China’s Economy and Energy Use

Development of the Model

Dale W. Jorgenson (Samuel W. Morris University Professor of Economics) and Mun S. Ho (Institute for Quantitative Social Science and Harvard China Project) have led the longest-running single initiative of the China Project, incrementally building up a general equilibrium model to study economic growth and energy utilization in China, and to consider their effects on environment. Long-time collaborator and Harvard alumna CAO Jing (School of Economics and Management, Tsinghua University) now co-leads the economic research with Jorgenson and Ho.

The initial effort, with Dwight H. Perkins (Department of Economics), was confined to a projection of Chinese economic growth and carbon emissions, using an aggregate growth model without industry detail (Ho, Jorgenson, and Perkins 1998). Jorgenson and Ho then developed a multi-sector model of Chinese economic growth in collaboration with Richard Garbaccio [then-Harvard Kennedy School of Government (HKS), now U.S. EPA], paying special attention to the dual plan-and-market features of the Chinese economy in the 1990s (Garbaccio, Ho, and Jorgenson 1999a, 1999b). With Karen Fisher-Vanden (then-HKS, now Penn State), this was followed by a version of the model with perfect foresight dynamics (Fisher-Vanden 2003a, 2003b). Much of this work was done in cooperation with the Development Research Center of China’s State Council.

The next version incorporated population projections including the changing demographic structure, projections of productivity growth, enhancements of labor quality, and changes in household spending and savings behavior. In parallel the team analyzed Chinese energy use at the industry level, using data from the 1987 and 1992 input-output tables, informing projections of industry energy use. At this stage the model incorporated a sub-model of local health impacts of SO2 and total suspended particulate (TSP) emissions, using information provided by Gordon Hughes and Kseniya Lvovsky of the World Bank. This version was first used to examine the reduction in local health damages due to a policy to reduce carbon emissions. The subsequent analysis focused on the effects of “green tax” policies, designed to reduce local air pollution damages, on economic growth, on reductions in mortality and morbidity, and on carbon emissions (Ho, Jorgenson, and Di 2002).

Clearing the Air: The Health and Economic Damages of Air Pollution in China (2007, MIT Press)

Integrating the China Project's Economic Model with its Environmental Health and Engineering Research

The above model development set the stage for the book-length Clearing the Air study published by MIT Press (Ho and Nielsen 2007) and described in a separate link here. This study built new collaborations of the economists with environmental health scientists from the Harvard School of Public Health and environmental engineers from Tsinghua University and the Harvard School of Engineering and Applied Sciences. An update of the economics of the Clearing the Air is reported here in the Review of Environmental Economics and Policy (Cao, Ho, and Jorgenson 2009), and is also summarized in an article in Harvard Magazine (Ho and Jorgenson 2008).

U.S.-China Strategic Economic Dialogue

In 2007 the integrated model developed in Clearing the Air was applied in the macroeconomic component of the environmental research initiative of the U.S.-China Strategic Economic Dialogue (SED) of U.S. Treasury Secretary Henry Paulson and China's Vice Premier WU Yi (and later Vice Premier WANG Qishan). Coordinated by China's State Environmental Protection Administration (Policy Research Center for Economy and Environment) and the U.S. Environmental Protection Agency (Office of Air and Radiation), the first objective of the "Joint Economic Study (JES)" of the SED was to assess the costs and benefits of the China's measures to achieve a 10% SO2 reduction and a 20% energy efficiency improvement under the 11th Five Year Plan (2006-2010). These measures included, among others, retirement of inefficient small thermal power plants and new mandates in flue gas desulfurization. The macroeconomic research team included China Project economists Jorgenson and Ho of Harvard and Cao of Tsinghua, along with Richard Garbaccio of U.S. EPA's National Center for Environmental Economics, and YANG Hongwei and colleagues at the Energy Research Institute of the National Development and Reform Commission. Click here for the Executive Summary of the JES reported at the Third SED in Beijing in December of 2007. The full academic version of the Harvard-Tsinghua economic analysis of the 11th FYP policy is reported in the journal Review of Environmental Economics and Policy (Cao, Garbaccio, and Ho 2009).

Clearer Skies Over China: Reconciling Air Quality, Climate, and Economic Goals (2013, MIT Press)

Integrating the China Project's Economic Framework with the Project's Atmospheric Model and Emission Inventories

In recent years the economics team has worked with China Project atmospheric scientists, engineers, and health scientists at both Harvard and Tsinghua University to achieve an interdisciplinary breakthrough: linking the economics-engineering-health framework of Clearing the Air with bottom-up emission inventories led by Tsinghua and the Project's GEOS-Chem atmospheric model of China. This major collaborative expansion has resulted in a new book assessing the full economic and environmental costs and benefits of both air pollution policies of the past in China, and prospective carbon taxes of the future, Clearer Skies Over China: Reconciling Air Quality, Climate, and Economic Goals (Nielsen and Ho 2013, MIT Press). The results were also featured in an op-ed in the New York Times by Chris Nielsen and Mun Ho of the China Project, and have been cited in a number of articles in other media sources in China and the U.S. This major initiative is described on a separate page here

Supported as part of this interdisciplinary initiative, the economics team is developing new sub-models of household demand, both in urban (Cao et al. in press, 2016) and rural contexts, integrating them into the larger CGE economic model. 

Funding Acknowledgements

The economics research of the Harvard China Project has been generously supported by the Cheung Yan Fund of the Harvard Department of Economics. The economics components of the integrated studies immediately above have been funded by awards from the Energy Foundation China, Harvard's Weatherhead Center for International Affairs, and the Harvard China Fund. Earlier economics research of the China Project was funded by the U.S. Environmental Protection Agency, the China Sustainable Energy Program of the Energy Foundation, the Harvard Asia Center, the China Council for International Cooperation on Environment and Development, the V. Kann Rasmussen Foundation, and the U.S. Department of Energy (grant DE-FG02-95ER62133).