Elsevier

Energy Policy

Volume 38, Issue 3, March 2010, Pages 1379-1388
Energy Policy

Why did China’s energy intensity increase during 1998–2006: Decomposition and policy analysis

https://doi.org/10.1016/j.enpol.2009.11.019Get rights and content

Abstract

Despite the fact that China’s energy intensity has continuously decreased during the 1980s and mostly 1990s, the decreasing trend has reversed since 1998 and the past few years have witnessed rapid increase in China’s energy intensity. We firstly conduct an index decomposition analysis to identify the key forces behind the increase. It is found that: (1) the high energy demand in industrial sectors is mainly attributed to expansion of production scale, especially in energy-intensive industries; (2) energy saving mainly comes from efficiency improvement, with energy-intensive sectors making the largest contribution; and (3) a heavier industrial structure also contributes to the increase. This study also makes the first attempt to bridge the quantitative decomposition analysis with qualitative policy analyses and fill the gap between decomposition results and policy relevance in previous work. We argue that: (1) energy efficiency improvement in energy-intensive sectors is mainly due to the industrial policies that have been implemented in the past few years; (2) low energy prices have directly contributed to high industrial energy consumption and indirectly to the heavy industrial structure. We provide policy suggestions in the end.

Introduction

China's energy demand has been increasing for decades. The growth has clearly speeded up in the new century, from 1386 million tons of standard of coal equivalent (tce) in 2000–2463 million tons of tce in 2006 (CSY, 2007). Moreover, industrial consumption increased more rapidly due to expansion in energy-intensive industries. China's industrial energy consumption reached 1751.4 million ton of coal equivalent (mtce) in 2006, which was 95.66 percent more than that in 2000 (CESY, 2007). The contribution of industrial sector to the total energy consumption increased from 64.59 percent in 2000 to 71.10 percent in 2006 (Fig. 1). The variations of the industrial output proportion is one of the important drivers behind the plunge in industrial energy consumption in the late 1990s. In July 1997, the Southeast Asian financial crisis broke out, which had a big impact on China’s industrial export and production. In 1998 and 1999, China’s export only increased 3 percent annually while the figures were 25.8 percent for the period of 1991–1997 and 29.9 percent for the period of 2001–2005, respectively. Domestic economy also experienced a deflation period and the output proportion of the secondary industry dropped from 46.2 percent in 1998 to 45.1 percent in 2001.The new economic cycle started since 2001. On the recovery of the financial crisis and China’s joining WTO in 2001, China’s secondary industrial production picked up rapidly. This is especially for energy-intensive sectors since 2003. In 2006, the output share of the secondary industry had reached 48.9 percent (CSY, 2007).

China has become the world's largest consumer for coal since 1986, and the second largest consumer for oil since 2002 and for electricity since 1995 (BP, 2009). China's high demand for primary energy has outpaced its energy production since 2001 (Fig. 2). Over the period of China’s ninth “Five-Year Plan” (1996–2000), the demand of electricity decreased dramatically (Huang, 2009) due to the adjustment of economic structure and Southeast Asian financial crisis. China’s electricity supply outpaced the demand over this period (Liu, 2005). Hence, the central government controlled strictly the investment in electricity industry since 1996. More than 70 percent of coal consumption attributed to electricity industry in China. As a result, the slow development in electricity industry lead to the reduction in coal consumption and production. Coal and electricity are two major kinds of energy in China (Fig. 4), the reduction in coal and electricity consumption and production attributed to the reduction in the total energy consumption and production (Fig. 2). Despite the fact that China's energy intensity has continuously decreased during the 1980s and mostly 1990s, the decreasing trend has reversed since 1998 and the past few years have witnessed rapid increase in China's energy intensity (Fig. 3). The facts of high demand are accompanied by a heavily coal-dependent consumption structure (Fig. 4) and low per capita energy endowments (77.36 percent of coal is devoted to power generation Authors’ calculation according to the CSY (2008) and China Electricity Council, 2008 electric power industry statistics monthly.). China's coal use takes up about 70 percent of the total energy consumption. Per capita oil, natural gas and coal deposits of China are only 6.1, 6.5, and 79 percent of the world average (Jiang, 2008).

The Chinese government is facing severe challenges from energy supply gap, low endowments and greenhouse gases (GHGs) pressure due to heavy dependence on coal use. The energy issue has become critical and strategic for China's long-term development. To achieve sustainable development, the Chinese government has no other choices but energy-saving practices (Wang et al., 2008). In fact, the government has long been looking for sustainable energy policies and strategies particularly in the industrial sector. Zhang (2003) has correctly pointed out that a deeper understanding of how energy consumption evolves in the sectors is very important in formulating future policies. This includes identification of key factors affecting energy consumption of the sectors under study. Such insights are also valuable to evaluate the performance of past policies. Since the industrial sector plays such a dominant role in total energy consumption, this paper studies the key forces behind the increase in China's industrial energy consumption using index decomposition analysis (IDA) and link the results to analysis of related industrial policies and energy price policies that have been implemented in the past years.

The paper proceeds as follows. The opening section introduces current energy situation and challenges and Section 2 goes through main studies and results applying decomposition methods. The next section introduces decomposition methodologies and discusses the data to be used and the way of data disposal. Our results and analysis are presented in the fourth section. Section 5 studies China's energy-related industrial policies and Section 6 reviews and evaluates energy price policy development. And the last section concludes.

Section snippets

Past studies: A literature review

Decomposition of China's industrial energy demand has recently become an actively researched topic. Many studies have attempted to identify quantitatively the structural effect and energy intensity effect of industrial energy consumption, which respectively, capture the contribution of industrial structure change and the contribution of energy intensity change (also interpreted as technology change or efficiency change) to the change in total industrial energy consumption. Results can be

Methods

Two broad categories of decomposition techniques have been developed in the literature, namely the input–output techniques—structural decomposition analysis (SDA) and the disaggregation techniques—index decomposition analysis (IDA). See Hoekstra and Van der Bergh (2003) and Ma, 2009, Ma and Stern, 2008 for discussions of the advantages and disadvantages of each category. Within the broad category of IDA, a variety of different indexing methods have been used. Ang (2004) provides a comprehensive

Comparison of decomposed effects

As shown in Table 1, the industrial energy consumption increased 805.52 mtce from 1998 to 2006. The contribution of production effect is 1763.33 mtce, which is the main driving force for the increase of China's industrial energy consumption. China's aggregate industrial production increases 20.29 percent annually during this period, Authors’ calculation according to the CSYs in constant 1998 price. which substantially drives up energy demand and consumption. On the other hand, the efficiency or

Analysis of industrial policies

Previous studies have also found that the improvement of energy efficiency is the main driver of the decrease of China's industrial energy consumption; however, explanations vary for different study periods. We argue that in the past few years, energy efficiency improvement in China's industrial sector was mainly policy driven. Yang (2008) mentioned that about half of the overall energy efficiency (economy-wide energy intensity) improvement is expected to come from energy consumption reduction

Analysis of energy price policies

China's energy price policies have experienced three stages with different policy focuses. We discuss the three stages in the following and illustrate associated policies in Fig. 9. The theme of energy price policies changes from stage to stage, but the main characteristic remains the same—low prices for energy products. Firstly, such low energy prices contribute directly to the rapid growth in energy consumption, and secondly, low prices particularly favor the development of energy-intensive

Conclusions

This study examines China's industrial energy consumption during 1998–2006 using the LMDI method. We intend to identify the key factors that influence China's industrial energy consumption and bridge the quantitative decomposition analysis with the qualitative policy analysis. We found that the most important driver behind China's energy intensity increase during 1998–2006 is the rapid development in energy-intensive industries. The top four contributing industrial sectors, which contribute

Acknowledgements

This study is funded by the National Natural Science Foundation of China (Project no. 70773040) and the National Social Science Foundation of China (Project no. 08BJL051). The authors want to thank Zhongfu Tan, Junfeng Hu and two anonymous reviewers for their comments and suggestions. An earlier version of this study was presented at Erb Colloquium at the University of Michigan. Comments from participants are much appreciated.

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