Decomposition analysis on changes of energy efficiency in China

The Chinese economy has been steadily growing since 1978. During most of the period energy intensity fell. Between 2002 and 2005 however energy intensity increased. In this paper we seek an answer for the overall decrease in energy intensity and temporary increase between 2002 and 2005. Index decomposition analysis is used to decompose energy intensity changes between 2000 and 2009 into three factors: sectoral changes, subsectoral changes and technological changes as a residual variable. The results of our decomposition show that technological changes contribute most to the decline in energy intensity followed by Subsectoral changes. The most valuable finding of our analysis is the causes of the fluctuation in energy intensity during the period 2002-2005. Our results show a negative contribution of technological change during 2002-2005. Because we don't think that during this period completely different technologies are used, we look for alternative explanation. According to us, the negative contribution is caused by two factors: overcapacity and product changes within subsectors. We found some evidence of this, hinting at the need for a decomposition of the technological change variable.