CoPS/IMPACT Working Paper Number G-323

Title: Elasticity of Substitution Between Electricity and Non-Electric Energy in the Context of Carbon Neutrality in China

Authors: Shenghao Feng, Keyu Zhang and Xiujian Peng


Electricity penetration is an important part of China's pursuit of carbon neutrality. Understanding the costs of replacing fossil fuel with electricity helps to understand the costs of reaching carbon neutrality in China. This study uses econometrics techniques to estimate the constant elasticity of substitution (CES) parameter between electricity and non-electric energy for China. Results show that the value is around 1.8 -- higher than the ones that have been used in the literature. We show that our estimated results are non-linearly stable. We compare our econometrically estimated parameter with two representative values that have been used in the literature. We apply these three parameter values in scenarios in which China reaches carbon neutrality in 2060. Simulation results suggest that the two representative values lead to overestimations of GDP costs and carbon price levels, and underestimations of electricity generation and energy consumption.

JEL classification: C68, E17, Q43, Q47, Q48, Q54

Keywords: CGE, CES, econometrics estimation, carbon neutrality, China, electricity

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