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Elasticity of Substitution Between Electricity and Non-Electric Energy in the Context of Carbon Neutrality in China

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  • Shenghao Feng
  • Keyu Zhang
  • Xiujian Peng

Abstract

Electricity penetration is an important part of China's pursuit of carbon neutrality. Understanding the costs of replacing fossil fuel with electricity helps to understand the costs of reaching carbon neutrality in China. This study uses econometrics techniques to estimate the constant elasticity of substitution (CES) parameter between electricity and non-electric energy for China. Results show that the value is around 1.8 -- higher than the ones that have been used in the literature. We show that our estimated results are non-linearly stable. We compare our econometrically estimated parameter with two representative values that have been used in the literature. We apply these three parameter values in scenarios in which China reaches carbon neutrality in 2060. Simulation results suggest that the two representative values lead to overestimations of GDP costs and carbon price levels, and underestimations of electricity generation and energy consumption.

Suggested Citation

  • Shenghao Feng & Keyu Zhang & Xiujian Peng, 2021. "Elasticity of Substitution Between Electricity and Non-Electric Energy in the Context of Carbon Neutrality in China," Centre of Policy Studies/IMPACT Centre Working Papers g-323, Victoria University, Centre of Policy Studies/IMPACT Centre.
    • Handle: RePEc:cop:wpaper:g-323
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    More about this item

    Keywords

    CGE; CES; econometrics estimation; carbon neutrality; China; electricity;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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