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Electricity prices and industry switching: Evidence from Chinese manufacturing firms

Robert Elliott, Puyang Sun and Tong Zhu

Energy Economics, 2019, vol. 78, issue C, 567-588

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.

Keywords: Industry switching; Energy prices; Firm behaviour (search for similar items in EconPapers)
JEL-codes: L6 O13 O14 (search for similar items in EconPapers)
Date: 2019
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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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