The Sustainability of Energy Substitution in the Chinese Electric Power Sector

Abstract

The Chinese electric power industry, including its coal industry and other energy industries that are not efficient, contributes to China’s serious energy shortages and environmental contamination. The governing authority considers energy conservation to be one of the most prominent national targets, and has formulated various plans for decarbonizing the power system. Applying the trans-log cost function, this paper examined the trans-log cost function to analyze the potential inter-factor substitution among energy, capital and labor. We also investigated what role human capital played in energy substitution for the electric power sector during the period from 1981 to 2017. Three key results were derived: (1) energy is price-insensitive, (2) there exists large substitution sustainability between both capital and labor with energy, and (3) human capital input not only enhances the extent of energy substitutability with capital and labor but also is a substitute to energy itself. These findings imply that the liberalization of the electric price mechanism is conducive to lessening energy use and augmenting non-energy intensiveness, and that energy conservation technology could become more sustainable by investing more capital in the electricity sector, thereby achieving a capital–energy substitution and a decrease of CO2 emissions. We further suggest that the priority for the Chinese electric power industry should be to attach more importance to increasing human capital input.