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Energy Prices and Energy Intensity in China: A Structural Decomposition Analysis and Econometrics Study

Xiaoyu Shi and Karen R. Polenske

May 2006

Xiaoyu Shi and Karen R. Polenske, May 2005

Since the start of its economic reforms in 1978, China\'s energy prices relative to other prices have increased. At the same time, its energy intensity, i.e., energy consumption per unit of Gross Domestic Product (GDP), has declined dramatically, by about 70%, in spite of increases in energy consumption. Is this just a coincidence? Or does a systematic relationship exist between energy prices and energy intensity?

In this study, we examine whether and how China’s energy price changes affect its energy intensity trend during 1980-2002 at a macro level. We conduct the research by using two complementary economic models: the input-output-based structural decomposition analysis (SDA) and econometric regression models and by using a decomposition method of own-price elasticity of energy intensity. Findings include a negative own-price elasticity of energy intensity, a price-inducement effect on energyefficiency improvement, and a greater sensitivity (in terms of the reaction of energy intensity towards changes in energy prices) of the industry sector, compared to the overall economy.

Analysts can use these results as a starting point for China\'s energy and carbon emission forecasts, which they traditionally conduct in China without accounting for energy-intensity changes. In addition, policy implications may initiate new thinking about energy policies that are needed to conserve China\'s energy resources and reduce carbon emissions.

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