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					Trends in productivity change and
      energy use in China:
Modeling environmental policies

                  Jing Cao
             Tsinghua University
                 Mun S. Ho
           RFF, Harvard University

          Linking Issues to motivate Chinese Climate Policies
      - Energy, Air Pollution, and Sustainable Rural Development
                           Aug. 30-31, Oslo
Introduction
   China’s rapid economic growth is accompanied by an rapid
    increase in energy use, severe air pollution and associated
    enormous environmental damages.

• China has topped the list of CO2 emitting    14000        Primary Energy Use (Mtce)
                                                            GDP (bil. 1995 yuan)
countries (NEAA)                               12000


• 40% of cities exceed National Air Quality    10000


Standard (Grade II)                            8000


                                               6000
• 16 of 20 most polluted cities are in China
                                               4000

• …                                            2000


• …                                               0

                                                   1950   1960     1970     1980        1990   2000   2010
                                                                            Year
    China’s Energy Intensity (1952-2005)
                            600



                            500
(kgce/thousand 1995 yuan)
     Energy Intensity




                            400



                            300



                            200



                            100
                                  1950   1960   1970     1980   1990   2000   2010
                                                       Year
China’s Energy Intensity after Economic
Reform (1978-2005)
Kgce/thousand 2005 yuan

    400

    350

    300

    250

    200

    150

    100

     50
          1978            1983   1988   1993   1998   2003
China’s Carbon Intensity
                    800

                    700
 Carbon Intensity




                    600

                    500

                    400

                    300

                    200
                          1980      1985       1990        1995        2000        2005
                                                     Year


                                     (Combusted from Fossil Fuel): 1980-2004
                             (Measured in tons of carbon dioxide per thousand 2005 yuan)
China’s TFP Growth
 Our previous work:
  Industrial and Aggregate Measures of Productivity Growth
  in China, 1982-2000 (Cao, Ho, Jorgenson and others, 2007)
 Data     Sources:
      Time-series Input-Output Table of China: 1982-2000 (output and
       intermediate input data, from Ren/NBS group);
      China statistical yearbook on investment in fixed assets (capital
       input data by asset type by sector, from Ren/NBS group);
      Chinese Household Income Project Surveys (CHIP, four waves)
       and Population Sensus (1982, 1990, 2000) and Sample Population
       Surveys (1987, 1995) (labor input data by sex, education level, and
       age groups, from Yue and Ren/NBS group)
China’s Aggregate TFP Growth
                                   1982-2000   1982-1984   1984-1988   1988-1994   1994-2000
Value added (growth rate,%)          8.91        12.50       10.2        7.81        7.96
Capital input (growth rate,%)        8.75        3.11        8.84        6.73        12.58
Labor input (growth rate,%)          3.89        3.73        4.66        3.41        3.91
Contribution to aggregate growth
 Capital                             4.57        1.72        4.83        3.58        6.33
 Labor                               1.83        1.66        2.11        1.59        1.94
 Aggregate TFP                       2.51        9.12        3.26        2.64        -0.31
Contribution to aggregate TFP
 Weighted sectoral TFP               2.70        7.48        2.78        2.92        0.83
   --- Primary Industry              0.91        1.84        -0.55       0.89        1.59
   --- Secondary Industry            2.10        3.67        2.71        1.94        1.60
   --- Tertiary Industry             -0.31       1.96        0.62        0.08        -2.51
 Reallocation of value added         0.00        0.00        0.00        0.00        0.00
 Reallocation of capital             -0.17       1.80        0.48        -0.28       -1.15
 Reallocation of labor               -0.02       -0.15       0.00        0.00        0.00
China’s Sectoral Energy Intensity and TFP
Growth (highlighted results)
                                    Coal                  Petroleum                  TFP
                           1982-2000   1994-2000   1982-2000   1994-2000   1982-2000   1994-2000
2. Coal Mining               133           132        18          14         0.78          2.59
3. Metal & Nonm. mining       49           34         23          17         1.15          3.72
4. Oil & Gas Mining           33           34         98          102        -9.96         -4.60
9. Lumber and wood            111          54         16          5.1        2.35          0.14
11. Paper                     67           44         6               4      4.84          0.84
13. Chemicals                117           79         55          37         1.59          -0.46
14. Petroleum, coal prod     257           150       599          410        -1.49         5.42
16. Stone, clay, galss       256           156        23          16         2.24          3.74
17. Primary metal            202           107        31          21         1.57          6.46
26. Transportation            47           26        123          61         0.54          -4.65
28. Electric utilities       1095          649        94          56         -1.96         -5.14
29. Gas utilities            1318          738       124          101        -2.71         -1.84
Trend of Sectoral Energy Input Share
(for example, share of coal input)
  0.100                                                                                                                                           0.140                                                                                                                                                             0.450                                                                                                                                               1.600

  0.090                                                                                                                                                                                                                                                                                                             0.400                                                                                                                                               1.400
                                                                                                                                                  0.120
  0.080                                                                                                                                                                                                                                                                                                             0.350
                                                                                                                                                                                                                                                                                                                                                                                                                                                                        1.200
  0.070                                                                                                                                           0.100
                                                                                                                                                                                                                                                                                                                    0.300
                                                                                                                                                                                                                                                                                                                                                                                                                                                                        1.000
  0.060                                                                                                                                           0.080                                                                                                                                                             0.250
  0.050                                                                                                                                                                                                                                                                                                                                                                                                                                                                 0.800
                                                                                                                                                  0.060                                                                                                                                                             0.200
  0.040                                                                                                                                                                                                                                                                                                                                                                                                                                                                 0.600
                                                                                                                                                                                                                                                                                                                    0.150
  0.030                                                                                                                                           0.040
                                                                                                                                                                                                                                                                                                                    0.100                                                                                                                                               0.400
  0.020
                                                                                                                                                  0.020
  0.010                                                                                                                                                                                                                                                                                                             0.050                                                                                                                                               0.200

  0.000                                                                                                                                           0.000                                                                                                                                                             0.000                                                                                                                                               0.000
          1   2   3   4   5   6       7       8       9       10    11    12    13    14        15        16        17        18        19                  1       2       3       4       5       6       7       8       9   10   11   12   13   14   15       16       17       18       19                              1       2    3        4        5        6            7            8    9       10    11    12    13    14    15    16    17    18    19             1       2       3       4       5       6       7       8       9   10   11   12   13   14   15    16    17    18    19




                          agriculture                                                                                                                                                   construction                                                                                                                                                                 food                                                                                                                                                            paper
  0.250                                                                                                                                             0.500                                                                                                                                                           0.600
                                                                                                                                                    0.450

  0.200                                                                                                                                             0.400                                                                                                                                                           0.500

                                                                                                                                                    0.350
                                                                                                                                                                                                                                                                                                                    0.400
  0.150                                                                                                                                             0.300
                                                                                                                                                    0.250                                                                                                                                                           0.300
  0.100                                                                                                                                             0.200
                                                                                                                                                                                                                                                                                                                    0.200
                                                                                                                                                    0.150
  0.050                                                                                                                                             0.100
                                                                                                                                                                                                                                                                                                                    0.100
                                                                                                                                                    0.050
  0.000                                                                                                                                             0.000                                                                                                                                                           0.000
          1   2   3   4   5       6       7       8       9    10    11    12    13        14        15        16        17        18        19                 1       2       3       4       5       6       7       8       9    10   11   12   13   14       15       16       17       18       19                     1       2    3        4        5        6            7        8        9       10    11    12    13    14    15    16    17    18    19




                                      leather                                                                                                                                   Fabricated metal                                                                                                                             Transport equipment                                                                                                                                                                     apparel

  0.250                                                                                                                                            0.400                                                                                                                                                            0.900                                                                                                                                                0.900
                                                                                                                                                                                                                                                                                                                    0.800                                                                                                                                                0.800
                                                                                                                                                   0.350
  0.200                                                                                                                                                                                                                                                                                                             0.700                                                                                                                                                0.700
                                                                                                                                                   0.300
                                                                                                                                                                                                                                                                                                                    0.600                                                                                                                                                0.600
  0.150                                                                                                                                            0.250
                                                                                                                                                                                                                                                                                                                    0.500                                                                                                                                                0.500
                                                                                                                                                   0.200
                                                                                                                                                                                                                                                                                                                    0.400                                                                                                                                                0.400
  0.100
                                                                                                                                                   0.150                                                                                                                                                            0.300                                                                                                                                                0.300
                                                                                                                                                   0.100                                                                                                                                                            0.200                                                                                                                                                0.200
  0.050
                                                                                                                                                   0.050                                                                                                                                                            0.100                                                                                                                                                0.100

  0.000                                                                                                                                            0.000                                                                                                                                                            0.000                                                                                                                                                0.000
          1   2   3   4   5       6       7       8       9    10    11    12    13        14        15        16        17        18        19                 1       2       3       4       5       6       7       8       9    10   11   12   13   14       15       16       17       18       19                         1   2        3        4        5        6            7        8        9    10    11    12    13    14    15    16    17    18    19                1       2       3       4       5       6       7       8   9   10   11   12   13   14   15   16    17    18    19




                                      printing                                                                                                                                  communications                                                                                                                                                                                             Finance                                                                                                   Public Service

                                                                                                                                                                                                                                     0.800

                                                                                                                                                                                                                                     0.700

                                                                                                                                                                                                                                     0.600

                                                                                                                                                                                                                                     0.500

                                                                                                                                                                                                                                     0.400

                                                                                                                                                                                                                                     0.300

                                                                                                                                                                                                                                     0.200

                                                                                                                                                                                                                                     0.100

                                                                                                                                                                                                                                     0.000
                                                                                                                                                                                                                                                1    2        3        4        5        6        7        8   9   10   11   12      13       14       15       16           17           18       19




                                                                                                                                                                                                                                                                                              trade
Trend of Sectoral Energy Input Share
(for example, share of coal input)
4.000                                                                                                                                           1.200                                                                                                                                    1.200                                                                                                                                                                                                           0.500
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         0.450
3.500
                                                                                                                                                1.000                                                                                                                                    1.000                                                                                                                                                                                                           0.400
3.000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         0.350
                                                                                                                                                0.800                                                                                                                                    0.800
2.500                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    0.300

2.000                                                                                                                                           0.600                                                                                                                                    0.600                                                                                                                                                                                                           0.250

1.500                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    0.200
                                                                                                                                                0.400                                                                                                                                    0.400                                                                                                                                                                                                           0.150
1.000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         0.100
                                                                                                                                                0.200                                                                                                                                    0.200
0.500
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         0.050
0.000                                                                                                                                           0.000                                                                                                                                    0.000                                                                                                                                                                                                           0.000
        1   2   3   4   5       6       7       8       9    10    11        12    13        14        15        16        17    18        19            1       2       3       4       5   6       7       8       9       10    11    12    13    14    15    16    17    18    19                 1       2       3       4       5           6           7           8           9       10        11         12        13        14        15        16        17        18        19                             1           2           3           4           5           6       7           8       9       10    11    12    13    14   15   16   17    18    19




                Coal                                                                                                                                     Metal mining                                                                                                                             Oil and gas mining                                                                                                                                                                                             textile

6.000                                                                                                                                           0.600                                                                                                                                    30.000                                                                                                                                                                                                          2.500


5.000                                                                                                                                           0.500                                                                                                                                    25.000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         2.000


4.000                                                                                                                                           0.400                                                                                                                                    20.000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         1.500

                                                                                                                                                0.300                                                                                                                                    15.000
3.000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         1.000
                                                                                                                                                                                                                                                                                         10.000
2.000                                                                                                                                           0.200

                                                                                                                                                                                                                                                                                          5.000                                                                                                                                                                                                          0.500
1.000                                                                                                                                           0.100

                                                                                                                                                                                                                                                                                          0.000                                                                                                                                                                                                          0.000
                                                                                                                                                0.000
0.000                                                                                                                                                                                                                                                                                                     1       2       3       4       5           6           7           8           9       10         11         12        13        14        15        16        17        18        19
                                                                                                                                                             1       2       3       4   5       6       7       8       9    10    11    12    13    14    15    16    17    18    19                                                                                                                                                                                                                                  1           2           3           4           5           6           7       8       9       10    11    12    13    14   15   16   17    18    19
        1   2   3   4   5   6       7       8       9       10    11    12        13    14        15        16        17    18       19




                    building                                                                                                                            Non-elect machinery                                                                                                                                                       Gas utilities                                                                                                                                                                         lumber

0.350                                                                                                                                                                                                                                                                                    6.000                                                                                                                                                                                                           0.800
                                                                                                                                                 0.400
0.300                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    0.700
                                                                                                                                                 0.350                                                                                                                                   5.000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         0.600
0.250                                                                                                                                            0.300
                                                                                                                                                                                                                                                                                         4.000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         0.500
0.200                                                                                                                                            0.250
                                                                                                                                                                                                                                                                                         3.000                                                                                                                                                                                                           0.400
0.150                                                                                                                                            0.200
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         0.300
                                                                                                                                                                                                                                                                                         2.000
0.100                                                                                                                                            0.150
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         0.200

0.050                                                                                                                                            0.100                                                                                                                                   1.000
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         0.100

0.000                                                                                                                                            0.050                                                                                                                                   0.000                                                                                                                                                                                                           0.000
        1   2   3   4   5   6       7       8       9       10    11    12        13    14        15        16        17        18    19                                                                                                                                                          1           2       3       4       5           6           7               8           9       10         11         12        13        14         15        16        17        18            19               1           2           3           4           5           6           7           8       9       10    11    12    13    14   15   16    17    18    19
                                                                                                                                                 0.000
                                                                                                                                                             1       2       3   4       5   6       7       8       9       10    11    12    13    14    15    16    17    18    19



                furniture                                                                                                                                                                                        rubber                                                                                                           petroleum                                                                                                                                                                                                     Misc. manufacture
0.180
                                                                                                                                                0.700                                                                                                                                     0.450                                                                                                                                                                                                             0.350
0.160
                                                                                                                                                0.600                                                                                                                                     0.400
0.140                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       0.300
                                                                                                                                                                                                                                                                                          0.350
0.120                                                                                                                                           0.500                                                                                                                                                                                                                                                                                                                                                       0.250
                                                                                                                                                                                                                                                                                          0.300
0.100                                                                                                                                           0.400
                                                                                                                                                                                                                                                                                          0.250                                                                                                                                                                                                             0.200
0.080
                                                                                                                                                0.300                                                                                                                                     0.200
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            0.150
0.060
                                                                                                                                                                                                                                                                                          0.150
                                                                                                                                                0.200                                                                                                                                                                                                                                                                                                                                                       0.100
0.040
                                                                                                                                                                                                                                                                                          0.100
0.020                                                                                                                                           0.100                                                                                                                                                                                                                                                                                                                                                       0.050
                                                                                                                                                                                                                                                                                          0.050
0.000                                                                                                                                           0.000                                                                                                                                     0.000                                                                                                                                                                                                             0.000
        1   2   3   4   5   6       7       8       9       10     11    12        13    14        15        16        17       18    19                 1       2       3       4       5   6       7       8       9       10    11    12    13    14    15    16    17    18    19                     1       2       3       4           5           6           7           8           9        10         11         12        13        14        15        16        17        18         19                      1           2           3           4           5           6           7       8       9    10    11    12    13   14   15   16   17    18    19




                emachinery                                                                                                                                   Other service                                                                                                                                                                        motor                                                                                                                                                                                         instrument
Trend of Sectoral Energy Input Share
(for example, share of coal input)
     3.000                                                                                                                                                           5.000
                                                                                                                                                                     4.500
     2.500
                                                                                                                                                                     4.000
                                                                                                                                                                     3.500
     2.000
                                                                                                                                                                     3.000
     1.500                                                                                                                                                           2.500
                                                                                                                                                                     2.000
     1.000
                                                                                                                                                                     1.500
                                                                                                                                                                     1.000
     0.500
                                                                                                                                                                     0.500

     0.000                                                                                                                                                           0.000
             1   2   3   4       5       6       7       8       9       10    11        12        13        14        15        16        17        18    19                 1       2       3       4       5       6       7       8       9       10        11        12        13        14        15        16        17        18        19




                                 chemicals                                                                                                                                                                    pmetal

     1.000                                                                                                                                                           25.000
     0.900

     0.800                                                                                                                                                           20.000
     0.700

     0.600                                                                                                                                                           15.000
     0.500

     0.400                                                                                                                                                           10.000
     0.300

     0.200                                                                                                                                                            5.000
     0.100

     0.000                                                                                                                                                            0.000
             1   2   3       4       5       6       7       8       9    10        11        12        13        14        15        16        17        18    19                1       2       3       4       5       6       7       8       9        10        11        12        13        14        15        16        17        18        19




                             transportation                                                                                                                                                           electricity
Applications in CGE Model: Modeling
Environmental Tax Policies
   Linking our TFP, energy intensity study to CGE
    Modeling (improve previous calibrated constant parameters in
    modeling)
     In this environmental policy simulation experiment, we
      assume the future TFP growth will follow the past TFP
      growth trajectory (1982-2000)
     Forecast future sectoral energy input share



   China CGE Model – A Recursive Solow CGE Model
    (see Cao, Ho and Jorgenson (2005 CCICED Report), Prototype
    Model see Garbaccio, Ho and Jorgenson (2000))
CGE Model Simulation – Model Counterfactual
Environmental Tax Policies
   Research Goal:
        What will be the economic and environmental impacts from Environmental Tax
        Reform (ETR)? Is there a “double dividend” in China?

   Three Environmental Tax Reform Proposals:
       Carbon Tax: imposed on the fuel use (in dollar per ton of carbon content)
       Fuel Tax: imposed on the fuel use (tax rate is proportional to the average
        marginal damage per unit of fuel use)
       Output Tax: imposed on sectoral output (tax rate is proportional to the marginal
        damage per unit of output)
Features of the CGE Model
   Based on 2000 China input-output table, 33 industrial sectors,
    Solow recursive growth structure.
   Representative household, assume fixed labor supply
   Assume “Two-Tier” plan-market capital market
   Armington assumption for modeling international trade
   Pre-existing taxation in the second-best setting
   Intake-Fraction methods to estimate for environmental health
    damages
   Adjusted the sectoral TFP parameters, and energy input
    shares based on our time-series I-O table (82-2000)
Environmental Damage Estimation
– Intake Fraction Method
Dose-response and Valuation Coefficients
Base Case Simulations
Variable                                             2000     2010      2030      30-year
                                                                                  growth
                                                                                     rate
Population (million)                                  1,262     1,351     1,481    0.53%
GDP (billion 2000 yuan)                               9,128    23,073    64,198    6.72%
Energy Use (fossil fuels, million tons of standard    1,191     1,957     3,631    3.79%
coal equivalent)
Coal Use (million tons)                               1,205     1,766     3,305    3.42%
Oil Use (million tons)                                  207      435       762     4.44%
Carbon Emissions (million tons)                         792     1,269     2,354    3.70%
Primary particulate emissions (mil. tons)             11.22      8.73     12.20    2.80%
SO2 emissions (million tons)                          18.89     24.26     41.37    2.65%
NOx (transportation) (million tons)                    3.04      7.24     15.90    5.67%
Premature Deaths (1,000)                                 88      173       525     6.12%
Value of Health Damages (bil yuan)                      153      278       579     4.54%
Health Damage/GDP                                    1.67%     2.47%     4.77%
Counterfactual Simulations (in changes, %)
                                Output Tax             Fuel Tax            Carbon Tax
                                  t=100%MD              t=30%MD
                             1st Year 20th Year   1st Year   20th Year   1st Year 20th Year
GDP                          +0.001     +0.54      +0.13      +0.12       +0.12    +0.15
Consumption                   +0.09     +0.05      -0.07      -0.08       -0.01    +0.04
Investment                    +0.18     +1.59      +0.14      +0.18       +0.14    +0.20
Coal use                       -3.2      -5.3      -12.7      -18.3       -12.6    -13.3
Carbon emissions               -2.8      -4.2      -10.1      -13.4       -10.4    -10.4
PM emissions                   -3.1      -4.5       -6.3       -9.0        -6.3     -6.7
SO2 emissions                  -3.1      -5.3       -9.8      -13.8        -9.9    -10.3
NOx (transportation)           -2.9      -7.1       -0.6       -1.1        -1.7     -1.8
Value of Health Damages        -2.5      -4.4      -10.1      -14.3       -10.2    -10.7
Change in other tax rates      -7.2     -15.0       -1.9       -2.0        -2.6     -2.1
Reduction in Damages/GDP      0.04       0.13        0.2        0.4         0.2      0.3
Env. tax/Total tax revenue      7.2      14.0        1.7        1.7         2.4      1.8
Comparison of Different Environmental Tax
Policy Options
                            Carbon Tax                  Fuel Tax                   Output Tax

Carbon reduction            Most effective                Effective                Less effective


Pollution reduction
(PM10 , SO2)/ health           Effective               Most effective              Less effective
damage reduction
                       Increase consumption and     Increase investment       Increase consumption and
                              investment                 (long run)                  investment
                               (long run)                                             (long run)

Impacts on Chinese      Significant shift within   Significant shift within    Very little shift within
                           energy structure           energy structure           energy structure
economy
                        Affect energy intensive    Affect energy intensive    Spread effects across the
                         sectors significantly      sectors significantly      sectors more broadly



Revenue collecting               Low                        Low                         High

Double Dividend                   Yes                        Yes                         Yes
Future Work:
   This work provide a preliminary study linking our TFP, energy
    intensity study and our CGE model
   Next step, we collaborate with NBS, Beihang University, the
    Conference Board for the next wave time-series input-output
    table (data expected to be available, 2008)
   Future Studies:
       Energy Intensity Decomposition (More in-depth study)
       Econometric models based on the state-space production function, to
        replace the current Cobb-Douglas function employed in the current
        version CGE model

				
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