Does Price Distortion Affect Energy Efficiency? Evidence from Dynamic Spatial Analytics of China

Abstract

Despite market-oriented reforms, China’s energy sector is subject to energy price distortions, which are believed to be a crucial determinants of energy efficiency in China. This paper investigates the impact of energy price distortions on energy efficiency in China from the perspective of spatial correlation. Using the nonradial directional distance function approach, we first estimate the provincial-level energy efficiency in China. Paying attention to spatial correlation among the provinces of China, in stage two, we identify the determinants of energy efficiency. Our empirical results suggest that price distortions have a significant impact on energy efficiency in China. This impact holds when the cross-region effect is considered, i.e., besides its own energy price distortion, a region’s energy efficiency is also correlated to the adjacent provinces’ energy price distortions. Furthermore, we found that the levels of energy efficiencies in adjacent provinces are highly correlated. This spatial relationship can be decomposed into the ‘spillover effect’ and ‘warning effect’. These two effects work together, determining the spatial relationship among the province-level energy efficiencies.