Research On The Elasticity Of Substitution Between Energy And Non-energy Factors Of China’s Industrial Sector

With the rapid growth of China’s economy, the energy consumption have risen dramastically, which makes the position of energy become more and more important. However, the growing consumption of energy has brought some negative effects, including global warming, air pollution and so on. Therefore, the study about energy conservation and emissions reduction have been paid more and more attentions. On one hand, the elasticity of substitution between input factors are important parameters of macro climate models. On the other hand, it can also be taken as a reference by the government to make the relevant climate policies. Hence, study on the elasticity of substitution between energy and non-energy factors have great theoretical and practical significance.This paper uses translog cost function which takes technical and allocative inefficiency into account to study the whole industrial sector, energy intensive industrial sector and its subsectors. We compute the value of technical and allocative inefficiency and the elasticity between two input factors, the results shows that for the whole industrial sector and energy intensive industrial sector, the allocative inefficiency present a downward trend, while the elasticity of substitution between capital and energy are turned from complementary to substitutability during 1990-2010. The possible reason is that the price of energy increased much faster than those of other factors, which drives company to use less energy. In addition, this paper uses two level nested CES production function to calculate the elasticity of substitution among three input factors. According to the results, the capital-energy and labor-energy elasticity of substitution of the whole industrial sector are higher than that of energy intensive industrial sector, partly because the energy cost ratio of whole energy intensive industrial sector are much higher than whole industrial sector. Thus the energy factors are more inclined to substitute non-energy factors of whole industrial sector compared to energy intensive industrial sector.In conclusion, it’s infeasible for the government to use capital or labor to substitute energy in industry level, but much more complex for the subdivision sectors. Meanwhile, the government should reduce unnecessary administrative intervention, improve the efficiency of the factor configuration. The reform of energy price is also necessary. Much more, the construction of the futures market and related derivatives market of energy goods should be accelerated, and market price discovery function should be strengthened with the help of financial innovation.