Summary of New Project Publication for Non-Specialists
Hu, Wenhao, Mun S. Ho, and Jing Cao. "Energy consumption of urban households in China." China Economic Review 58 (Dec 2019)
This paper is co-authored by three Harvard-China Project affiliates. The research began while Wenhao Hu (now Assistant Professor at Ma Yinchu School of Economics, Tianjin University) was a visiting Ph.D. fellow at the China Project, working with Mun S. Ho (Visiting Scholar) and Jing Cao (Associate Professor, School of Economics and Management, Tsinghua University).
This HCP Research Brief for non-specialists was written on behalf of the team by Mun S. Ho.
Summary of the Research
The design of energy and environmental policies require a knowledge of how various energy consumers might respond to them. In the particular case of market-based policies, we should know how firms and households respond to energy prices. Do they cut their use of fossil fuels or electricity by a lot when we raise a 10% tax on them? Or are they mostly unable to change? Are they more able to adapt over time? The answers can influence the design of policies that affect energy prices, and the total social cost of the policies. If consumers do not cut the use of some energy source even when the prices rise, then we may conclude that it is costly to do so and thus alternative types of policies may be required. We also need to know the change in behavior over longer periods of time, for instance as incomes rise and the population gets older.
In China, direct use of electricity by households was about 14% of national consumption in 2015 and rising, and the direct use of all forms of energy was 12% and also rising. (This excludes the indirect use of energy that is embodied in the goods that households buy.) This rise parallels the rise in ownership of automobiles and household appliances such as air conditioners and washing machines. Given the importance of household energy to the economy and environment, it is important that we understand their energy demands.
There is a lot of research into these questions, but much of the past work in China used provincial or city-level data given the restrictions on access to household survey data. Such aggregated data can only offer limited answers to these questions. In this paper we are able to use the Urban Household Income and Expenditure Survey of the National Bureau of Statistics, which covered 5,000-17,000 households per year between 1992 and 2009. For each household we calculated five main budget categories from detailed expenditures: electricity, transportation, consumer goods, services, and other home energy (OHE). We then separately study the allocation of OHE to coal, gas and district heating, and the allocation of transportation to fuels of household-owned vehicles and other transportation services. We constructed price indices for these items at the provincial level, with separate estimates for big and small cities.
Our approach of using data for the entire household budget allows a comprehensive view of energy consumption. This is in contrast to studies using only data on consumption of particular types of energy, e.g., electricity. Here we consider not only the substitution between coal and gas, and between electricity and OHE, but also between electricity and goods and services. Our main findings include the following:
- Income elasticities for electricity and OHE are low; that is, as people get richer they do not proportionally increase their spending on them. In contrast, the income elasticity for transportation (both household vehicles and transportation services) is 1.23; that is, a 10% increase in income leads to a 12.3% increase in transportation expenditures.
- We found the following energy price elasticities, which indicate how responsive households are to price changes: electricity (0.49), OHE (0.35), transportation (0.71), coal (0.41), gas (0.11), and gasoline (0.3).
- We compared all of these estimates to those found in previous studies, which show a large range of estimates. Our income elasticity for electricity (0.7) is within the wide range estimated for China and, as expected, much higher than that estimated for richer countries. The price elasticity for coal is towards the low end of the range, while our gasoline price elasticity is similar to that of the few studies on the topic.
These results indicate that, assuming incomes continue their rapid rise in China, we can expect much higher gasoline and travel demand, but a slowing of coal demand. Electricity use will continue to grow but perhaps at a decelerating rate. Finally, urban consumers show some modest ability to substitute for energy in response to prices, which means that market-based policies, such as tax-based ones, may be effective.