Electricity prices and industry switching: Evidence from Chinese manufacturing firms

Research output: Contribution to journalArticle

Authors

Colleges, School and Institutes

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.

Details

Original languageEnglish
Pages (from-to)567-588
Number of pages22
JournalEnergy Economics
Volume78
Early online date13 Dec 2018
Publication statusPublished - 1 Feb 2019

Keywords

  • Energy prices, Firm behaviour, Industry switching

ASJC Scopus subject areas