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2013-07-11 | project

China's Climate Change Policies: Competitiveness and Distributional Effects - An Ex-post and Ex-Ante Analysis

Project Progress Report

It is now well known that China has become the biggest emitter of the greenhouse gases and the biggest coal using country. Under the pressure of rising carbon emissions, local air pollution as well as energy security concerns, the Chinese government has adopted a series of energy saving policies in the 11th Five Year Plan (FYP)2006-10 and planning to draft more policies in the current 12th Five Year Plan period. In the 11th FYP period, substantial policies have been enforced, such as shutting down inefficient small power plants, imposing energy-saving targets on manufacturing firms, and imposing differential electricity pricing policies in the manufacturing sector. Although technology mandates are used widely, there is some limited use of market-based instruments. In the 12th Five Year plan period, the Chinese government is actively pursuing more market-based policies, including carbon tax and other environmental tax reform, as well as carbon pricing through pilot cap-and-trade programs.

In this project, we have conducted an ex-post study on the effects of 11th Five Year Plan policies on manufacturing firms, to understand how firms actually responded to the government mandates and limited market-incentives (such as differential electricity pricing). Based on a firm level energy saving and carbon abatement survey in 6 provinces, we first examined the effectiveness of the 11th FYP energy saving policies empirically, and summarized the abatement cost and R&D investment. We then use a CGE model to simulate the economy-wide effects of sectoral “energy saving” targets in the manufacturing sector. The results are given in Cao and Zhou (2013).

Rising energy prices during this period induced people to reduce residential energy use somewhat; however, this substitution effect is overwhelmed by the income effect of greater use of air-conditioners and other appliancesgenerated by the rising incomes. In order to understand how household use of fuels, electricity and gasoline has changed in response to rising incomes and energy prices, we estimate the income and price elasticities for these energy types using a two-stage budgeting method, applying a Linear Expenditure System and AIDS model using NBS urban household survey data. The results are reported in Cao, Ho and Liang (2013). We find the energy is price-inelastic for all income groups. For the individual energy types the price elasticities range from -0.403 to -1.143. Gasoline is the most income elastic and electricity is the least. Low income households are more price elastic than richer ones, with an elastic demand for coal and inelastic demand for electricity and gas. The middle income group is more price elastic for electricity and gas, and less elastic for gasoline than the high income group. High income group are more price elastic for gasoline than for the other two types of energy.

Ourfuture research plan aims to estimate a complete consumption model that includes more detail on all expenditures, not just energy. These expanded demand functions will then be used in our carbon tax incidence study. By combining our CGE model and econometrics results, we can provide a better evaluation of likely policy impacts as well as estimates on household distributional effects. 

    Principal investigator

  • Other authors:
    Ho, Mun