Substitution of Energy and Capital an Its Uncertainty for China Zhaoning ZHENG Research Center of Contemporary Management Global Climate Change Institute School of Public policy and management Tsinghua university, Beijing 100084, China 1
Background t α1 β1 γ µ 5θ 5 1 = (1 + ρ ) ( ) t φ 5 ( 1 ) ( ) 5 φ Y (1 ) φ ) 5 5 = + ρ5 A5 a5 b5 K + b5 E + (1 a5 Y A L K E 1 1 1 output output L θ 5 h5 θ 5 labor capital energy labor capital energy 2
Background Y A L K E = ( ) ( α1 β1 γ1 ) 1 1 output output 5 µθ 5 5 θ5 5 5 φ5 5 Y = A a b K + (1 b ) E + (1 a ) L φ φ θ 5 5 5 5 5 5 h labor capital energy labor capital energy 3
4 Version 1 and 2 output labor capital energy ) ( ) 1 ( 1 1 1 1 1 1 γ β α ρ E K L A Y t + = ) ( 2 2 2 2 2 γ β α E K L A Y = 3 3 3 3 3 ] ) (1 [ ) 1 ( 3 3 3 3 3 3 3 θ θ θ θ ρ h t E b a b K a L A Y + + + = 4 4 4 4 4 ] ) (1 [ 4 4 4 4 4 4 θ θ θ θ h E b a K b L a A Y + + =
Y 5 = Version 3, 6 and 9 φ φ5 ( b K + (1 b ) E ) µ θ t ( 1+ ρ5) A5 a5 5 5 5 5 5 5 φ ) 5 + (1 a L θ 5 h5 θ 5 Y output 11 = [ ( ) ] h11 β11 γ θ 11 11 θ11 θ11 a K E + (1 a ) L t ( 1+ ρ11) A11 11 11 labor capital energy Y 17 t α θ17 = ( 1+ ρ17 ) A17 L [ b17k + (1 b17 ) E h17 17 17 ] β θ θ17 GREEN, HERMES, MS-MRT DEMETER, EPPA 17 5
Version 4, 7 and 10 Y 7 = φ φ7 ( b K + (1 b ) L ) µ θ t ( 1+ ρ7 ) A7 a7 7 6 7 7 7 7 φ ) 7 + (1 a E θ 7 h7 θ 7 output Y 13 = [ ( ) ] h13 α13 β θ 13 13 θ13 θ13 b L K + (1 b ) E t ( 1+ ρ13) A13 13 13 energy capital Y 19 t γ θ19 = ( 1+ ρ19 ) A19 E [ b19k + (1 b19 ) L h19 19 19 ] β θ θ19 GLOBAL2100, labor MARKAL-MACRO 19 6
Version 5,8 and 11 Y 9 µθ ( ) t φ φ 9 = ( 1+ ρ9) A9 a9 b9 E + (1 b9 ) L 9 9 9 9 φ ) 9 + (1 a K θ 9 h9 θ 9 output Y 15 = [ ( ) ] h15 α15 γ θ 15 15 θ15 θ15 b L E + (1 b ) K t ( 1+ ρ15) A15 15 15 Y 21 t β θ 21 = ( 1+ ρ 21) A21 K [ b21l + (1 b21) E h21 21 21 ] α θ θ21 21 capital energy labor 7
What I found neutral technology progress rate lies between 0.03 and 0.05 for all production functions For C-D C D function, labor input can be omitted in the models without TP, and is equal to 0 in the model with TP. For CES production function, the distribution parameter of labor input, is also very small and can be omitted in the models without TP, and is equal to 0 in the models with TP no production function whose entire estimated parameters passed t-ratio t test According to regression results, the labor input can be excluded from functions 8
Why labor no impact Surplus labor : apparent or potential 1. the high rate of employment in China is to great extent for the sake of keeping social stability trading off economic efficiency 2. potential rate of unemployment in China is about 18%, based on some research 3. more than 200 million surplus rural labor cannot be transferred out to other industries 9
Point of view More often, to china, population is a kind of burden, not resource, regarding to poor education and training on technology skills whose fault? Energy supply and investment supply are constrained 10
literatures T.-Y. Zhou, The trend and way out for China s employment, re-employment employment and labor transfer, Research on Finance and Economic Issues, vol. 11, pp.3-12, Nov.,1999. X.-L. Wu, Y.-J. Jing, Causes and countermeasures for much excess labor supply in China, Population J., vol. 10, pp.36-38, 38, Apr.2000. 11
AK model characteristic for China s economical growth Y. Su, X.-X. Xu, Specification of China s s economic growth model:1952-1998, 1998, Economic Research J., no.11, pp.3-11, Nov. 2002 Y = 0.314839834K (5.559) capital / GDP =about 3.3 0.993571058 (60.951) 12
1994 1996 1998 2000 30000 25000 20000 15000 10000 5000 0 Annex fig 1 GDP 13 1982 1984 2000 1998 year 80000 60000 40000 20000 0 Annex fig 3. population year 1994 1996 1998 2000 1986 1988 1990 1992 1978 1980 150000 100000 50000 0 annex fig 4. energy year 1982 1984 1986 1988 1990 1992 1978 1980 1994 1996 1986 1988 1990 1992 1984 1982 1978 1980 108 yuan 104 tce 104 persons 2000 1998 1996 1994 100000 80000 60000 40000 20000 0 capital 1986 1988 1990 1992 year 1984 1982 1978 1980 108yuan
capital-gdp relation energy-gdp relation GDP 30000 25000 20000 15000 10000 5000 0 0 20000 40000 60000 80000 100000 capital GDP 30000 25000 20000 15000 10000 5000 0 0 50000 100000 150000 energy labor-gdp relation 14 GDP(108 yuan) 30000 25000 20000 15000 10000 5000 0 30000 40000 50000 60000 70000 80000 labor(104 person) thousand yuan RMB 12 10 8 6 4 2 0 1978 1980 1982 1984 1986 1988 1990 1992 1994 Annex fig.2capital of per capital 1996 1998 2000 year 14
GDP-capital-energy relation 30000 GDP 20000 10000 60000 80000 100000 120000 140000 160000100000 80000 ENERGY 60000 40000 20000 CAPITAL 15
16 Recommended version 1: CES θ θ θ ρ h t r E a A ak Y + + = ] ) (1 [ ) (1 1 θ θ θ h r E a A ak Y + = ] ) (1 [ 2
Recommended version 1: C-D Y = (1 + ρ) 3 r t AK β E γ Y4r = AK β E γ 17
Y 1r = (1 + ρ ) t A[ ak θ + (1 a) E θ ] h θ Parameters name Parameter value Standard error t-ratio 0.0408 0.00395 10.33 A 1 a 0.7011 0.05569 12.59-1 h 0.8064 0.00879 91.72 18
Y 2r = A[ ak θ + (1 a) E θ ] h θ Parameters name Parameter value Standar d error t-ratio A 0.0118 0.00656 a 0.7995 0.03201 9 1.79 24.97-1 h 1.2703 0.04687 27.10 19
Y = (1 + ρ) 3 r t AK β E γ Parameters name Parameter value Standard error t-ratio 0.0344 0.00407 8.46 A 1 0.5196 0.05932 8.76 0.2975 0.05025 5.92 20
Y4r = AK β E γ Parameters name Parameter value Standard error t-ratio A 0.0326 0.01613 0.8766 0.02686 0.3041 0.06360 2.02 32.64 4.78 21
Substitution elasticity and Returns to scale Model Substitution elasticity Returns to scale Model 1 (K/E) <1 Model 2 (K/E) >1 Model 3 1 (K/E) <1 Model 4 1(K/E) >1 22
CES C-D 23
Summary Only capital and energy are used as inputs. Great uncertainty exists regarding the substitution elasticity between energy and capital Technology progress has great influence on the parameters of production functions output elasticity of capital input is much higher than that of energy input 24
Discussion Surplus labor issue. Sectoral production functions may be more appropriate than national production function for China control energy consumption growth while keeping high economic growth rate, R&D and technology promotion. 25
Scenario Set Business as Usual GDP 70000 60000 50000 40000 30000 20000 10000 0 2000 2005 2010 2015 2020 2025 2030 year 3000 2500 2000 1500 1000 500 0 ENERGY (billion yuan, 2000price) Energy consumption (Mtce) 26
Scenario Set energy conservation GDP 70000 60000 50000 40000 30000 20000 10000 0 2000 2005 2010 2015 2020 2025 2030 year 3000 2500 2000 1500 1000 500 0 ENERGY (billion yuan, 2000price) Energy consumption (Mtce) 27
Scenario Set energy elasticity 0.45 0.4 0.35 0.3 0.25 2005 2010 2015 2020 2025 2030 BAU EC 28
Energy consumption for different scenarios energy consumption MTCE 3500 3000 2500 2000 1500 1000 500 0 2000 2005 2010 2015 2020 2025 2030 year BAU EC ER5 ER10 ER15 29
Uncertainty of capital stock demand Between C-D and CES under BAU -----With technological progress Absolute diff ( billion, 2000 price) 40000 35000 30000 25000 20000 15000 10000 5000 0 2005 2010 2015 2020 2025 2030 Absolute diff ( billion, 2000 price) 30
Uncertainty of capital stock demand Between C-D and CES under BAU -------With technological progress 50.00% 40.00% 30.00% 20.00% 10.00% Relative diff 0.00% 2005 2010 2015 2020 2025 2030 year 31
Uncertainty of capital stock demand Between C-D and CES under BAU -------Without technological progress Absolute diff ( billion, 2000 price) 60000 50000 40000 30000 20000 10000 0 2005 2010 2015 2020 2025 2030 year Absolute diff ( billion, 2000 price) 32
Uncertainty of capital stock demand Between C-D and CES under BAU -------Without technological progress 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% Relative diff 0.00% 2005 2010 2015 2020 2025 2030 year 33
The difference of capital stock with- and withouttechnological progress under BAU scenario -------CES production function Absolute diff ( billion, 2000 price) 100000 80000 60000 40000 20000 0 2005 2010 2015 2020 2025 2030 year Absolute diff ( billion, 2000 price) 34
The difference of capital stock with- and withouttechnological progress under BAU scenario -------CES production function Relative diff 120% 100% 80% 60% 40% 20% 0% 2005 2010 2015 2020 2025 2030 year 35
The difference of capital stock with- and withouttechnological progress under BAU scenario -------C-D production function 120000 100000 80000 Absolute diff ( billion, 2000 price) 60000 40000 20000 0 2005 2010 2015 2020 2025 2030 year 36
The difference of capital stock with- and withouttechnological progress under BAU scenario -------C-D production function Relative diff 140% 120% 100% 80% 60% 40% 20% 0% 2005 2010 2015 2020 2025 2030 year 37
Uncertainty of capital stock demand Between C-D and CES under EC -----With technological progress Absolute diff( billion, 2000 price) 50000 40000 30000 20000 10000 0 2005 2010 2015 2020 2025 2030 year 38
Uncertainty of capital stock demand Between C-D and CES under EC -------With technological progress Relative diff 50% 40% 30% 20% 10% 0% 2005 2010 2015 2020 2025 2030 year 39
Uncertainty of capital stock demand Between C-D and CES under EC -------Without technological progress Absolute diff( billion, 2000 price) 60000 50000 40000 30000 20000 10000 0 2005 2010 2015 2020 2025 2030 year Absolute diff( billion, 2000 price) 40
Uncertainty of capital stock demand Between C-D and CES under EC -------Without technological progress Relative diff 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2005 2010 2015 2020 2025 2030 year 41
The difference of capital stock with- and withouttechnological progress under EC scenario -------CES production function Absolute diff( billion, 2000 price) 1000000 800000 600000 400000 200000 0 2005 2010 2015 2020 2025 2030 year Absolute diff( billion, 2000 price) 42
The difference of capital stock with- and withouttechnological progress under EC scenario -------CES production function Relative diff 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% 2005 2010 2015 2020 2025 2030 year 43
The difference of capital stock with- and withouttechnological progress under EC scenario -------C-D production function Absolute diff( billion, 2000 price) 1200000 1000000 800000 600000 400000 200000 0 2005 2010 2015 2020 2025 2030 year Absolute diff( billion, 2000 price) 44
The difference of capital stock with- and withouttechnological progress under EC scenario -------C-D production function 120.00% 100.00% 80.00% Relative diff 60.00% 40.00% 20.00% 0.00% 2005 2010 2015 2020 2025 2030 year 45
The incremental capital of CES functions under different scenarios to BAU With TP :8380yuan/tce Without TP:14240 yuan/tce 46
The incremental capital of C-D functions under different scenarios to BAU -------With technological progress (10 4 yuan/tce) 3.5 3 2.5 2 1.5 1 0.5 0 2010 2015 2020 2025 2030 BAU-EC ER5-EC ER10-ER5 ER15-ER10 47
The incremental capital of C-D functions under different scenarios to BAU -------Without technological progress (10 4 yuan/tce) incremental capital 4 3.5 3 2.5 2 1.5 1 0.5 0 2010 2015 2020 2025 2030 year BAU-EC ER5-EC ER10-ER5 ER15-ER10 48
Conclusion the strong energy supply constraint, the uncertainty of energy-capital substitution asks the huge and uncertain investment to improve energy efficiency and develop new energy to ensure the future sustainable development of China strong constraint of energy availability determines the active energy saving and energy substitution policies must be implemented in China 49
Conclusion energy conservation and energy substitution had already asked China increase huge investment to save and substitute energy. So, if real GHG emission=bau emission for China? GHG emission BAU cost EC ER 50
Conclusion High substitution elasticity of energy and capital shows the promising prospect that China have huge potential to participate the global GHGs emission reduction cooperation mechanism such as CDM of Kyoto protocol Depreciation year of capital: 20year CO2 Abatement cost: 10 US$ /t co2e----41us$/t co2e 51