Electricity prices and industry switching: Evidence from Chinese manufacturing firms

Robert Elliott (Lead / Corresponding author), Puyang Sun, Tong Zhu

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    Abstract

    Energy is an essential input into a firm's production process. In this paper we investigate how electricity price changes across Chinese provinces affect the decision of firms to switch production from one industry to another. To address potential endogeneity between electricity prices and unobservable province level policies we construct an instrument from the interaction of regional coal production and thermal power generation capacity. Our instrumental variable results show that manufacturing firms are more likely to switch the industry of their main product to a less energy intensive industry as a result of rising electricity costs. More specifically, a 10% increase in the price of electricity leads to an increase in the probability of switching to a less energy intensive industry of around 2.3%. Our findings suggest that a well designed electricity price scheme can encourage firm behaviour than is consistent with reductions in energy use.

    Original languageEnglish
    Pages (from-to)567-588
    Number of pages22
    JournalEnergy Economics
    Volume78
    Early online date13 Dec 2018
    DOIs
    Publication statusPublished - Feb 2019

    Keywords

    • Energy prices
    • Firm behaviour
    • Industry switching

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