Economic Growth with Coal, Oil and Renewable Energy Consumption in China: Prospects for Fuel Substitution

Abstract

We examine the relationship between Chinese aggregate production and consumption of three main energy commodities: coal, oil and renewable energy. Both autoregressive distributed lag (ARDL) and vector error correction modeling (VECM) show that Chinese growth is led by all three energy sources. Economic growth also causes coal, oil and renewables consumption, but with negative own-price effects for coal and oil and a strong possibility of fuel substitution through positive cross-price effects. The results further show coal consumption causing pollution, while renewable energy consumption reduces emissions. No significant causation on emissions is found for oil. Hence, making coal both absolutely and relatively expensive compared to oil and renewable energy encourages shifting from coal to oil and renewable energy, thereby improving economic and environmental sustainability.