Estimation of energy substitution effect in China's machinery industry--based on the corrected formula for elasticity of substitution

Characterized with high-energy consumption, China's machinery industry has seen a surge in its energy consumption reaching 540.743 Mtce (million tons of coal equivalent) in 2014, which is about 12.7% of China's total energy consumption. We try to examine inter-factor substitution towards energy conservation in the Chinese machinery industry by applying the corrected formula. Documented results evidence a significant substitution relation between energy and capital as well as labor. The estimated substitution elasticity between capital and energy is about 1.029 while that of labor and energy stands at 1.030. This is a clear indication that, allocating more capital or labor to China's machinery industry instead of energy will be vital in the CO2 mitigation effort. Also, a practical scenario estimation to access energy conservation and CO2 abatement indicates that, a 5% and 10% increase in capital inputs will reduce energy consumption by 27.742 and 55.483 Mtce while CO2 emissions will reduce by 64.553 and 129.105 Mt respectively in 2014.

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