Changes in China's Energy Intensity: Origins and Implications for Long-Term Carbon Emissions and Climate Policies

Since the economic reforms that began in 1978, China has experienced a dramatic decline in energy intensity but in 2002 it flattened out and even rose slightly. There have been considerable debates about the origins of this dramatic decline in energy intensity before the year 2000: is this decline mostly due to changes in the composition of economic activity? (structural change) or is it mostly due to changes in technology? (energy per ton of steel, for example). However, very few studies have examined the slightly rising energy intensity trend for the post-2000 period. In this report, we use a new time-series input-output data set from 1981– 2007 to decompose the reduction in energy use into technical change and various types of structural change, including changes in the quantity and composition of imports and exports. We use two different decomposition methodologies: Structural Decomposition Analysis (SDA) and Index Decomposition Analysis (IDA) methods. Based on these estimates of changes in energy intensity, we project Autonomous Energy Efficiency Improvement (AEEI) parameters in forecasting future capital, labor and energy input shares of output for each industry. We then construct a recursive-dynamic computable general equilibrium (CGE) model of the Chinese economy to analyze both command-and-control policies and carbon taxes, and provide policy recommendations on how China could pursue a more sustainable development trajectory to deal with greenhouse gas emissions.