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The threshold effects of energy efficiency on the elasticity of substitution between energy and non-energy factors

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Abstract

Considerable efforts have been made to estimate the relationship between energy and non-energy inputs in the production process. However, it remains controversial whether energy and non-energy inputs are complements or substitutes. Empirical analysis is conflicting on this issue. This study seeks to explore an alternative way to explain these conflicting results by examining the issue from the perspective of energy efficiency. This study is based on time series data for capital, labor, and energy from 28 Chinese provinces, covering 1985 to 2012. The results show that capital and energy are substitutes in all of the provinces, whereas labor and energy are complements in most of the provinces. Using the threshold effect model, we discover evidence of a threshold point based on the amount of energy efficiency activity in a province. This point separates the substitution behavior of provinces between energy and non-energy inputs. Low-energy efficiency provinces do not substitute as readily as high-energy efficiency provinces. The findings imply that the energy-saving technologies should be applied in provinces with comparatively higher energy intensity because they have more energy conservation potential.

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Notes

  1. The choice of the starting period was constrained by availability. The municipality of Chongqing separated from Sichuan province in 1997 and become an independently administered municipal city. We combine Chongqing and Sichuan together, which is the common way to deal with their relationship for the purpose of time series research. Hainan was created in 1988 as a province, leaving its data empty for 1985–1987. And since there is no energy data available in the public domain for Tibet, we have excluded it in our empirical study. Thus, we get 28 cross-section observations, which we refer to as “province” or “region.”

  2. Due to the unavailability of material input for various regions, material is not incorporated. Frondel and Schmidt (2002) argue that whether or not a static translog study incorporates materials is irrelevant for the estimates it produces.

  3. There is a considerable amount of missing time series data of fuel price for China except of coal. Here, to calculate the energy values, we multiply the coal price by the standard coal equivalent energy, which seems the best alternative. Fortunately, coal makes up approximately 70 % of total energy consumption.

  4. The number of bootstrap replications is 300.

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Acknowledgments

We are grateful to the comments from David Vanzetti and Anil Kavuri and financial support from China Natural Science Funding No. 71673134, Qing Lan Project, and the Fundamental Research Funds for the Central Universities No. NJ20150035.

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Authors and Affiliations

  1. College of Economics and Management, Nanjing University of Aeronautics and Astronautics, Nanjing, 211106, China

    Donglan Zha & Jinjin He

  2. Research Centre for Soft Energy Science, Nanjing University of Aeronautics and Astronautics, Nanjing, 211106, China

    Donglan Zha & Jinjin He

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Correspondence to Donglan Zha.

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Zha, D., He, J. The threshold effects of energy efficiency on the elasticity of substitution between energy and non-energy factors. Energy Efficiency 10, 873–885 (2017). https://doi.org/10.1007/s12053-016-9491-2

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