What is driving China’s decline in energy intensity?

While energy intensity in China has fallen almost continuously since the onset of economic reform in the late 1970s, beginning in 1996 the data show a striking decline in China’s absolute level of energy use. Most of this decline can be accounted for by falling coal consumption in the industrial sector. In order to investigate this energy puzzle, this paper employs a unique set of panel data for approximately 2500 of China’s most energy intensive large and medium-sized industrial enterprises during 1997–1999. Rising relative energy prices, research and development expenditures, and ownership reform in the enterprise sector, as well as shifts in China’s industrial structure, emerge as the principal drivers of China’s declining energy intensity and use.