Working Papers in Economics

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1 Worng Papers n Econocs Departent of Econocs, Rensselaer Polytechnc Insttute, th Street, Troy, NY, , USA. Tel: ; Fax: ; URL: E-Mal: sternd@rp.edu Chna s Changng Energy Intensty Trend: A Decoposton Analyss Chunbo Ma Rensselaer Polytechnc Insttute Davd I. Stern Rensselaer Polytechnc Insttute Nuber 0615 Deceber 2006 For ore nforaton and to browse and download further Rensselaer Worng Papers n Econocs, please vst:

2 Chna s Changng Energy Intensty Trend: A Decoposton Analyss Chunbo Ma Departent of Econocs, Rensselaer Polytechnc Insttute, Troy, NY 12180, USA. Davd I. Stern Departent of Econocs, Rensselaer Polytechnc Insttute, Troy, NY 12180, USA. Abstract Chna experenced a draatc declne n energy ntensty fro the onset of econoc refor n the late 1970s untl 2000, but snce then rate of declne slowed and energy ntensty actually ncreased n Most prevous studes found that ost of the declne was due to technologcal change, but dsagreed on the role of structural change. To the best of our nowledge, no decoposton study has nvestgated the role of nter-fuel substtuton n the declne n energy ntensty or the causes of the rse n energy ntensty snce In ths paper, we use logarthc ean Dvsa ndex (LMDI) technques to decopose changes n energy ntensty n the perod We fnd that: (1) technologcal change s confred as the donant contrbutor to the declne n energy ntensty; (2) structural change at the ndustry and sector (sub-ndustry) level actually ncreased energy ntensty over the perod of , although the structural change at the ndustry level was very dfferent n the 1980s and n the post 1990 perod; (3) structural change nvolvng shfts of producton between sub-sectors, however, decreased overall energy ntensty; (4) the ncrease n energy ntensty snce 2000 s explaned by negatve technologcal progress; (5) nter-fuel substtuton s found to contrbute lttle to the changes n energy ntensty. JEL classfcatons: Q43 Keywords: Chna, energy, decoposton analyss, nter-fuel substtuton Tel: , Fax: , E-al: ac2@rp.edu. Correspondng author. Tel: , Fax: , E-al: sternd@rp.edu. 1

3 Chna s Changng Energy Intensty Trend: A Decoposton Analyss Introducton Snce the start of econoc refor n 1979, Chna has experenced spectacular econoc growth. Its gross doestc product (GDP) has ncreased at 9.5% annually over the past quarter century. Industry and anufacturng grew by an even faster rate, ore than 11% p.a. fro 1980 to 1990 and ore than 13% p.a. fro 1990 to 2000 (World Developent Indcators, 2002). But, over the sae perod, coercal energy consupton 1 ncreased by only 4.44% p.a. (Chna Energy Statstcal Yearboo, CESY). By 2000, coercal energy ntensty (energy/gdp) had decreased by 65% copared to Energy ntensty declned n every year up tll 2000 except for However snce 2000 the declne n energy ntensty slowed and energy ntensty actually ncreased n 2003 (Fgure 1 & 2). The a of ths paper s to nvestgate the causes of ths reversal n the trend and to apply a ore detaled decoposton analyss to a longer perod than any prevous study of Chna s energy ntensty. The causes of the sgnfcant declne n Chna s energy ntensty have been nvestgated by a nuber of decoposton studes (Huang, 1993; Snton and Levne, 1994; Ln and Polense, 1995; Garbacco et al., 1999; Zhang, 2003; Fsher-Vanden et al., 2003). Whle ost studes fnd that the ost portant factor s technologcal change, there s dsagreeent on the role of structural change a shft n the x of ndustres. Many found that structural change has played a nor role n reducng energy ntensty. However, Garbacco et al. (1999) found that structural change actually ncreased energy ntensty between 1987 and Fsher-Vanden et al. (2003) slarly found an ntensty-ncreasng effect at the 1-dgt SIC sectoral level 1 Coercal energy consupton s equvalent to all non-tradtonal fors of energy. In other words, t does not nclude boass, frewood, and other tradtonal fuels. 2

4 fro 1997 to We reach the sae concluson as the latter two research teas n our nvestgaton of the entre perod. Both Snton and Levne (1994) and Fsher-Vanden et al. (2003) found that the explanatory power of structural change rses as the level of sectoral dsaggregaton becoes fner. In ths paper we carry out a decoposton on a consstent 3 set of data at three levels of sectoral dsaggregaton: aong ndustres the hghest level subdvsons of producton 4, sectors wthn each ndustry, and sub-sectors wthn each sector. Structural change at each level wll be exactly dentfed. To the best of our nowledge, no decoposton study of Chna s energy ntensty has exaned the role of nter-fuel substtuton. Ths study wll contrbute to exanng the substtuton effect aong coal, ol, natural gas, electrcty and other fuels, on the overall energy ntensty. Addtonally, all prevous studes focus on the contnuous declne n energy ntensty n the perod untl 2000, though ostly they exane short nubers of years wthn those two decades. Ths s the frst study to loo at the post-2000 perod. The paper s organzed as follows. Secton 2 brefly revews the lterature and conducts a exploratory analyss of the data. Secton 3 descrbes the ethod used to decopose the nter-fuel substtuton effects, the technologcal change effect, and the structural effects at three levels of sectoral dsaggregaton. Secton 4 dscusses the sectoral dsaggregaton and data used. Secton 5 apples the decoposton ethod to two sets of data and presents and dscusses the results. Lastly, Secton 6 concludes. Lterature Revew and Exploratory Analyss There are two broad categores of decoposton technques: nput-output technques structural decoposton analyss (SDA) and dsaggregaton technques ndex decoposton analyss (IDA) (Hoestra and Van der Bergh, 2003). The SDA approach s 2 Ths level s nteredate between the ndustry and sector levels of aggregaton used by the Chnese governent and n ths paper. 3 Consstency s defned n ters of aggregaton. For exaple, a set of output data wth varous levels of sector al dsaggregaton s consdered consstent f the output of an ndustry equals the su of the output of all the sectors wthn that ndustry and the output of a sector equals the su of the output of all the sub-sectors wthn that sector. 4 Chna s econoy s currently categorzed nto three ndustres: prary, secondary and tertary ndustres. 3

5 based on nput-output coeffcents and fnal deands fro nput-output tables whle the IDA fraewor uses aggregate nput and output data that are typcally at a hgher level of aggregaton than nput-output tables. Ths basc dfference also deternes the advantages and dsadvantages of the two ethods. One advantage of SDA s that the nput-output odel ncludes ndrect deand effects deand for nputs fro supplyng sectors that can be attrbuted to the downstrea sector s deand - so that SDA can dfferentate between drect and ndrect energy deands. The IDA odel s ncapable of capturng ndrect deand effects. Thans to the greater structural detal n the nput-output table, SDA has another advantage of beng able to dstngush between a range of technologcal effects and structural effects that are not possble n the IDA odel. The advantage of the IDA fraewor s that t t can readly appled to any avalable data at any level of aggregaton. Whle nput-output tables ay only be avalable sporadcally, IDA can be appled to data avalable n te seres for. In ths paper, we use the IDA odel and, therefore, energy consupton refers to drect energy consupton wthout consderng ndrect spllovers. There are a varety of dfferent ndexng ethods that can be used n IDA. Ang (2004) provdes a useful suary of the varous ethods and ther advantages and dsadvantages. Several of these have been appled n analyses of Chna s energy ntensty. Huang (1993) uses ultplcatve arthetc ean Dvsa ndces to decopose energy ntensty changes n Chnese secondary ndustry and the sx sectors nto whch he dvded t n the perod nto the effects of structural change and proveents n energy ntenstes. The sx sectors are: paper, checals, buldng, etal, echancal - electrc electronc (MEE), and other secondary ndustry. He found that the an contrbuton to declnng ntensty n each ndustry s fro the proveents n sub-sector ntensty durng the perod. Most studes assue that such changes are the result of technologcal change. Structural change due to shfts of producton aong subsectors contrbuted lttle to the total change n Huang s study. Snton and Levne (1994) used a Laspeyres ndex ethod to deterne the relatve roles of structural change and real ntensty change (.e. the technologcal effect) n Chna's ndustral sector between 1980 and 1990 wth three dfferent sets of data, and found slar results to Huang (1993). Whle the prevous studes use IDA approaches, Ln and Polense (1995) used SDA to study Chna s energy use between 1981 and The econoy was 4

6 dsaggregated nto seven sectors: agrculture, energy, heavy ndustry, lght ndustry, constructon, and transport and servces. They found that Chna s reducton n energy use durng ths perod cae about prarly by changes n how to produce (producton technology changes) rather than n what to consue (fnal deand shft), whch s consstent wth other studes. Garbacco et al. (1999) also appled SDA to study the declne n ntensty between 1987 and 1992, dsaggregatng the econoy nto 29 sectors. Ther an concluson s that techncal change wthn sectors accounted for ost of the fall n the energy-output rato. Structural change actually ncreased the use of energy, whch s at varance to ost of the other studes. An ncrease n the port of soe energy-ntensve products also contrbuted to the declne n energy ntensty 5. Zhang (2003) used an addtve Laspeyres ndex to exane the energy use n Chna s ndustral sector durng Industral energy consupton was decoposed nto scale, real ntensty, and structural effects, and real ntensty (.e. technologcal effect) was found to be the donant factor. The ndustral sector was also dsaggregated nto 29 sectors. Fsher-Vanden et al. (2003) exaned the absolute declne n energy consupton as well as ntensty declne durng They appled the ultplcatve arthetc ean Dvsa ethods to a unque set of enterprse-level data. They decoposed both total energy ntensty as well as ntenstes coputed for each of the ndvdual fuels and electrcty. As expected, they found that proporton of the change n energy ntensty explaned by structural change rses as the level of dsaggregaton becoes fner. At the fr level, shfts n the shares of frs n ndustry output accounted for ore than half of easured reductons n total energy ntensty. Whle productvty change wthn frs stll eerges as the donant factor drvng the declne n the ntensty of electrcty, shfts of output between frs plays a near equal, though saller, role n declnng coal and refned ol ntenstes. Consstent wth the fndngs of Garbacco et al., the results also showed that structural change at the 1-dgt SIC level ncreased energy ntensty. 5 These two SDA studes also use ndex decoposton n ther analyses. Ln and Polense s study was actually an addtve Laspeyres type decoposton that use fxed base-perod shares, whereas Garbacco et al. s wor used addtve arthetc ean Dvsa type decoposton. 5

7 Fgure 1 - Coercal Energy Intensty n Logarths ( ) Fgure 2 - Coercal Energy Intensty n Growth Rates ( ) 10% 5% 0% -5% % -15% -20% 1) Data Source: Chna Statstcal Yearboo (CSY), Chna Energy Statstcal Yearboo (CESY), varous ssues. 2) The raw energy data are n gras of standard coal equvalent (GSCE) and coercal energy consupton ncludes the consupton of coal, ol, natural gas, electrcty, heat and others; the raw GDP data are at constant prces (RMB). In concluson, accordng to the studes dscussed above, the technologcal effect has consstently contrbuted to decreasng energy ntensty n Chna durng ost of the econoc refor perod but a clear pcture does not eerge regardng the contrbuton of structural change. The actual changes n ndustral structure are very dfferent n the decade of the 1980s and the perod followng the 1980s. As shown n Fgure 2, fro 1980 to 1990, structural change occurred anly fro prary ndustry (agrculture) to servces, wth prary ndustry s share of GDP decreasng fro 37% to 28% and servces share ncreasng fro 28% to 36%. In ths perod the share of secondary ndustry was relatvely constant, ncreasng slghtly fro 35% to 36%. However, fro 1990 to 2003, a shft n output fro prary ndustry to secondary ndustry donated, wth the share of prary ndustry 6

8 decreasng fro 28% to 14% and secondary ndustry ncreasng fro 36% to 53%. Over the sae perod, the share of servces declnes slghtly fro 36% to 33%. Fgure 3 shows the dfferent energy ntenstes of prary, secondary and tertary ndustry n Chna. Secondary ndustry has the hghest ntensty and prary ndustry the lowest. Consderng the energy ntenstes n the three ndustres (Fgure 4) and the patterns of structural change over te (Fgure 3), the effect of structural change on energy ntensty at the ndustry level should be an ncrease n energy ntensty durng the entre perod of econoc refor. Fgure 3 - Industry Coposton 100% 80% 60% 40% 20% 0% Prary Secondary Tertary 1) Prary ndustry ncludes one sector Farng, Forestry, Anal Husbandry, Fshery and Water Conservancy ; secondary ndustry ncludes four sectors Mnng, Manufacturng, Electrc power, Gas and Water and Constructon ; and tertary ndustry ncludes three sectors - Transportaton, Storage, Post and Telecouncaton Servces, Wholesale, Retal Trade and Caterng Servces, and Resdental Consupton and Others (Households). 2) Data Source: CSY 2005; authors calculaton (constant prces). Whle ost studes attrbute the declne to the effects of structure and technologcal change, none of the prevous studes have exaned the effect of nter-fuel substtuton on overall energy ntensty. Presuably, as the energy coposton of an econoy changes, the overall energy ntensty would change as well due to the dfferences n qualty of the varous energy carrers, 6 gven a constant level of technology and coposton of output. In all prevous 6 The concept of energy qualty refers to the dfferences n econoc productvty of dfferent fuels and electrcty. There are dfferent ways of defnng and easurng energy qualty. The relevant concept here s the dfferent argnal productvtes of the fuels (Cleveland et al., 2000). Typcally electrcty has a hgher argnal product per oule than ol and natural gas, whch n turn have hgher argnal products than coal. Therefore, substtutng a oule of electrcty for a oule of ol, or a oule of ol for a oule of coal wll reduce energy ntensty. 7

9 studes of Chna s energy ntensty nter-fuel substtuton s subsued nto technologcal change. 7 The current study separates nter-fuel substtuton - a ove along a neoclasscal producton soquant fro technologcal change - a shft n the neoclasscal soquants. Fgure 4 - Industral Energy Intensty ( ) Prary Secondary Tertary 1) Fgure s n logarthc scale; the raw energy data are n gras of standard coal equvalent (GSCE) and the raw GDP data are at constant prces (RMB). 2) Data Source: CSY 2005; CESY, varous ssues; authors calculaton. Coercal energy ntensty n Chna has fallen contnuously n ost years over the perod (Fgure 1 & 2) but t also stagnated durng two perods: and The declne n coercal energy ntensty slowed down durng both perods although stagnancy was ore salent n the latter perod. Moreover, energy ntensty even ncreased n the years of 1989 and What are the dfferences between these two perods n ters of the causes of stagnancy? Is the change n the latter perod teporary as n the late 1980s, or s t a sgn of a reversal n trend? All prevous studes focus on the draatc declne. It s portant to understand the substantal decrease n Chna s energy ntensty; however, t also aes good sense to also exane the stagnant perods and answer these questons. 7 The nter-fuel substtuton effect has been studed n the carbon decoposton lterature usng the Kaya dentty decoposton or ts extended fors. 8

10 Methods Several varants of the IDA approach have been developed. However, to a large extent, selecton of ethod sees to be arbtrary and there s lttle consensus as to whch one s the superor ethod. Ang (2001, 2004) and Ang et al. (1998) argued that the logarthc ean dvsa ndex (LMDI) ethod should be preferred to other decoposton ethods wth the advantages of path ndependency, ablty to handle zero values and consstency n aggregaton (See Appendx for ore detals). Therefore, we have adopted ths ethod though t has not been used n prevous studes of Chna s declnng energy ntensty. 8 Each decoposton approach can be appled n a perod-wse or te-seres anner. A perod-wse decoposton copares ndces between a base year and the fnal year of a gven perod, showng the accuulated effects over the perod. However, the results of a perod-wse decoposton are very senstve to the choce of base year and fnal year and t does not show how the effects of the decoposed factors have evolved over the studed perod. A te-seres analyss copares ndces on a year-by-year bass and when annual data are avalable, te-seres decoposton s, therefore, preferred and adopted n the current study. In any case, perodwse results can be derved fro a te-seres analyss, but not vce versa, of course. The addtve for 9 of the decoposton s as follows:!!!! F " I " I = S (1) I - Overall energy ntensty; F - Share of fuel n total energy consupton of the -th sub-sector; I - Energy ntensty n the -th sub-sector; S - Output share of the -th sub-sector n the -th sector; 8 However, ths ethod has been used n decoposng Chna s carbon essons (Wu et al., 2005; n press; Wang et al., 2005) 9 See Ang (2005) for defntons of addtve and ultplcatve fors of decopostons. 9

11 S - Output share of the -th sector n the -th ndustry; S - Output share of the -th ndustry n the overall econoy. Manpulatng equaton (1) as descrbed n the Appendx results n the decoposton of the annual changes n energy ntensty: "I tot = $ $ $ $ L(w t#1,w t ) ln( F t ) + $ $ $ $ L(w t#1,w t ) ln( I t ) F t#1 I t#1 + $ $ $ $ L(w t#1,w t ) ln( S t ) + $ $ $ $ L(w t#1,w t ) ln( S t ) S t#1 S t#1 + $ $ $ $ L(w t#1,w t ) ln( S t ) = "I fls + "I tec + "I strss + "I strs + "I str S t#1 (2) Where w = F! I! S! S! S, and L(w t"1,w t ) s a weghtng schee called logarthc ean weght: L(w t"1,w t ) = (w t " w t"1 ) /ln(w t /w t"1 ). "I tot,! I fls, tec! I,! I strss,! I strs, and! I str are aggregate ntensty change, ntensty changes due to fuel substtuton, technologcal change, and structural shft at three levels (34 sub-sectors, 8 sectors and 3 ndustres) of sectoral dsaggregaton respectvely. We apply ths detaled odel to a dataset coverng the perod of Because consstent data at the level of sub-sectors s not easly avalable for the perod fro 1980 to 1993 (See next secton for ore detals) we conduct a separate decoposton n order to exane the patterns of the structural effects over the longer perod fro 1980 to Ths decoposton only uses two levels of sectoral dsaggregaton (3 ndustres and 6 sectors) and does not separately account for nterfuel substtuton. Ths splfed decoposton s gven by: 10

12 "I tot = $ $ L(w t#1,w t ) ln( I t ) + $ $ L(w t#1,w t ) ln( S t ) I t#1 S t#1 + $ $ L(w t#1,w t ) ln( S t ) = "I tec + "I strs + "I str S t#1 (3) Equaton (2) and (3) are referred to as the coplete decoposton and the splfed decoposton henceforward. Data We copled data fro varous ssues of the Chna Statstcal Yearboo (CSY) and Chna Energy Statstcal Yearboo (CESY). The energy data and GDP data are n gras of standard coal equvalent (GSCE) and RMB Yuan respectvely. The whole econoy s dvded nto three ndustres: the prary, secondary, and tertary ndustres. The prary ndustry ncludes one sector Farng, Forestry, Anal Husbandry, Fshery and Water Conservancy (FFAFW). Secondary ndustry s dsaggregated nto four sectors Mnng, Manufacturng, Electrc Power, Gas and Water (EGW), and Constructon. Tertary ndustry ncludes three sectors - Transportaton, Storage, Post and Telecouncaton Servces (TSPTS), Wholesale, Retal Trade and Caterng Servces (WRTCS), and Resdental Consupton and Others (Households). The thrd and fnest level of dsaggregaton s wthn secondary ndustry sectors of Mnng, Manufacturng, and EGW whch are further dvded nto 6, 20, and 3 sub-sectors respectvely. The dataset wth three levels of dsaggregaton (3 ndustres, 8 sectors and 34 sub-sectors) covers the perod of The second set of data covers the longer perod fro 1980 to 2003; however, we only dsaggregate the econoy nto two levels for ths longer perod analyss: three ndustres (prary, secondary and tertary) and sx sectors (FFAFW, Industry, Constructon, TSPTS, WRTCS, and Households). Ths cruder dsaggregaton s used because we do not have energy consupton data at a fner level of dsaggregaton for the perod Ideally, energy ntensty should be easured by energy consupton per unt of gross output rather than value added. But, n order to have consstent aggregaton at the varous sectoral 11

13 levels, suaton of the output at a lower level of aggregaton ust equal the output at a hgher level of aggregaton. The double countng proble nherent n the gross output easure fals to satsfy ths requreent. To ae aggregaton possble and consstent we use value added. Value added for the top two levels of aggregaton (ndustry and sector) are avalable fro varous ssues of CSY. However, easureent of value added at the level of the sub-sectors wthn secondary ndustry sectors needs soe clarfcaton. Chna s secondary ndustry was categorzed nto 40 sub-sectors n 1984 for the frst te. Also vllage-run secondary ndustres were ncluded n the FFAFW sector before 1984 and oved n 1984 nto the totals for secondary ndustry. In 1994, aendents were ade to the ndustral categorzaton of Although the whole of secondary ndustry stll has 40 sub-sectors, 10 there are soe nor changes n the coverage of each sub-sector. Moreover, before 1998, value added n each sub-sector were collected and reported fro all ndependent accountng unts at or above the townshp level. Fro 1998 onwards, the data are reported fro all state-owned ndustral enterprses plus non-state-owned ndustral enterprses wth annual sales revenue of over 5 llon RMB Yuan. 11 Because of these dfferent saplng ethods, changes between 1997 and 1998 are unrelable but the decoposton results wthn each of the and perods ndvdually are totally vald. Moreover, snce value added at the sub-sector level s copled and reported fro a saple of enterprses that satsfy the crtera descrbed prevously, the su of ths value added does not equal the GDP reported for the MME sector 12 n the natonal accounts whch, together wth the Constructon sector, consttute the secondary ndustry of our analyss. Between 1994 and 2003, the rato of the su of the value added n the saple enterprses to the GDP data of the MME sector n the natonal accounts vared fro 58% (1998) to 79% (2003) as shown n Fgure 5. To create a consstent sectoral aggregaton, value added n each sub-sector was adusted upwards usng the assupton that the shares of total value added of the 10 Soe sub-sectors are cobned to ae the 34-sub-sector dsaggregaton n ths study. 11 Ths change n saplng crtera does not result n a consstently larger or saller percentage of econoc actvty beng sapled. 12 In the natonal account, the secondary ndustry s classfed nto two sectors: Industry and Constructon. The Industry sector s equvalent to Mnng, Manufacturng and Electrc Power, Gas and Water (EGW). Ths sector s referred to as MME sector henceforward nstead of Industry sector to avod confuson wth the classfcaton at ndustry level. The fnest classfcaton s actually wthn ths MME sector. 12

14 subsectors n the saple s equal to the shares of total value added of the subsectors n the entrety of the ndustry. Fgure 5 - GDP of MME and Saple VA ( ) GDP of MME Saple VA 1) Data Source: CSY ) GDP and VA are n trllon RMB Yuan at current prces. 3) MME Mnng, Manufacturng, & Electrc Power, Gas and Water, whch s equvalent to the Industry sector n the natonal account. GDP data are converted to constant prces n Snce the prce ndces are only avalable at the levels of ndustres and sectors, value added at constant prces at the level of sub-sectors s derved usng the prce ndces of the assocated sectors, assung that prce ndces of all the sub-sectors wthn each sector are the sae as that of the sector. Energy consupton n ths study refers to coercal energy only 13. Due to data ltatons, fnal energy consupton s used n the full decoposton and total consupton (fnal consupton and losses n electrcty generaton) s used n the splfed decoposton. Electrcty s converted to coal equvalent based on the quantty of coal needed to produce the electrcty at the average coal nput per lowatt hour for theral power generaton n the relevant year, nstead of the calorfc value of the electrcty tself. 13 Boass used to account for a substantal share of Chna s total energy consupton, but ts share reduced rapdly n recent years due to ncreases n other energy carrers. Boass consupton data were only avalable at the econoy wde level so that our study focuses on coercal energy only. The nter-fuel substtuton results do not, therefore, nclude the effects of substtuton between boass and coercal energy. 13

15 Results and Dscusson In ths secton, we apply the proposed odels (Equatons (1) and (2)) to two sets of data and explore the contrbutons of the varous effects to the changes n Chna s coercal energy ntensty. We frst conduct the coplete decoposton over the perod fro 1994 to Tables 1 and 2 and Fgure 6 show the decoposton results. The change n the x of ndustres ( Istr) ncreases the energy ntensty as we expected. The accuulated (perod-wse) effect s an ncrease of GSCE/constant RMB, whch accounts for 21.86% of the total ntensty change ( Itot) n absolute value. The accuulated structural effect at the sub-sector level ( Istrss) decreases energy ntensty, accountng for 15.56% of the accuulated total energy ntensty decrease ( Itot). Most of the contrbuton occurred over the perod of Ths result s consstent wth Fsher-Vanden et al. (2003) s study n whch they found that wth fner sectoral dsaggregaton, the structural effect becoes very sgnfcant over these few years. But the structural shft aong sectors ( Istrs) plays a very nor role. Ths effect ncreases energy ntensty n ost years except 1995 and 1998, whch results n an accuulated ncrease of 2.97 GSCE/constant RMB. Slarly, despte the aor fluctuatons n 1998 and 1999 the accuulated effect of the nter-fuel substtuton ( Ifls) s alost neutral over the perod fro 1994 to Our results also show that technologcal change ( Itec) plays the donant role n decreasng energy ntensty, whch s consstent wth the conclusons of prevous eprcal studes. It s noteworthy that the decrease n overall energy ntensty ( Itot) slowed down after 2000 and the decreasng trend was even reversed n 2003 (Table 1 & 2). Although structural effects explaned a relatvely larger share of the total changes after 2000 than prevous years (Table 2 and Fgure 5), they are not the an causal factor of the slowdown and the reversal. These structural effects are sall and relatvely stable over the entre perod (Table 1). Thus, the ncrease n the explanatory power of the structural effects s not a result of an ncrease n the absolute value of the structural effects, but one of a decrease n the technologcal effects. It s 14

16 Table 1 - Coplete Decoposton of Energy Intensty Change (GSCE/RMB) ( ) Ifls Itec Istrss Istrs Istr Itot ) Data Source: CSY 2005; CESY, varous ssues; authors calculaton (constant prces). 2) Negatve values ndcate decreasng energy ntensty. 3) I fl, I tec, I strss, I strs, I str and I tot are effects of the nter-fuel substtuton, technologcal change, structural shft at the levels sub-sectors, sectors and ndustres, and aggregate ntensty change respectvely. Table 2 - Decoposton of Energy Intensty Change n Percentage (% of Itot) ( ) Ifls Itec Istrss Istrs Istr Itot % % -7.44% 21.15% % % % 81.21% 92.00% % % % % 94.52% 23.97% -7.32% % % % 95.56% 30.48% 5.50% % % % 97.61% -1.79% -2.65% -5.00% % % % -0.79% -4.81% % % % % -0.27% -9.79% % % % % % % % % % 45.96% 27.58% 5.40% 20.98% % % % 15.56% -4.28% % % 1) Negatve nubers represent that the assocated effect s n the opposte drecton of the total ntensty change. For exaple, f I tot n Table 1 s postve (ncreasng ntensty), a negatve nuber here ndcates an effect that decreases the energy ntensty. 2) Data Source: CSY 2005; CESY, varous ssues; authors calculaton. 15

17 Fgure 6 - Coplete Decoposton of Energy Intensty Change (GSCE/RMB) ( ) !Ifls!Itec!Istrss!Istrs!Istr!Itot 1) Data Source: CSY2005; CESY, varous ssues; authors calculaton (constant prces). 2) I fl, I tec, I strss, I strs, I str and I tot are the effects of nter-fuel substtuton, technologcal change, structural shft at the levels sub-sectors, sectors and ndustres, and aggregate ntensty change respectvely. clearly shown n Table 1 that the shrnage and reversal of the technologcal effect has been the aor factor causng the slowdown of the ntensty decrease and ts reversal snce In other words, the technologcal effect donates all the changes n energy ntensty: draatc decrease, slow-down of the decrease, and reversal. Decoposed technologcal effects 14 for all sub-sectors also ndcate that the two sub-sectors of Raw Checal Materals and Checal Products and Households ade the ost contrbuton to the accuulated technologcal effects durng Of the (GSCE/constant RMB) accuulated reducton n real energy ntensty for all sub-sectors, these two sub-sectors account for (GSCE/current RMB), a contrbuton of 51.96%. Table 3 lsts the top 10 contrbutng sub-sectors to the accuulated technologcal effect durng As the table shows, all of the ten sub-sectors have experenced a substantal declne n energy ntensty and soe of the are aong the ost energy ntensve sub-sectors of the econoy. These ten sub-sectors contrbuted 94.43% of the total accuulated technologcal effect over ths perod. It s noteworthy that Chna s households sector aes such a substantal 14 More detals are avalable on request. 16

18 contrbuton to the accuulated reducton n energy ntensty due to the technologcal effect whle Judson et al. (1999) found that the technologcal change n the U.S. households sector s energy usng. Energy ntensty n Chna s households sector has reduced fro GSCE/RMB n 1994 to GSCE/RMB n a very sgnfcant reducton. A deeper loo at Chna s households sector reveals that the explanaton ay le n the shft n fuel x. In 1994, coal accounted for 53.74% of total energy consupton n ths sector, whle n 2000 t accounted for ust 30.71%. The shares of other energy carrers (petroleu, natural gas, electrcty etc) ncrease consequently, wth electrcty beng the aor substtute. The sgnfcant reducton n coal consupton ay partally explan the substantal energy ntensty declne n ths sector gven the low energy qualty of coal. Addtonally, other factors ay also contrbute to the declne n energy ntensty, such as effcency gans n coong stoves, preference of energy-savng applances, and a swtch fro ndvdual heatng syste to group or dstrct heatng systes. However, such substantal declne n energy ntensty wll not last long for two reasons: 1) there s lted roo for the households sector to further substtute coal wth other fuels; 2) ore and ore energy-consung gadgets wll coe to Chna s households as the lvng standard ncreases. Actually the reducton n energy ntensty n household sector slowed down fro , although the share of coal ept decreasng fro 30.71% to 25.08%. Energy ntensty n ths sector only reduced fro GSCE/RMB to GSCE/RMB. The followng sub-sectors experenced ntensty ncrease durng the perod and account for uch of the slowdown n the overall technologcal effect: Raw Checal Materals and Checal Products, Checal Fbers, Electrc Power, Stea, and Hot Water Producton & Supply, TSPTS and WRTCS. Although we do not have data for ore recent years, there are reports that the energy ntensty of GDP contnued to ncrease n The ncrease has rased consderable concern n natonal polcy crcles. The newly approved Fve-Year Plan ( ) 16 for the frst te aes reducton n energy ntensty a natonal developent obectve. The obectve states that energy ntensty wll be reduced

19 by 20% n 2010 copared wth the 2005 level, whch s equvalent to an annual 4.4% reducton. Ths sees reasonable copared wth the annual 5.2% rate of declne n energy ntensty over the perod of ; however, t s a rather dffcult tas gven the recent trend of ncreasng ntensty snce Wthout nnovatve easures n technology, anageent, as well as engageent n legslaton, polcy and enforceent, t ght be dffcult to accoplsh the tas. Table 3 - Top 10 Contrbutng Sub-sectors to Total Technologcal Effect Top 10 Sub-sectors Energy Intensty Technologcal Effect % of Total Raw Checal Materals & Checal Products % Resdental Consupton & Others (Households) % Machnery, Electrc Equpent, Electronc Manufacturng % Nonetal Mneral Products % Food, Beverage, & Tobacco Processng % Electrc Power, Stea, Hot Water Producton & Supply % Petroleu & Natural Gas Extracton % Coal Mnng and Dressng % Paperang and Paper Products % Medcal and Pharaceutcal Products % 1) Data Source: CSY 2005; CESY, varous ssues; authors calculaton. 2) Energy ntensty n GSCE/RMB at constant prces. We conduct the splfed decoposton for the perod usng constant prces. For ease of presentaton, we suarze the decoposton results n 5-year perods n Table 4 & 5 and Fgure 7 except for the perods and when energy ntensty was stagnant or ncreasng whch we loo at n ore detal. As dscussed n Secton 1 of ths artcle, the pattern of structural change n the 1980s was dfferent to that whch followed t. In the 1980s the shft s anly fro prary ndustry to tertary ndustry whle fro 1991 to 2003 the shft s anly fro prary ndustry to secondary ndustry. Despte ths dfference, the shfts are both fro a less energy-ntensve ndustry (prary) to a ore energy-ntensve ndustry (tertary and secondary), whch wll tend to ncrease overall energy ntensty. The decoposton results show that the structural effect at the ndustry level ( I str ) has consstently ncreased the energy ntensty. Our fndng of a structural effect at the ndustry level that ncreases overall energy ntensty does not ndcate nconsstency wth prevous 18

20 Table 4 - Splfed Decoposton of Energy Intensty Change (GSCE/RMB) ( ) Itec Istrs Istr Itot ) Data Source: CSY, CESY, varous ssues; authors calculaton (constant prces). 2) Negatve values ndcate decreasng energy ntensty. 3) I tec, I strs, I str and I tot are effects of the technologcal change, structural shft at the levels sectors and ndustres, and aggregate ntensty change respectvely. Table 5 - Splfed Decoposton of Energy Intensty Change (% of Itot) ( ) Itec Istrs Istr Itot % 8.25% -4.29% % % 3.38% % % % % 2.01% % % % 45.50% % % -7.54% % % % -5.55% % % % 8.91% 98.54% % % -3.50% % % 1) Data Sources: CSY, CESY, varous ssues; authors calculaton. 2) Negatve nubers represent that the assocated effect s n the opposte drecton of the total ntensty change. For exaple, f I tot n Table 4 s postve (ncreasng ntensty), a negatve nuber here ndcates an effect that decreases the energy ntensty. 19

21 Fgure 7 - Splfed Decoposton of Energy Intensty Change (GSCE/RMB) ( ) !Itec!Istrs!Istr!Itot 1) Data Sources: CSY, CESY, varous ssues; authors calculaton (constant prces). 2) I tec, I strs, I str and I tot are effects of the technologcal change, structural shft at the levels sectors and ndustres, and aggregate ntensty change respectvely. eprcal studes that found structural effects that decrease energy ntensty. Those studes were conducted: ether: 1) over a shorter perod as perodwse analyses whch are senstve to the selecton of the base year and endng year (A te seres analyss ay not fnd the structural effect consstently decreasng energy ntensty); or 2) at a fner sector level that s slar to the fnest sector level used n our coplete decoposton n whch we also found a structural effect that decreases the energy ntensty. Actually, Fsher-Vanden et al. (2003) also found a structural effect that ncreases energy ntensty when a sector level coparable to our ndustry level s used. The only exceptonal study s Garbacco et al. (1999) whch found that structural change actually ncreased energy between 1987 and 1992 even f the econoy s dsaggregated nto 29 sectors. The structural effect at the sector level ( I strs ) also ncreases the overall energy ntensty (except for the frst 5-year perod) but to a lesser degree. Our results further confr the donant role of the technologcal effect n explanng the changes of overall energy ntensty. It not only explans ost of the declne n Chna s energy ntensty over the entre perod of 20

22 econoc refor, the slowdown and reversal of the technologcal effect also becoes the aor reason for stagnancy n the two perods: and Decoposed technologcal effects at the sector level ndcate that MME and Households ae the greatest contrbuton to the reducton n real energy ntensty at sectoral level durng These two sectors ontly explan 90.78% of the total accuulated technologcal effect. Our decoposton results show that stagnancy n these two sectors n ters of decreasng energy ntensty s also the an reason for the slowdown and reversal durng the two stagnant perods: and Conclusons Snce the onset of econoc refor n the late 1970s, Chna has experenced a draatc declne n the energy ntensty of econoc output. Much research has been conducted to exane the causes of ths declne. Whle ost studes consder the declne of real energy ntensty wthn sectors as the donant contrbutor, there s dsagreeent on the role of structural effects as well as the effect of sectoral dsaggregaton on the easured contrbuton of structural change. Based on a consstent set of data ( ), we exaned the structural effects at three levels of sectoral dsaggregaton wthn one odel usng the LMDI ethod so that we could easure the contrbutons of structural change at dfferent levels of aggregaton. We also separated the nter-fuel substtuton effect fro the general technologcal effect, whch has not been done n prevous studes of energy ntensty n Chna. Fnally, we also nvestgated the slow down and reversal n the declne n energy ntensty snce Wth a second set of data ( ), we conducted a splfed decoposton to dentfy the pattern of structural change over a longer perod. Our results confr the donant role of technologcal change over the entre perod of Contnuous proveent n the real energy ntensty wthn sub-sectors contrbutes the ost to the overall energy ntensty declne up tll The reducton n the rate of proveent also becoes the aor reason for the new trend of overall energy 21

23 ntensty snce Although the pattern of structural change at the ndustry level s dfferent n the 1980s and n the followng perod, the effects at both the ndustry and sector levels are slar contrbutng an ncrease the energy ntensty, ceters parbus. However, structural shft at the sub-sector level decreased energy ntensty durng the perod Inter-fuel substtuton s found to contrbute lttle to the changes n the energy ntensty. As far as the technologcal effect and the structural effect are concerned, our results are consstent wth prevous eprcal studes n that the technologcal effect plays a donant role whle the structural effect plays a nor role. In addton, we found that the technologcal effect not only explans ost of the declne n Chna s energy ntensty over the entre perod of econoc refor, the slowdown and reversal of the technologcal effect also becoes the aor reason for stagnancy durng and the new trend snce Moreover, our odel dentfes the drecton and agntude of the structural effect at dfferent levels of sector dsaggregaton. A couple of caveats are approprate. Frst, to ae sectoral aggregaton consstent, we reconstructed the value added data for the sub-sectors of secondary ndustry fro the saple statstcs, assung that the data structure of the saple statstcs s representatve of the populaton. Second, Chna s Natonal Statstcal Bureau has recently copleted a coprehensve econoc survey that ncludes all enterprses 17. Ths s dfferent fro the current annual statstcs derved fro the saple survey. The new survey shows that the exstng annual statstcs ot a sgnfcant proporton of GDP and a aorty of the gnored value-added s n tertary ndustry. As a result, actual energy ntensty s lower than prevous estates. Ths could affect decoposton results such as those presented n ths paper. However, ths new survey s only avalable for a sngle year and, therefore, cannot be used n a decoposton drectly. Exanaton of these ssues would provde topcs for further research (Chnese) 22

24 Appendx- Index Decoposton Analyss (IDA) There are two an classes of paraetrc decoposton ethods based on the Laspeyres (or the Paasche) ndex, and the Dvsa ndex. Methods of the frst type 18 nclude basc Laspeyres ndex, Paasche ndex, Fsher deal ndex, Shapley ndex and Marshall-Edgeworth ndex etc. They are all based on the basc Laspeyres and Paasche ndces. For nstance, the Fsher deal ndex s actually a geoetrc average of the Laspeyres and the Paasche ndces, whle the Marshall-Edgeworth ndex s an arthetc average of the two. The second type 19 ncludes the arthetc ean Dvsa ndex (AMDI) and the logarthc ean Dvsa ndex (LMDI). Ang (2004) provdes a detaled classfcaton of the varous ethods and proposed the LMDI ethod as the preferred ethod. LMDI has a few dstnct advantages. Soe other decoposton ethods can result n large unexplaned resduals, whle LMDI s not path-dependent and leaves no unexplaned resdual, whch aes for a perfect decoposton. LMDI can also handle zero values, whch are coon n real datasets. Energy ntensty s usually decoposed nto the effects of ndustral structural change and technologcal change. Snce the technologcal effect s easured usng sectoral energy ntensty, as the level of sectoral dsaggregaton becoes fner, the share of total change accounted for by structural change wll ncrease (Snton and Levne, 1994; Fsher-Vanden et al., 2003). Our odel s extended to consder the effects of ultple levels of dsaggregaton. Instead of exanng the effects of dfferent levels of dsaggregaton on the results of the decoposton separately, we study these effects n one odel so that the contrbutons of the structural effects at each level can be dentfed. Also, the odel ncludes the effect of nter-fuel substtuton, whch has not been exaned before n the lterature on Chna s energy ntensty. Such a odel can be specfed as: 18 Exaples of eprcal applcatons are Retler et al. (1987) and Howarth et al. (1991). 19 Eprcal applcatons and developents of Dvsa ethods nclude Huang (1993), Cho et al. (1995), Wu et al. (n press), ust to nae a few. 23

25 E E O O O E =!!!! " " " " " O (A1) E O O O O E - Total energy consupton; E - Consupton of fuel n the -th sub-sector; E - Total energy consupton n the -th sub-sector; O, O, O - Econoc output n the -th sub-sector, -th sector, and -th ndustry; O - Total econoc output;,, and denote the ndustry, sector and sub-sector. Dvdng both sdes of Equaton (A1) O yelds:!!!! F " I " I = S (A2) I - Overall energy ntensty; F - Share of fuel n total energy consupton of the -th sub-sector; I - Energy ntensty n the -th sub-sector; S - Output share of the -th sub-sector n the -th sector; S - Output share of the -th sector n the -th ndustry; S - Output share of the -th ndustry n the overall econoy. Dfferentatng Equaton (A2) wth respect to te yelds: I& = + +!!!!!!!!!!!! F F F& " I " I " I & & + +!!!!!!!! F F " I " I& & (A3) 24

26 The rght-hand sde of Equaton (A3) can be wrtten n ters of growth rates: I & = +!!!!!!!! g g S F " w " w + +!!!!!!!! g S g I " w " w +!!!! g S " w (A4) Where g, F, g I, g S g S and S g are growth rates of the fuel share, sector energy ntensty and sector output share at dfferent levels of dsaggregaton, and, w s the weght, wth w = F! I! S! S! S. The next step s to ntegrate both sdes of Equaton (A4) wth respect to te: % I = + + t! """" t# 1 t! """" t# 1 t! """" t# 1 g g S S g F $ w $ w $ w $ dt + $ dt $ dt + t! """" t# 1 t! """" t# 1 g S g I $ w $ w $ dt $ dt (A5) To solve the ntegrals, soe nd of weght functon s needed. Sato (1976) proposed to use the logarthc ean as the weght functon based on ts desrable propertes whch atch those that weght functons are expected to have: L ( x, y) = ( y! x) / ln( y / x) (A6) Where both x and y are postve nubers and x " y, wth L(x, x)=x whch s the lt as y " x. In our case wth w and t w! 1, we have: t L(w t"1,w t ) = (w t " w t"1 ) /ln(w t /w t"1 ) (A7) So, under the logarthc ean weght schee, Equaton (A5) becoes: 25

27 "I tot = $ $ $ $ L(w t#1,w t ) ln( F t ) + $ $ $ $ L(w t#1,w t ) ln( I t ) F t#1 I t#1 + $ $ $ $ L(w t#1,w t ) ln( S t ) + $ $ $ $ L(w t#1,w t ) ln( S t ) S t#1 S t#1 + $ $ $ $ L(w t#1,w t ) ln( S t ) = "I fls + "I tec + "I strss + "I strs + "I str S t#1 (A8) Ths s the LMDI decoposton n addtve for 20, wth "I tot,! I fls, tec! I,! I strss,! I strs and! I str representng the aggregate ntensty change, ntensty changes due to the fuel substtuton, technologcal change and structural change at the levels of sub-sector, sector and ndustry respectvely. 20 See Ang et al. (1998) for ore detals about the addtve LMDI 26

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