal companies and power plants.

2.2.Oil price deregulation

Four stages characterized oil price deregulation in China:In Stage1(pre-1981),oil prices were fully state controlled;in Stage2(1981–1994),the two-tiered pricing system was introduced;in Stage3(1994–1998),oil prices were market meditated;and in Stage4(post-1998), domestic oil prices were set in accordance with the global market price.

From1955to1981,the price of oil was under tight state control because oil was an important strategic resource in China.In1982,the two-tiered pricing system was introduced in the oil sector for the purpose of phasing out subsidized prices for petroleum products.The two different price tiers were in-quota prices and market prices for products once the re?nery had met the quota assigned by the state.The price scheme introduced in1985allowed upstream and downstream industries to adjust their out prices in relation to the?uctuation of input costs(Wang, 1995).The proportion of market-priced re?ned products increased rapidly from less than10%in1983to about65% in1993.As1993progressed,however,China’s macro-economic conditions began to deteriorate and in?ation emerged.Some important state-owned enterprises,such as China Petrochemical Corporation,protested against the high prices they were suddenly forced to pay for their inputs(Goldstein,1993).In May1994,the state began reversing reforms in the crude oil sector by reimposing price controls(Khan,1994).

In the mid-1990s,growth in energy consumption out-paced growth in domestic energy supply,leading to a substantial expansion in China’s oil imports.In1990, China imported only6.6%of its oil;in1997the?gure rose to over30%(see Fig.1).In2000,China imported more than50million tons of crude oil,and the?gure reached over100million tons in2004.Currently,China is the second largest oil importer in the world,behind the US.

With the dependence on foreign oil imports increasing, China had to adjust its domestic oil prices.In June1998, China reformed the oil pricing system to set domestic oil price in accordance with the global oil price.Since then, crude oil prices in China have been based on world market prices and are adjusted monthly.Prices of petroleum products also are set by the government in accordance with world oil prices.

Although several signi?cant adjustments have brought the price of Chinese oil roughly in line with that of the international market,it is argued by scholars that current oil prices do not play a satisfactory role in energy resource allocation because they fail to re?ect the real demand for oil(Zhang2005).Thus,regulatory improvements are desirable.

2.3.Electricity price deregulation

Since the beginning of economic reform in China, progress has been made towards raising electricity prices to realistic market levels.In1985,electricity tariffs were raised throughout the country.For the?rst time,local areas were allowed to raise tariffs to cover the rising costs of fuel and transportation.The increases in tariffs stimulated capital investment in the power sector.The state council issued a policy titled‘‘On encouraging investment in the power industry and executing multi-tiers of electricity tariffs’’,which was aimed at encouraging foreign?rms to invest in and make pro?ts from the power industry(Lam,2004).

In1987,the Chinese government issued a new policy of electricity pricing called the‘‘two-cent’’policy,which raised electricity tariffs by two cents per kWh throughout China,except for households and some electricity-intensive industries.The extra revenues were collected by local governments and were used primarily for the construction of large-and medium-scale power plants.In1991,a‘‘high-in and high-out’’policy was introduced,which allowed electricity tariffs to?uctuate according to fuel and other production costs.In1993,a‘‘new plant–new price’’policy was implemented,under which all power plants built after 1992are allowed to sell power to provincial power companies at debt repayment prices in order to provide suf?cient revenues for the repayment of loan capital with

50%

40%

30%

20%

10%

199519961997199819992000200120022003 Fig.1.China’s dependence on oil imports(imported oil/gross domestic oil consumption).

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interest,generally within 10years.As a result of the new pricing policies,tariffs have risen rapidly (Lam,2004).Since 1997,electricity prices have remained steady.Although electricity prices in China increasingly re?ect market forces,they remain under tight governmental regulation,in comparison with coal and oil prices.Power deregulation is underway as competition is introduced into the power generation arena to break the monopoly of the state-owned power corporations.This competition will have great in?uence on future electricity prices.2.4.Energy price evolution

As a result of the energy price deregulation that occurred over the past two decades,prices of different forms of energy,such as coal,oil,and electricity,kept rising in a ?uctuating way.In 2004,the price index was 4.828for electricity,5.320for coal,and 11.738for oil,compared to 1.0for each of these in 1985(see Fig.2).

Fig.2illustrates some unique features of energy price deregulation in China.First,price reform of energy lagged behind that of most other industrial products.Before 1992,energy prices increased slowly,and the price differences among coal,oil,and electricity were small.Between 1992and 1997,the prices of these three types of energy increased rapidly.After 1997,although the price differences between coal and electricity remained small,the price of oil increased substantially.

Second,the paths of price deregulation for the three forms of energy differed signi?cantly.The price of coal price has been market-mediated since 1996,whereas the price of electricity has remained under state control due to its high political and social sensitivity.Moreover,com-pared to coal prices,crude oil prices have become comparable to those of the world market.

Third,the prices of coal and electricity are closely correlated.The growth rate of the price of coal is lower than that of electricity because coal is the main source for power generation in China.For instance,about 55%of total coal outputs were consumed by the power sector in 2004.

Fourth,the relative prices of energy are rising.After signi?cant new energy price reforms in 1993,real prices of coal,oil,and electricity rose at a far higher rate than those of other industrial products (Fig.2).

Finally,the price evolution of different types of energy is linked to China’s energy structure,which is characterized by an abundance of coal and a scarcity of oil.The composition of energy consumption in China is unbalanced in comparison with that of other countries (see Table 1),which is highlighted by the large domestic market share of coal in China (although its dominance has declined in recent years).Furthermore,growth in energy consumption has been so strong since the early 1980s that it has outpaced growth in domestic energy supply,leading to a substantial expansion in China’s oil imports.

Overall,energy price deregulation over the past two decades resulted in a ?uctuating increase in energy prices.Have these price changes affected China’s energy intensity?Answering this question will help in planning future reforms of energy prices in China.Before constructing an econometric model to assess the effects of energy pricing on energy intensity,we ?rst describe the evolution of energy intensity in China.

3.Energy intensity in China

Numerous studies have focused on China’s decreasing energy intensity over the last two decades.When China initiated its economic reform program in the late 1970s,China’s energy intensity was double that of the US and triple that of Japan.By 1999,China’s energy intensity had decreased to levels more comparable to those of the US

14412210860E x -f a c t o r y p r i c e i n d e x e

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Fig. 2.Ex-factory price indexes for energy and industrial products between 1985and 2004.The index for all three energy types was 1in 1985.

Table 1

Composition of energy consumption in selected countries (percentage shares)Year

20031996China

China US Japan India Russia Korea Coal 67.174.724.217.656.919.719.2Oil

22.718.039.153.831.921.161.6Natural gas 2.8 1.826.711.97.952.47.4Other

7.4

5.5

10.0

16.7

3.3

6.8

11.8

Source:Crompton and Wu (2005).

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and Japan.Crompton and Wu (2005)identi?ed technical and structural changes as the main causes of this decline.Fisher-Vanden et al.(2004)reported that the rising relative energy prices,research and development expenditures,ownership reform in the enterprise sector,and shifts in China’s industrial structure were the principal drivers of China’s declining energy intensity and use.In addition,Fisher-Vanden et al.found that price effects accounted for 54.4%of the decline in measured aggregate energy intensity.

Fig.3shows that aggregate energy intensity declined dramatically in the last two decades.However,the pattern of the decline differed for the three types of energy.The decrease in coal intensity followed the trend of aggregate energy intensity,which makes sense in that coal plays a dominant role in primary energy composition in China,accounting for approximate 70%of the total primary energy consumption over the long periods.The evolution of oil/electricity intensity differed signi?cantly from that of

coal intensity.The steady decline in oil intensity was of a small magnitude,and the decrease in electricity intensity seemed to be insigni?cant (Figs.3and 4).

It should be noted that aggregate energy intensity has reversed its trend and has been increasing since 2001.The same is true for coal and electricity intensity,implying that the increase in energy consumption outpaced the increase in GDP in recent years,which may have profound policy implications,such as preventing the excessive expansion of investment in heavy industry.4.The model

We followed Fisher-Vanden et al.(2004)to construct the estimation equations for our model,which were based on cost minimization and the following Cobb–Douglas cost function:

C eP K ;P L ;P M ;P M ;Q T?A à1P a K

K P a L L P a E E P a M M Q ,

(1)

where Q is the quantity of output,P K is the price of capital input,P L is the price of labor input,P E is the price of energy input,P M is the price of materials input,and a X is the elasticity of input X (X ?K ,L ,E ,M ).A is the produc-tivity term de?ned as

A ?exp ey ln eFDI Ttd W 1tl W 2T,

(2)

where FDI is foreign direct investment,here introduced as an exogenous technological shock to China’s productivity (see details in Section 5),and W 1and W 2represent ownership change and sectoral shifts,respectively,which are structural factors contributing to productivity.

From Shephard’s lemma,we know that the factor demand for an input is equal to the derivative of the cost function with respect to the input price.We derived the factor demand for energy

E ?a E A à1P a K

K P a L L P a E E P a M M Q P E

(3)

Assuming

P Q ?P a K

K P a L L P a E E P a M M ,

(4)

where

a i ?1,we simpli?ed Eq.(3)as

E ?

a E A à1P Q Q P E or E Q ?a E A à1P Q

P E

.(5)

Substituting for A de?ned above and taking the log of both sides,we obtained the following estimation equation:ln E Q

?a ty 0ln FDI td 0W 1

tl 0

W 2tb ln P E P Q

t i

e6T1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

E n e r g y i n t e n s i t

9.08.07.06.05.04.03.02.01.00.0

Fig.3.Aggregate energy intensity,coal intensity,and oil intensity in China between 1985and 2004.Note :tce/10,000yuan measured in 1985constant prices

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

E l e c t r i c i t y i n t e n s i t y

0.0

0.60.4

0.2

Fig.4.Electricity intensity in China between 1985and 2004.Note :kwh/

yuan measured in 1985constant prices

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Likewise,we could obtain the estimation equations for individual types of energy as follows (see details in Fisher-Vanden et al.,2004):ln E coal Q

?a ty 0ln FDI td 0W 1tl 0W 2

ta coal à1eTln P coal ^P Q !ta oil ln

P oil

Q !ta ele ln P ele

^P Q !t coal ,

e7Tln E oil Q

?a ty 0ln FDI td 0W 1tl 0W 2

ta coal ln P coal ^P Q !tea oil à1Tln

P oil

^P Q !ta ele ln P ele

^P Q !t oil ,

e8T

ln E ele Q

?a ty 0ln FDI td 0W 1tl 0W 2

ta coal ln P coal ^P Q !ta oil ln

P oil

^P Q !tea ele à1Tln P ele

^P Q !t ele ,

e9T

where ln ^P Q à

?ln P Q àá

àa C ln P C eTàa O ln P O eTàa EL ln P EL eT1àa C àa O àa EL

5.Empirical speci?cation and data

Explanatory variables in estimation equations include price variables,structural variables,foreign direct invest-ment (FDI),and dummy variables (see Appendix Table A2).5.1.Price variables

Price variables included aggregate energy price,coal price,oil price,and electricity price.These variables took the form of relative price (see Table A2).5.2.Structural variables

Structure-based variables fell into two categories:sectoral adjustments and ownership shifts.

5.2.1.Sectoral adjustments

The sectoral shift approach measured the impact of changes in industrial composition on overall energy

intensity.For example,China’s gradual move away from heavy industry,which was generally energy intensive,contributed to China’s declining energy intensity (Fisher-Vanden et al.,2004).Furthermore,while the share of primary industry (agriculture)has been declining gradu-ally,tertiary industry (service industry)has made a great stride in its share.We used W 2to describe the sectoral shifts,which we de?ned as the percentage of the output represented by tertiary industry in GDP.

5.2.2.Ownership shifts

China’s enterprise reform has included a gradual clari?cation and decentralization of property rights.Property rights reform within China’s enterprise sector has included both the strengthening of managerial control rights within ?rms that have maintained their state-owned enterprise (SOE)designation and a rapid expansion of various ownership classi?cations outside the state sector,both through new entry and through the conversion of SOEs.During the latter half of the 1990s,many of China’s larger SOEs were converted to shareholding companies (Li,1997;Jefferson et al.,2003).To illustrate this change in ownership,we used W 1to represent the extent of privatization,which we de?ned as the percentage of gross industrial output represented by state-owned enterprises.5.3.FDI

We introduced FDI to re?ect exogenous technological shocks,the impacts of which have been important to China’s technological development and economic growth.Sit (1985)pointed out that FDI has provided a substantial impetus in modernizing China’s existing industries,includ-ing the transfer of technological know-how,managerial expertise,and international marketing skills.Wei (1995)reported that in the late 1980s,the contribution to China’s economic growth came mainly from foreign investments.Furthermore,the contribution of foreign investment typically occurs in the form of technological or managerial spillovers across ?rms as opposed to an infusion of new capital.

5.4.Dummy variable

Given the drastic changes in energy price policy over time in China,especially in the early-to mid-1990s,we introduced a dummy variable to capture the differences in price effects over different periods of time.The value of the dummy variable,D ,was 0before 1995and 1after 1995.We had the time dummy variable interact with the price variables in the following econometric estimation equations.

5.5.Revised equations

Data used in Eqs.(6a)–(9a)(see below)are from time-series data sets collected between 1985and 2005.The data

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are from China’s Statistical Yearbook,published by China’s National Bureau of Statistics.

To use the aggregate data,we?rst had to address the relevant problem of endogeneity.It should be noted that oil prices and electricity prices are largely exogenously determined,because oil prices in China have been set in accordance with those of the global market and electricity tariffs are still under the tight control of the state government.Thus,the issue of endogeneity could result from the relationship of coal intensity and coal price(e.g.,a decline in coal intensity could lead to a decline in the demand for coal,which in turn would lead to a decline in coal prices).The relationship between FDI and energy intensity could also represent an endogenous issue because foreign investors might invest more in China because?rms are becoming more ef?cient.To avoid the problem of endogeneity,we adjusted Eqs.(6)–(9)to create Eqs. (6a)–(9a)using the data from the previous year in place of those of the current year for price variables and FDI.By doing so,we expected that the current energy intensity would not be the cause of the changes of energy prices and FDI in the last term.The revised estimation equations are as follows:

?aty0ln FDI tà1td0eW1Tttl0eW2Tt

tb ln

P E

tà1

tg D ln

P E

tà1

tf Dt i,

e6aT

E coal

?aty0ln FDI tà1td0eW1Tt

tl0eW2Ttta coalà1

eTln

P coal

tà1

ta oil ln

P oil

tà1

ta ele ln

P ele

tà1

tg1D ln

P coal

tà1

tg2D ln

P oil

tà1

tg3D ln

P ele

tà1

tf Dt coal,e7aT

E oil

?aty0ln FDI tà1td0eW1Tt

tl0eW2Ttta coal ln

P coal

tà1

tea oilà1Tln

P oil

tà1

ta ele ln

P ele

tà1

tg1D ln

P coal

tà1

tg2D ln

P oil

tà1

tg3D ln

P ele

tà1

tf Dt oil,e8aT

E ele

?aty0ln FDI tà1td0eW1Tt

tl0eW2Ttta coal ln

P coal

tà1

ta oil ln

P oil

tà1

tea eleà1Tln

P ele

tà1

tg1D ln

P coal

tà1

tg2D ln

P oil

tà1

tg3D ln

P ele

tà1

tf Dt ele.e9aT

We estimated Eqs.(6a)–(9a)as a system of four

seemingly unrelated regressions(SUR).

6.Results and analysis

Using Eqs.(6a)–(9a),we estimated the impacts of energy

price on energy intensity.We had to consider the problem

of multicollinearity among the three types of fuel prices,as

well as FDI,W1,and W2,which might in?uence the validity

of the estimated results.To avoid the possibility of

multicollinearity among these variables,we tried various

models through the addition/deletion of certain variables.

After carefully comparing the results from different

models,we?nally obtained the estimation results

shown in columns a–d of Table2,in which FDI and

W1were deleted.With the exception of the two coef?-

cients of electricity price in columns b and c,all coef?cients

were statistically signi?cant.Our main results are listed

below:

From Table2,we could calculate the own-price elasticity

and cross-price elasticity by energy type over the period

after1995by adding both the coef?cient associated with

the price variable alone and the coef?cient associated with

the interaction term.The results obtained are included in.

A comparison between Tables2and3makes us draw

conclusions as follows:

(1)The signi?cant coef?cients of interact terms(the

dummy variable interaction with the price variables)

in all four equations suggest a structural break of own-

price elasticities between the two periods before and

after1995.While the own-price elasticity of coal

increased greatly in its magnitude(à0.285before

1995andà1.591after1995),the own-price elasticity

of oil showed a signi?cant decreased magnitude

(à0.544before1995andà0.059after1995).And,the

own-price elasticity of aggregate energy changed from

à0.543before1995toà0.649after1995,implying the

price effect on the aggregate energy intensity becomes

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stronger over that last period.These results repre-sent evidence of asymmetric price effects over time periods.

(2)In both periods before and after1995,the own-price

elasticities were signi?cantly negative for coal,oil,and aggregate energy consumption,which is consistent with the results of Fisher-Vanden et al.(2004),implying that higher relative prices of different energy types leads to the decrease of coal intensity,oil intensity,and aggregate energy intensity,respectively.

(3)While the own-price elasticity of electricity was

negative before1995(–0.019,insigni?cant statistically), it became positive after1995(0.427),hence a structural break occurred for the own-price elasticity of electricity in the two periods.This?nding deserves more attention.As illustrated in Fig.4,electricity intensity has been increasing since1999,coinciding with the rising electricity price(Fig.2)at the same period,which results in the positive sign of the own-price elasticity of electricity.One possible explanation for this?nding may lie in the growing demand for electricity in recent years.Lin(2003)indicated that electricity demand(Q) in China is highly dependent on such factors as GDP, energy price(P),population(POP),light industry output(M2),and energy ef?ciency(EF).The co-integration model over the period1978–2001is as follows(Lin,2003):

ln Q?0:780ln GDPà0:016ln P

t0:565ln POPà0:527ln M2à0:332ln EF.

Table2

The estimation results of energy intensity by energy type

Dependent variable(a)Aggregate energy ln(E/GDP)(b)Coal ln(E coal/GDP)(c)Oil ln(E oil/GDP)(d)Electricity ln(E ele/GDP)

C 3.222*** 2.684*** 1.176***–0.911***

(12.962)(21.704)(8.077)(à12.006)

lneP coal=^P QT–0.285**0.1210.031

(–2.313)(0.821)(0.413)

lneP oil=^P QTà0.541***–0.544***–0.070*

(à9.149)(–7.713)(–1.921)

lneP ele=^P QT0.1420.531***–0.019

(0.939)(2.957)(–0.206)

lneP E=P QT–0.543***

(–3.657)

W2–0.040***–0.029***–0.028***–0.005*

(–4.975)(–6.922)(–5.626)(–1.766)

D–0.237***–0.147***–0.296***–0.131***

(–5.166)(–6.296)(–10.850)(–9.166)

D lneP coal=^P QT–1.306***0.023–0.629***

(–7.806)(0.114)(–6.100)

D lneP oil=^P QT0.264***0.485***0.180***

(4.088)(6.306)(4.516)

D lneP ele=^P QT0.261–0.651***0.446***

(1.520)(–3.181)(4.211)

D lneP E=P QT–0.106*

(1.767)

Adjusted R20.9650.9260.9770.951

Note:(1)The?gures in parentheses are t-values.

(2)*Signi?cant at the10%level.

**Signi?cant at the5%level.

***Signi?cant at the1%level.

Table3

The own-price elasticities and cross-price elasticities by energy type after1995

Dependent variable(a)Aggregate energy ln(E/GDP)(b)Coal ln(E coal/GDP)(c)Oil ln(E oil/GDP)(d)Electricity ln(E ele/GDP) lneP coal=^P QTà1.5910.144à0.598

lneP oil=^P QTà0.277à0.0590.110

lneP ele=^P QT0.403à0.1200.427

ln(P E/P Q)à0.649

L.Hang,M.Tu/Energy Policy35(2007)2978–29882985

This equation suggests that multidimensional effects may exist for the own-price elasticity of electricity(i.e., price effect,income effect(GDP),population effect, and structural effect(percentage of light industry output in total GDP)).While the price effect and the structural effect were negative,the income effect and population effect were both positive.In addition,the magnitude of the price effect was the least of all the four effects(à0.016).Hence,the aggregate outcome of these effects resulted in the positive sign of the own-price elasticity of electricity after1995.

(4)Regarding the substitutability/complementarity among

the three energy types,the only conclusion we can draw is that coal and electricity are substitutes in the period before1995,according to their cross-price elasticities.This is partly consistent with the?nd-ings of Fisher-Vanden et al.(2004).It seems the interfuel price transmission mechanism is complex in China.

(5)The coef?cients of W2were statistically signi?cant in all

four cases,and the negative sign of these coef?cients indicates that the growth of tertiary industry had negative effects on energy intensity,which is consistent with the results of previous studies.Hence,in addition to energy price,sectoral shifts were another main contributor to China’s declining energy intensity in the last two decades.

7.Conclusion and policy implications

In this paper,we investigated the impacts of energy price on energy intensity.While China’s declining energy intensity is often explained in terms of technological and structural factors(Crompton and Wu,2005),we took a different approach and focused on the role of energy price deregulation.Our major?ndings are as follows:

1.The own-price elasticities of coal,oil,and aggregate

energy were negative in the periods before and after 1995,which implies that an increase of relative prices of different energy types leads to a decrease in coal intensity,oil intensity,and aggregate energy intensity.

However,the positive own-price elasticity of electricity after1995indicates that the price effect is probably weaker than that of other factors,such as income effect and population effect.Overall,raising energy prices is an effective policy tool for increasing ef?ciency of energy use.

2.In addition to changes in energy price,changes in

structure—especially the growth of tertiary industry—also contributed to China’s declining energy intensity.

3.The impacts of energy prices were asymmetric over the

time periods studied.While the own-price elasticity of coal increased greatly in magnitude(à0.285before1995

andà1.591after1995),the own-price elasticity of oil decreased signi?cantly in magnitude(à0.544before 1995andà0.059after1995).

Consistent with Cornillie and Fankhauser’s?ndings (2004),we found a strong link between energy prices and energy intensity in the transition context of the Chinese economy.This existence of this link is not surprising because transition is chie?y about creating structures and incentives for the ef?cient use of resources,and energy is a crucial resource in transition countries(Cornillie and Fankhauser,2004).In anticipation of China’s vast total energy demands in the coming decades,it is urgent for policy makers to enhance energy ef?ciency in China,and raising energy prices may be a real option to approach this aim.

From the perspective of energy ef?ciency,we conclude that raising energy prices is a useful and productive policy tool,not only because it will correct its possible distortion(i.e.,too cheap under the strong regulation by state government),but also because it will be helpful in marketing the price of coal.In fact,because coal is a main source of power generation—it accounted for 455%of total coal consumption in2004—tough price bargaining between coal corporations and power corporations has been occurring for a long time(it is known as the‘‘coal–electricity price con?ict’’).Un-doubtedly,raising the electricity price may mitigate this con?ict.

Another advantage to raising energy prices is that it will be bene?cial to the security of China’s energy supply.This is especially true for oil,because raising the oil price will provide a strong incentive to domestic oil corporations to enhance their core competence.The rapid increase in energy consumption raises important issues for the security of China’s energy supply.In2003,China’s imports of oil reached128.3million tonnes,or around46%of domestic oil consumption,following growing energy demand/supply imbalances as domestic supply struggled to keep pace with demand.The increasingly high dependence on imported oil exposes China to the price volatility of the global oil market.Hence,it is imperative for domestic oil corpora-tions to diversify both the sources of imported energy and the suppliers.

The impacts of raising energy prices are multidimen-sional.Increasing prices will improve energy ef?ciency and increase energy supply,but it will also add more burdens to vulnerable households.Because of the big gap between the poor and the rich in China,as indicated by the Gini coef?cient(above0.4),it will be a great challenge for the state government to eliminate fuel poverty.Given the strong social sensitivity of energy prices,as well as their possible shocks to the Chinese economy,it is necessary for policy makers to raise energy prices gradually through economic approaches.Hence,China has a long way to go in terms of future energy price reform,because policy makers face a trade-off among economic growth,

L.Hang,M.Tu/Energy Policy35(2007)2978–2988 2986

social stability,energy supply security,and energy ef?-ciency.

Since the beginning of2006,the state government has raised energy prices several times.For instance,on26th March,the government raised prices of gasoline and diesel by300and200yuan,respectively.On24th May,prices for oil products were raised by500yuan,and electricity tariffs were raised by2.52fen on average since1st May.These frequent price adjustments suggest that a new round of energy price reform lies just ahead.Acknowledgments

We would like to thank the anonymous referee for his valuable comments.All remaining errors are ours. Appendix

For elasticity ratio of energy consumption in China from 1985to2004and the speci?cations of variables used see Tables A1and A2,respectively.

Table A1

Elasticity ratio of energy consumption in China:1985–2004

Year Growth rate of

energy consumption

over preceding year

(%)Growth rate of

electricity

consumption over

preceding year(%)

Growth rate of gross

domestic product

(GDP)over

preceding year(%)

Elasticity ratio of

energy consumption

Elasticity ratio of

electricity

consumption

19858.1913.50.60.67

1989 4.237.29 4.1 1.02 1.78

1990 1.8 6.2 3.80.47 1.63

1991 5.19.29.20.551

1992 5.211.514.20.370.81

1993 6.31113.50.210.7

1994 5.89.912.60.460.79

1995 6.98.210.50.660.78

1996 5.97.49.60.620.77

1997à0.8 4.88.80.55

1998à4.1 2.87.80.36

1999à1.58 6.17.10.86

20000.139.580.02 1.19

2001 3.548.637.50.47 1.15

20029.911.68.3 1.19 1.4

200315.316.59.5 1.61 1.74

200415.214.59.5 1.6 1.53

1.The data in2004were estimated?gures.

2.Source:National Bureau of Statistics,1985–2005.

Table A2

Variables speci?cation

Variables Description

Dependent variable

ln(E/GDP)Aggregate energy intensity(log)

ln(E coal/GDP)Coal intensity(log)

ln(E oil/GDP)Oil intensity(log)

ln(E ele/GDP)Electricity intensity(log)

Independent variable

Price variables

ln(P E/P Q)Price of aggregate energy/price of output(log)

lneP coal=^P QTPrice of coal/composite price of other inputs(log)

lneP oil=^P QTPrice of oil/composite price of other inputs(log)

lneP ele=^P QTPrice of electricity/composite price of other inputs(log)

Structural variables

Ownership W1Gross output in state-owned enterprises(%) Sectoral shifts W2GDP in tertiary industry(%)

ln(FDI)Annual foreign direct investment in RMB(log)

Dummy The value is0before1995and1after1995

Note:All prices are calculated from State Statistical Bureau in price indexes(1985?1).

L.Hang,M.Tu/Energy Policy35(2007)2978–29882987

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