Firm-level determinants of energy and carbon intensity in China

In recent years, China?s leaders have sought to coordinate official energy intensity reduction targets with new targets for carbon dioxide (CO₂) intensity reduction. The Eleventh Five-Year Plan (2006–2010) included for the first time a binding target for energy intensity, while a binding target for CO₂ intensity was included later in the Twelfth Five-Year Plan (2011–2015). Using panel data for a sample of industrial firms in China covering 2005 to 2009, we investigate the drivers of energy intensity reduction (measured in terms of direct primary energy use and electricity use) and associated CO₂ intensity reduction. Rising electricity prices were associated with decreases in electricity intensity and increases in primary energy intensity, consistent with a substitution effect. Overall, we find that energy intensity reduction by industrial firms during the Eleventh Five-Year Plan translated into more than proportional CO₂ intensity reduction because reducing coal use—in direct industrial use as well as in the power sector—was a dominant abatement strategy. If similar dynamics characterize the Twelfth Five-Year Plan (2011–2015), the national 17 percent CO₂ intensity reduction target may not be difficult to meet—and the 16 percent energy intensity reduction target may result in significantly greater CO₂ intensity reduction.