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Impacts of energy intensity target constraint on elasticity of substitution between production factors in China

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Abstract

China has implemented the energy intensity target (EIT) constraint policy to improve its energy efficiency for more than three decades. Producers in China need to consider factor prices, outputs, and EIT constraint while they plan the number of input factors. Therefore, this article brings the EIT into the conditional input demand function of an input factor and assesses the impacts of the elasticity of substitution between different production factors. By building two-factor substitution elasticity models with and without EIT constraints, this paper examines the impacts of EIT constraint on the elasticity of substitution between input factors in both the fossil fuel production sector and the non-fossil-fuel production sector. The main conclusions are, firstly, EIT constraint influences both own-price elasticity of an input factor and cross-price elasticity between different input factors. Secondly, EIT constraint hinders the responses of some input factors to the price changes of other input factors, and changes relationships between some input factors from complementary to substitute, or vice versa. Two policy implications are obtained. First, producers should consider the impacts of EIT constraint on their investment, labor input, energy input, and raw materials purchase and bring these impacts into their business strategies. Second, reducing energy input by changing prices of other production factors will be ineffective under EIT constraint.

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Notes

  1. According to enterprise ownership, Chinese firms can be classified into the following categories: private firms, joint-stock firms, joint ventures, state-owned firms, firms owned by the whole people, firms under collective ownership, and so on. However, this paper does not focus on the types of firms. As long as firms participate in economic activities in China’s market, they are the objects concerned by this paper.

  2. In a strict sense, energy intensity represents the energy consumption per unit of GDP. However, to facilitate the construction of models, energy intensity is set as the energy consumption per unit of output. There is no marked difference between the fluctuation velocities of the two kinds of index.

  3. Under the assumption of linear homogeneous input-demand functions of factors, the coefficient of \( \hat{E} \) is 1.

  4. Under the assumption of linear homogeneous input-demand functions of factors, the coefficient of \( \hat{X} \) is 1.

  5. See CIP3.0 Database http://www.rieti.go.jp/en/database/CIP2015/index.html.

  6. The four energy industries are mining and washing of coal, extraction of petroleum and natural gas, processing petroleum and coking, and production and supply of gas.

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Funding

This research was funded by the National Natural Science Foundation of China, grant number 71673217.

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Authors and Affiliations

  1. School of Economics and Finance, Xi’an Jiaotong University, Xi’an, 710061, China

    Feng Wang & Ruiqi Wang

  2. Independent Energy Economist, Baarerstrasse 59, 6300, Zug, Switzerland

    Xiying Liu

  3. Energy Policy Research Group, Judge Business School, University of Cambridge, Cambridgeshire, CB2 1AG, UK

    David M. Reiner

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  1. Feng Wang
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  2. Xiying Liu
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  3. David M. Reiner
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  4. Ruiqi Wang
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Correspondence to Ruiqi Wang.

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Wang, F., Liu, X., Reiner, D.M. et al. Impacts of energy intensity target constraint on elasticity of substitution between production factors in China. Energy Efficiency 14, 34 (2021). https://doi.org/10.1007/s12053-021-09946-z

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