The Behavioral Impacts of Firm-level Energy-Conservation Goals in ...

Policy Analysis pubs.acs.org/est

The Behavioral Impacts of Firm-level Energy-Conservation Goals in China’s 11th Five-Year Plan Dan Wu,†,‡ Yuan Xu,*,†,‡,§ Yee Leung,†,‡,§ and Chor Wing Yung∥ †

Department of Geography and Resource Management, The Chinese University of Hong Kong, Hong Kong, China Shenzhen Research Institute, The Chinese University of Hong Kong, Shenzhen, China § Institute of Environment, Energy and Sustainability, The Chinese University of Hong Kong, Hong Kong, China ∥ Department of Economics, The Chinese University of Hong Kong, Hong Kong, China ‡

ABSTRACT: Energy efficiency is one of the most effective means of curbing energy consumption and associated pollutant emissions. However, energy-saving opportunities at negative net costs, or an energy-efficiency gap, widely exist and they defy an entirely rational explanation. This paper examines the significant overperformance of energy-intensive firms against their assigned energyconservation goals in a national program in China’s 11th Five-Year plan (2006−2010). Higher energy prices can be only partially responsible for more active energy saving. Behavioral constraints are explained to cause the bounded rationality of firms on energy-efficiency investment. As our theoretical and empirical studies show, energy-conservation goals could overcome such behavioral constraints to accelerate the commercialization of energy-efficiency technologies, reduce uncertainty and hesitancy of relevant investment, facilitate the enrichment of information, and concentrate the attention of firms on energy conservation. We conclude that goal-setting could provide an effective complementary policy instrument in dealing with energy conservation in China and possibly in other parts of the world.

1. INTRODUCTION Facing immense energy and environmental challenges, China in its 11th Five-Year Plan (2006−2010) started a high-profile national policy to regulate energy intensity, or energy consumption per unit of GDP. The indicator was mandated to decrease by 20% over those five years. This difficult goal invited the Chinese government to further plan and implement numerous large-scale projects and policies targeting various energy consumers.1 One key program is to set up compulsory energy-conservation goals for about 1000 energy-intensive firms in nine industries (iron and steel, petroleum and petrochemicals, chemicals, electric power generation, nonferrous metals, coal mining, construction materials, textiles, and pulp and paper) which were responsible for 33% of total energy consumption in China, and with each firm consuming at least 0.18 million tce (tons of coal equivalent) per year.2 The goals were designed and evaluated based on energy consumption per product, per output value or added value, and the bundle of products.3 Firms could achieve the goals through producing the same product with less energy, or by upgrading to highervalued or less-energy-intensive products, but not by decreasing production. This program, otherwise known as the “Top 1000 Program”, achieved a net energy saving of 165 Mtce (million tons of coal equivalent) in 2010,4 far exceeding the originally planned 100 Mtce.2 Specifically, for the 881 firms that still exist and remain in the “Top 1000 Program”, 866 firms exceeded their original goals, and no province was an exception (Figure 1). The overperformance has also been confirmed in the literature.5 © 2014 American Chemical Society

Figure 1. Energy-conservation goals and results of the “Top 1000 Program”, by provinces4

The firms, generally state-owned, had good reasons for taking the energy-conservation goals seriously. The annual and fiveyear evaluations of their managers had a key element of energysaving performance, and strong incentives in the form of carrots−such as promotion opportunities, and sticks−such as no promotion or punitive electricity prices, were correspondingly applied.6,7 However, the nearly universal, significant Received: Revised: Accepted: Published: 85

July 18, 2014 November 3, 2014 December 5, 2014 December 5, 2014 dx.doi.org/10.1021/es5031596 | Environ. Sci. Technol. 2015, 49, 85−92

Environmental Science & Technology

Policy Analysis

overperformance of energy saving across the firms is puzzling: why did the firms do much more than what the goals required? Goals are an important policy instrument in China’s administration. In the 11th Five-Year Plan, China included the stringent goal of reducing SO2 emissions, but the goal did not lead to significant voluntary overperformance.8 One key debating point in the international climate negotiations is the stringency of goals to mitigate greenhouse gas emissions. The self-interest of the parties generally discourages them from significantly outperforming these goals. If the overperformance in China’s “Top 1000 Program” indicates that further energy saving was indeed in their self-interest, another puzzle then emerges: why did the firms not fully avail themselves of the energy-saving opportunities previously? Retrospectively, the energy-conservation goals may have been too conservative and as such they enabled the firms to overperform until they reached the boundary set by their own self-interest. Energyintensive firms, compared with the government, have much better knowledge of their own energy-saving position. Does their overperformance indicate that accurate information may not be essential when they set up effective energy-conservation goals? In this paper we aim to answer these three questions. The research exploration will be built upon, and contribute to, the literature centering on the energy-efficiency gap between what could be achieved economically and what has been done in reality. Various definitions of energy-use optimality have been applied, responding to specific situations.9,10 This study adopts a definition from a rational choice perspective: the energy-efficiency gap indicates the unfulfilled opportunities of energy conservation with negative net costs, or a positive return on investment. Many of these opportunities have not been captured in the U.S. economy.11,12 China has been ranked low among 156 countries from 1980 to 2007, with an energyefficiency index which indicated the prevalence of such opportunities and a wide energy-efficiency gap.13 The leading causes could be rooted both in market failure and behavioral anomalies.14 Market failure may result from imperfect information, separated decisions between landlords and renters, financial barriers, externality of knowledge spillover, and distorted energy prices.14 These factors generally adopt the rational choice approach to explain the decision of insufficient investment on energy saving. Another category of explanations, namely, behavioral anomalies, is associated with insights from behavioral economics assuming and verifying that human subjects’ rationality is rather bounded. Energy consumers may have time-inconsistent preferences of investment in energy efficiency, exhibit loss aversion due to uncertainties, project the future incorrectly, make different choices when the same alternatives are framed differently, and prefer familiarity.14 The rest of the paper is organized as follows. Section 2 constructs a theoretical model to analyze the energy-efficiency investment decisions of firms and to provide theoretical answers to the three research questions. Section 3 further attempts to fill the theoretical model with empirical evidence in the Chinese context. Section 4 briefly discusses the implications.

2.1. A Theoretical Model of Energy-Efficiency Investment. In analyzing the energy-efficiency gap, Allcott and Greenstone developed a model to explain energy-efficiency investment as the comparison between capital costs and the willingness-to-pay (WTP).15 We adopt this general framework and further incorporate (i) detailed behavioral factors, to enrich the understanding of the WTP, and (ii) technological commercialization, to examine the impacts of changing capital costs. For a company to invest in energy efficiency for an additional margin, the WTP should outweigh the required capital costs: (1)

WTP > C

In this study, we define the WTP as an adjusted present value of saved energy brought about by energy-efficiency investment. Multiple reasons could lead a firm to underestimate the WTP. Uncertainty could compromise the present value of energy saving and subsequently discourage related investment.16−21 Informationinsufficient, imperfect, asymmetric, or costlyis another critical barrier which constrains the calculation as well as raises the perceived investment risks.14 Attention affects the activeness in seeking relevant information, and the lack of it could lead to ignoring important information.14 We then rewrite the WTP as the product of Rthe actual present value of saved energyand γ. R could be expressed, for simplicity, as the product of energy price, p, and the quantity of saved energy, q. q is largely defined by energy-efficiency technologies. γ could be expressed as γ = γ (u , i , a) ≤ 1

(2)

where u refers to the control of uncertainty, i information availability and perfectness, and a attention. Low uncertainty, sufficient information and high attention tend to raise the WTP close to R, or γ approaching 1. We also assume that the incremental capital cost, C, evolves with technological maturity; the commercialization of an energy-efficiency technology reduces its costs until it reaches a mature stage C*.22 Then, C could be rewritten as the product of C* and(λ ≥ 1). The investment decision equation would then become γ (u , i , a) · p · q > λ · C ∗

(3)

or p>

λ C∗ · γ (u , i , a) q

(4)

We define G=

λ γ (u , i , a)

(5)

Then p > G·

C∗ q

(6)

For an energy-efficiency technology with given unit costs C*/q, the investment would be determined by two general factors, a market-oriented factor reflecting rational calculations, p, and a behavior-directed factor reflecting bounded rationality, G. Higher energy prices and greater rationality tend to move the decision toward more energy-efficiency investment. If energy-efficiency technologies are ranked according to their unit costs from low to high, eq 6 could be further

2. THE THEORETICAL ANALYSIS OF ENERGY-CONSERVATION GOALS In this section, we first build a theoretical model to serve as an analytical framework. The model is then applied to explain the role of energy-conservation goals. 86

dx.doi.org/10.1021/es5031596 | Environ. Sci. Technol. 2015, 49, 85−92


Policy Analysis

thresholds, or T0 < Tg < T*, the decision-making on energyefficiency investment will become more dynamic to gradually evolve toward T*, the equilibrium status of perfect rationality with the narrowing energy-efficiency gap. 2.3. Theoretical Answers to the Research Questions. With the above theoretical model and analysis, we attempt to provide theoretical explanations and answers to the three research questions. First, the energy-intensive firms were driven by their rationality of cost minimization and profit maximization to significantly overperform in their energy conservation goals. Energy-conservation goals in the “Top 1000 Program” largely fell between two equilibrium statuses, T0 and T*, while they are not at equilibrium themselves. Second, they did not utilize the energy-saving opportunities in the absence of energy-conservation goals because the initial status was also at equilibrium, represented by T0. Third, accurate information may not be necessary to set up effective energyconservation goals, and the potentially high costs to collect and analyze information could be greatly reduced. As long as the goals are more stringent than T0, they tend to induce similar outcomes close to the new, rational equilibrium, T*. If the governmental ambition on energy conservation is beyond T*, then more information should be required for more appropriate goal-setting. The theoretical explanation assumes that the firms are largely market-oriented entities. However, most firms in the “Top 1000 Program” are state-owned. A firm might be forced to adopt certain types of technologies under the pressure of the government irrespective of their economic calculations. The theoretical model could accommodate such a state-driven scenario. In this situation, u could also incorporate political/ administrative uncertainties and γ would go beyond 1, indicating that the WTP for energy-efficiency investment is higher than the economic value of saved energy to account for the political/administrative benefits. In this case, G would be further reduced to less than 1. In a purely state-driven scenario, when G approaches 0, the economic costs would cease to be important in the decision-making process. However, this scenario would not be able to explain the first puzzle concerning the significant overperformance because statedriven firms would not do more than what they were told. The large-scale economic reform in the past three-and-a-half decades should have largely released the state-owned firms from the direct, daily management of the government and allowed them to be more responsive to the market, despite the remaining huge influences of the government. Energy-efficiency technologies could be understood broadly to cover not only those “hard” ones involving new equipment or investment but also “soft” ones such as better management on energy consumption or others with energy-related impacts. The latter category could especially correspond to low-hanging fruits with minimal unit costs of energy conservation.

illustrated in Figure 2 to examine the investment on multiple technologies. Two equilibriums could exist. One, with the T0

Figure 2. Illustration of the investment decision on energy-efficiency technologies and the energy-efficiency gap.

number of energy-efficiency technologies adopted, indicates natural market conditions without any external intervention, or the situation of bounded rationality (G > 1). The other, T*, corresponds to substantially narrowed, if not entirely disappearing, bounded rationality. It represents an equilibrium status because of the reference to the situation of nearly perfect rationality (G = 1). Then, accordingly, the situations between T0 and T* are not at equilibrium and, if located in the interim area, rationality tends to drive the energy-saving performance toward T*. The gliding trajectory to reach the more favorable equilibrium will not be completed overnight. T* points mainly to the long-run direction toward which investment on energy efficiency is advancing. Nevertheless, the approaching pace could be faster in the short run to show strong efficiency gains. The energy-efficiency gap in this paper is expressed as the difference between T* and T0, with T*−T0 technologies that economically should, but fail to, be adopted due to the impacts of behavioral factors (Figure 2). If data are available on the deployment potential of various energy-efficiency technologies, the unit cost curve in Figure 2 could be converted to a marginal cost curve of energy conservation in a society. The energyefficiency gap will then be expressed as the absolute amount of energy conservation, Q*−Q0, that a society should economically achieve but is a witness of only the opportunities wasted. 2.2. The Impacts of Energy-Conservation Goals. Goalsetting theory and many empirical studies recognize four pathways for goals, especially specific and difficult, to positively influence task performance; goals orient the direction of actions, energize the actions, bring about persistence, and motivate proficiency.23 Better understanding of the decisionmakers’ behavioral factors could design goals which are more effective in mobilizing actions and enhancing task performance.24 In the energy-efficiency decision (eq 6), energyconservation goals, in the form of a quantity Qg and corresponding to Tg in Figure 2, do not directly affect energy prices p, but exert impacts mainly through G (eq 5) and its various factors. If the goals even fall behind the investment levels at natural market conditions, or Tg ≤ T0, the goals will not pose any discernible impacts on energy-efficiency investment. If goals go beyond the level at which the energyefficiency gap is fully closed, or Tg ≥ T*, firms will do and only do what the goals require. If the goals fall between the two

3. THE EMPIRICAL ANALYSIS OF ENERGY-CONSERVATION GOALS In this section, under the guidance of the above theoretical framework, we will provide an empirical explanation for the three research questions. Particularly, we will organize empirical evidence to analyze the four key factors of energy-efficiency gaps, specifically the commercialization of energy-efficiency technologies, on the cost side, and uncertainty, information and attention, on the WTP side. Furthermore, to what extent the 87



Policy Analysis

of energy-efficiency technologies is reflected in the Promotion List with detailed technological and cost information on actual projects. The energy-conservation goals in the 11th Five-Year Plan contributed to their accelerated application, technological development and commercialization. As we calculate below from the data, the unit costs of energy saving in the commercial projects are largely lower than the energy price, thereby indicating that energy-efficiency investment is profitable or largely driven by the market (Figure 3). Companies could save money by saving energy.

change of energy prices affected energy conservation will be discussed. 3.1. Data. We have collected data sets to approach the research questions. The data of energy prices are from the Berkeley’s China Energy Databook Version 8.0.25 From 2008 to 2013, the NECC (National Energy Conservation Center) laid out six groups of national key energy-efficiency technologies for promotion (abbreviated as the Promotion List), which is an attempt to provide information on commercial projects on applicable conditions, cost, effectiveness, and payback time of those technologies for their wider adoption in more firms.26 The Promotion List (from 2008 to 2013) is used in this paper to analyze the commercialization, maturity, and economics of the technologies. In order to put the empirical analysis into the context of actual firms, sustainability reports, and Corporate Social Responsibility reports from eight firms with good data availability in several key energy-intensive industries are reviewed to investigate how they achieved their energy-saving goals in the 11th Five-Year Plan, including two iron and steel companies (Baosteel Group Corporation and Sinosteel Corporation), the largest four power corporations in China (China Datang Corporation, China Guodian Corporation, China Huadian Corporation, and China Huaneng Group), one large coal company (the China National Coal Group Corporation), and one large oil and gas company (the China National Petroleum Corporation). Data from the International Energy Saving and Environmental Protection Exhibition (www. enercn.com) are used to shed light on the magnitude of the information pool. Data in the Report of China Energy Saving Services Industry in the 11th Five-Year Plan are used to show the change of the energy-saving services market.27 Furthermore, semistructured in-depth interviews were conducted in the field, during May 2013 and June 2014 to collect first-hand information and to verify our initial analysis from largely publically available data. Our interviewees were selected from a wide spectrum of energy-saving-related, governmental and nongovernmental entities, including one from the Beijing Municipal Commission of Economy and Information Technology, one from the National Energy Conservation Center, one from the U.S.−China Energy Cooperation Program, two from the Worldwide Fund for Nature, eight engineers and managers from four coal-fired power stations, and one manager in an energy-saving service company. Besides background information on energy conservation in their particular realm, interview questions were structured largely based on the theoretical framework to focus on the key behavioral factors, as specified in eq 3. 3.2. Goals Contribute to Mobilizing the EnergyEfficiency Investment. 3.2.1. Goals Help to Accelerate the Commercialization of Energy-Efficiency Technologies. Energy-conservation goals facilitate related research and development. For example, total patent applications in 53 categories of energy-efficiency technologies grew by 9.6% annually over the 10th Five-Year Plan, while they soared by 25.8% annually over the 11th Five-Year Plan.28 Energy conservation and environmental protection ranked third in total number of patents issued in 2010 among seven strategic emerging industries, as identified by the State Council.29 In the past decade, various new industries on energy and environmental protection had emerged in response to related governmental polices.30,31 Energy-efficiency technologies and industries were also developed to satisfy the fresh demand triggered by energy-conservation goals. The commercialization

Figure 3. Unit costs of energy-efficiency technologies in the 2008− 2013 Promotion List and coal prices (adjusted for inflation to the 2010 level).

Due to the lack of operation and maintenance cost data, only the investment cost is used for estimating the cost for utilizing a technology. The formula for estimating the unit cost of energy saving is r 1 unit cost = TC· · 1 − (1 + r )−n q where TC represents the total overnight investment cost of a technology, r refers to the discount rate, n indicates the number of years for using the technology, and q stands for annually saved energy. TC·(r/(1 − (1 +r)−n)) represents the levelized investment cost. This study assumes that r = 8% and n = 20; energy saving for reducing one kwh of electricity is assumed to be 333 g of coal equivalent, as it was the average thermal efficiency of coal-fired power plants in 2010;32 the capacity factor of power generators is taken as 5600 h per year based on our interviewing an engineer in a coal-fired power station; the factors for converting coal, crude oil, natural gas and heat to coal equivalent are 0.714 tce/t, 1.43 tce/t, 1.33 tce/1,000 m3, and 0.034 tce/GJ, respectively;33 the exchange rate from RMB to US$ is 0.15 on average in 2010.34 In the original version of the Promotion List, investment costs and annual energy-saving quantities were expressed in ranges. For making a conservative estimate, we use the higher bound of the investment costs, and the lower bound of the annual energy-saving quantities. Energy price, for estimating the economic benefit of energy saving, is assumed as the 2010 price of imported bituminous coal, that is., US$119.0/ton, or US$166.7/tce.25 The unit costs of energy saving are estimated for the listed 216 technologies with available data of commercial projects. Equation 6 could then be illustrated with real data in Figure 3, corresponding to the situation when G = 1. Results show that 88



Policy Analysis

Promotion List also covered 31 technologies in the power sector and 29 in the iron and steel sector. The wide commercial application of energy-efficiency technologies set references for other potential users. Together with the wide deployment of energy-efficiency technologies and rapidly enlarged markets, the industry of energy-saving services developed very rapidly during the 11th Five-Year Plan. From 2006 to 2010, the members of the Energy Conservation Service Industry Committees of the China Energy Conservation Association (EMCA, Energy Management Company Association) increased from 89 to 560, the number of energy-saving service companies which adopted Energy Management Contracting (EMC) rose from 76 to 782, the number of employees increased from 16 000 to 175 000, and the energy-saving service industry’s revenue scale expanded from US$0.7 billion to 12.5 billion.27 3.2.3. Goals Facilitate the Enrichment of Information. The 11th Five-Year Plan witnessed rapid expansion and improvement of energy-saving information providers as well as information distribution. Before the 11th Five-Year Plan, information on energy-efficiency technologies or measures usually came from two sources: other companies of the same kind in the same industry, and internal communications within the same company. Information providers expanded substantially in the 11th Five-Year Plan to include extended governmental organizations, industrial associations, and energy-saving service companies. Extended governmental organizations were established as important information providers to help implement the energyconservation policies. For example, the NECC is responsible for conducting research on relevant policy, rules, planning and institution; evaluating an energy-saving program of fixed assets; promoting technologies, products and business models; and advertising, training and consulting. They play a supplementary and supporting role for the government, especially in those industries in which energy saving is led mainly by the government and which are at the initial stage of policy implementation. As stated previously, from 2008 to 2012, the NECC laid out six groups of national key energy-efficiency technologies for promotion. Compared with other nongovernmental sources of information, these extended governmental organizations align their efforts more closely with energy-conservation goals, both being subject to the discretion of the government. In contrast, industrial associations are motivated more by cultivating the market. They provide more information on energy-efficiency technologies and have more enthusiasm in introducing new business models. For example, two typical associations at the national level include the China Energy Conservation Association (CECA) and the ESCO Committee of the China Energy Conservation Association (EMCA). CECA focuses more on introducing and promoting new technologies, particularly through collecting information on advanced technologies, researching and promoting new technologies, training managers and experts, and organizing conferences and exhibitions. EMCA (expert.emca.cn) concentrates more on introducing a market-based mechanism, specifically Energy Performance Contracting (EPC), to help to develop the energy service industry and companies. By May 2013, 3242 energy service companies had registered in the National Development and Reform Commission (NDRC) and Ministry of Finance (MOF) and 192 had registered in the Ministry of Industry and Information Technology (MIIT).42

the median unit cost was US$44.2/tce, thereby indicating that for saving one ton of coal equivalent, a company adopting the technology could have a net positive return of US$122.5 in 2010 before offsetting operation and maintenance costs (Figure 3). 190 technologies, or 88%, incur such negative net costs. Energy-conservation goals might have helped to accelerate the commercialization, and the likely cost reduction, through creating a large, predictable market to initiate an effective learning process. 3.2.2. Goals Reduce Uncertainty. Uncertainty associated with energy-efficiency investment, especially involving new and not-yet-commercialized technologies, is one key cause of the energy-efficiency gap. Energy-conservation goals for energy-intensive firms urge corresponding investment and greatly alleviate the hesitancy of such decision-making. Goal responsibility contracts were widely signed to clarify energy-conservation tasks not only for an energy-intensive firm as a whole, but also at branch level. For example, the Baosteel Group signed contracts with its branch companies in 2006, requiring them to fulfill energy-saving tasks by investing in energy-efficiency technologies.35 The Sinosteel Corporation signed contracts with its 17 and 18 manufacturing branches in 2008 and 2009, respectively, to quantitatively evaluate their energy-saving performance.36 In addition, energy audit and energy-saving plans were conducted to facilitate investment in long-term energy efficiency. The Baosteel Group started an energy audit in 2005, and formulated an energysaving plan (2007−2012) in 2007, and by 2008 various scales of energy-management systems (EMS) in major manufacturing branches had been established.35 Some energy-intensive firms went even further after overcoming the energy-efficiency investment uncertainty to create a business branch supplying energy-saving services, such as energy-management contracts (EMC). The China Guodian Corporation’s EMC business started in 2009 and had reached US$40 million by 2011.37 In 2008 the China National Coal Group Corporation also launched EMC programs on green lighting and circulating water pumps.38 Furthermore, early deployment of the emerging technologies especially serves a demonstration purpose to reduce technological and financial uncertainty. The following wide deployment further strengthens the learning effects to achieve technological maturity and cost reduction. We analyze the commercial application of energy-efficiency technologies by reviewing the sustainability reports and corporate social responsibility (CSR) reports of energyintensive companies. According to the China Sustainability Reporting Resource Center (www.sustainabilityreport.cn), which has collected 5963 reports from 2,586 companies, it was during the period of the 11th Five-Year Plan that a very large number of companies started disclosing their measures and achievements of energy saving and emission reduction in their annual sustainability reports and CSR reports. The technologies recorded in the reports are, to a large extent, demonstrated to be reliable, and these play key roles in achieving energy-saving goals. Because the relevant energysaving technologies appeared in the reports, other companies were able to learn about the maturity and reliability of these technologies, and, as from 2006, this has further reduced the uncertainty of using these technologies. For example, the reports of the four power corporations documented the application of 19 distinct energy-saving technologies,37,39−41 and those of Baosteel Group disclosed 18 technologies.35 The 89



Policy Analysis

2008, the China Guodian Corporation began to benchmark against nationally advanced energy-saving performance37 while the China Huaneng Group used internationally advanced levels as references.40 The China National Petroleum Corporation and the Baosteel Group implemented similar benchmarking measures that were regarded as key methods for achieving their energy-saving goals.35,43 3.3. Higher Energy Prices Strengthen Energy Saving. Higher energy prices are another important factor in explaining the substantially greater energy-conservation efforts and investment in the 11th Five-Year Plan. Higher energy prices could indeed encourage the energy-intensive firms in the “Top 1000 Program” to invest more in energy efficiency. The Purchasing Power Index of fuel and power (PPI-Fuel & Power) could represent the evolution of average energy prices facing firms, especially in comparison with the overall PPI. In the 11th Five-Year Plan, PPI-Fuel & Power increased by 46.0% in 2010 relative to the 2005 level, while the overall PPI was 23.3% higher.25 In addition, coal dominates China’s primary energy consumption, accounting for about three-quarters of the national total.34 The average price of imported bituminous coal (in 2010 RMB) was 21.8% higher.25 Even if other conditions remained unchanged in the 11th Five-Year Plan from the 10th Five-Year Plan, such as the absence of serious energy-conservation goals, more energy-efficiency investment would also be expected to offset the much higher energy costs. However, higher energy prices could hardly explain why such energy-saving opportunities were seriously under-utilized in the preceding 10th Five-Year Plan. PPI-Fuel & Power increased by 35.9% during the 10th Five-Year Plan with the overall PPI up by 23.4%, whereas the average price of imported bituminous coal (in 2010 RMB) was 84.6% more expensive.25 If higher energy prices could affect the behavioral factors to significantly narrow the energy-efficiency gap, much should have been done in the 10th Five-Year Plan. Furthermore, low-to-moderate price levels would not eliminate profitable energy-efficiency investment opportunities. For example, for the 216 energy-efficiency technologies in the Promotion List that we have analyzed, 63.9% would still correspond to negative net costs or positive returns even if the energy prices were as low as the 2000 level, similarly applying the price of imported bituminous coal (Figure 3). At the 2005 price level, 82.9% of the technologies would be economically profitable (Figure 3). If the energyintensive firms had perfect rationality, such profitable opportunities would not be widely available in the 11th FiveYear Plan. The overall energy performance of China’s economy could also partly confirm the constrained impacts of energy prices on energy-consumption or energy-conservation behaviors. China’s economy expanded by 59.3% over the 10th Five-Year Plan and the rate accelerated to 70.1% over the 11th Five-Year Plan, and energy consumption grew by 62.3% and 37.7%, respectively.34 Although energy prices increased significantly in both the 10th and the 11th Five-Year Plans, the former period witnessed that the energy intensity, or energy consumption per unit of GDP, became 1.9% higher while the latter achieved a 19.1% reduction. A key difference should be the 20% reduction goal of energy intensity in the 11th Five-Year Plan, but no such quantitative, measurable goal with national enforcement was present in the 10th Five-Year Plan. The much narrower energyefficiency gap should have contributed significantly. In addition, the coal-fired power sector, largely comprising state-owned power corporations also falling under the “Top 1000 Program”,

Even if the 138 dual-registered companies are excluded, the energy service industry had clearly been thriving over the past few years, with active new market entry across the entire country (regist.cecol.com.cn). Information distribution has also become more effective and efficient. The economic and search costs of information have been significantly reduced. The Internet plays an increasingly visible role in distributing information from extended governmental organizations, industrial associations and energy service companies. Another distribution channel is more traditional−it includes exhibitions, training workshops and conferences. For example, the influential China (Beijing) International Energy Saving and Environmental Protection Exhibition (www.enercn.com), sponsored by Beijing Municipal Government and NDRC, was initiated in 2005 and it held its sixth exhibition in June 2014. Such exhibitions bring together a wide range of stakeholders for information sharing, including energy-efficiency technology providers, service companies and potential customers. In comparison, training workshops and conferences distribute information at a greater depth on energy-conservation policies, energy-efficiency technologies, actual projects and case studies, energy services, etc. Governmental organizations are especially active, such as the Training Center of NDRC (www.tnet.gov.cn). 3.2.4. Goals Concentrate Attention. Attention is a scare resource. Energy-conservation goals and associated incentives for their enforcement in the “Top 1000 Program” encouraged energy-intensive firms to reallocate more attention to this new priority. More concentrated attention will not only positively affect investment on energy-efficiency technologies, but also facilitate the creation and utilization of other opportunities, such as unnecessary energy consumption due to management inefficiency. Managers at various levels in the firms were mobilized through different mechanisms. For example, in 2007, the China National Petroleum Corporation formed a leadership group, headed by the chief executive officer, to take charge of energy saving.43 The increased attention at headquarters also penetrated deeply through the management structures. Energy saving became an important component in evaluating the performance of managers, for example, in the China Huadian Corporation and the China Huaneng Group.40,41 The China Huaneng Group even designated energy-saving performance as an overriding criterion for disqualifying a manager for promotion, not to mention a cut in salary.40 In 2008, the China Datang Corporation specified rewards and punishment for staff responsible for energy-saving measures.39 Training workshops and mobilization conferences contributed to shifting attention toward energy conservation. In 2006, the Baosteel Group trained energy-management staff on energy audits; by 2009, the number of training programs on energy-efficiency technologies had increased to 29.35 The China Datang Corporation carried out an energy-saving competition based on quantitative indexes.39 Similarly, the China National Petroleum Corporation in 2007 initiated a knowledge competition on energy saving for the 150 000 staff in the company.43 Multiple management tools were also applied to direct attention toward energy conservation. For example, the China Datang Corporation developed an energy-efficiency benchmarking system in 2006 which covered a series of operational performance indicators, and each participating power generator was required to achieve specified benchmarks in 2008.39 In 90



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raised the thermal efficiency of coal-fired electricity generation from 31.3% in 2000 to 33.2% in 2005 and then further to 36.9% in 2010, again more in the 11th Five-Year Plan than in the 10th.44

need to more deliberately consider behavioral factors and bounded rationality in their design and implementation.

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*Phone: +852-3943 6647; fax: +852-2603 5006; e-mail: [email protected].

4. DISCUSSION Energy-conservation goals on energy-intensive firms in the “Top 1000 Program” in China’s 11th Five-Year Plan effectively mobilized energy-efficiency investment to narrow the energyefficiency gap. Higher energy prices in the 11th Five-Year Plan could only partially account for this overperformance. Energyconservation goals played a critical role to overcome the initial behavioral barriers of uncertainty, information deficiency and attention shortage, and to facilitate the commercialization of energy-efficiency technologies as well as cost reduction. The absence of such goals and other significant policies in the preceding 10th Five-Year Plan could have trapped the energyintensive firms, leading to the persistent energy-efficiency gap. In addition, the overperformance indicates that accurate information on energy-conservation potential may not be necessary for setting up effective energy-conservation goals. As long as the goals are stringent enough to seriously mobilize energy-efficiency investment, firms will make their own further decisions to utilize energy-saving opportunities. However, it does not mean that the government should do nothing after setting up the goals. In the “Top 1000 Program”, the Chinese central government ensured the enforcement of the goals, thereby effectively enabling the various behavioral impacts of goals and mobilizing the firms. Without serious enforcement, just like with any other energy-efficiency policy, energyconservation goals will not be able to achieve significant effects. Energy-conservation goals could become an effective, politically less resistant, flexible and convenient policy instrument. Although other policy instruments may yield similar behavioral impacts on uncertainty, information and attention to encourage energy-efficiency investment, the successful implementation of the “Top 1000 Program” has demonstrated that energy-conservation goals are also effective. Unlike those policy instruments such as energy or carbon taxes, goals do not add additional financial burden on energy consumers. Their political resistance accordingly could be substantially lower. Especially compared with command-and-control policies, energy-conservation goals have fewer constraints on the paths leading to their realization. Because firms and other energy consumers tend to have much better information on their own situations than the government does, energy-conservation goals could leave decisions on energy-efficiency investment to the market. Because energy-conservation goals do not need to be very accurate for their effective implementation, the policymaking process could be more convenient than other policy instruments requiring such accuracy. Putting a price on carbon, either through tax or cap-andtrade, is pivotal in current global climate mitigation policies, which will raise energy prices and encourage rational energy saving. Findings in this paper imply that energy-conservation goals might provide an effective, complementary policy instrument to further enhance energy-efficiency investment by narrowing the energy-efficiency gap caused by bounded rationality. Furthermore, many energy and environmental policies, including on energy conservation, are essentially based on the assumption of rationality. Implications could be further extended from this research that future policies might

Notes

The authors declare no competing financial interest.

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ACKNOWLEDGMENTS Funding comes from the National Basic Research Program of China (2012CB955803), the Geographical Modeling and Geocomputation Program under the Focused Investment Scheme of The Chinese University of Hong Kong, and the Energy Foundation’s China Sustainable Energy Program (G1308-18740). We appreciate the cooperation of our interviewees, valuable comments from Zhang Shiqiu, colleagues in The Chinese University of Hong Kong as well as two anonymous reviewers, and language editing by Dr David Wilmshurst.

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