An Analysis of Fuel Demand and Carbon Emissions in China

Under the Kyoto Protocol to the United Nations Framework Convention on Climate Change, targets have been set for various developed countries to reduce their carbon emissions. China’s share of carbon emissions ranked the second highest in the world in 1996, only after the United States. Although China was not formally required to achieve a reduction in its carbon emissions under the protocol, pressures were mounting, especially from the United States, for China to address the issue seriously. Some recent research on China’s carbon emissions has largely been carried out in the framework of computable general equilibrium models. For example, Fisher-Vanden (2003) used such models to assess the impact of market reforms on shaping the level and composition of carbon emissions; Garbaccio et al. (1999) and Zhang (1998) studied macroeconomic and sectoral effects of policies and instruments, such as, a carbon tax, on achieving predefined targets of carbon emissions. A common omission in these studies is the role of fuel price changes in determining the amount of carbon emissions. This paper first shows China’s total CO2 emissions from burning all types of fossil fuels over the 50 years or so to 2001, with those from burning coal singled out for the purpose of illustrating coal as the major CO2 emitter. Then, using annual data for the period 1985-2000, the study investigates whether changes in the relative prices of various fuels reduce coal consumption. Four sectors in the Chinese economy are selected for the study, namely, the chemical industry, the metal industry, the non-metal materials industry and the residential sector, which are top energy as well as top coal consumers. Five fuels are considered, namely, coal, crude oil, electricity, natural gas and petroleum products, which accounted for nearly all of the total energy consumption in each of the four sectors. A translog demand system is estimated for each sector using the seemingly unrelated regression method. The results suggest that significant substitutions away from coal to alternative fuels take place in the residential as well as the metal sectors.