Scaling Compliance with Coverage? Firm-level Performance in China’s Industrial Energy Conservation Program

Abstract

Industrial energy conservation programs in China form a cornerstone of China’s energy and environmental management efforts, engaging thousands of major energy-using enterprises, and targeting hundreds of million tons of annual coal-equivalent energy savings during the Eleventh and Twelfth Five-Year Plans (2006 to 2015). An important question in China and other developing countries is to understand how compliance systems develop and perform, especially in settings where regulators have limited prior experience and resources to support evaluation and enforcement. We use detailed, newly-released compliance reports, combined with industrial census data on participating firms, to identify the drivers of compliance at the firm level. We find evidence consistent with manipulation of reported compliance data during the Eleventh Five-Year Plan (2006–2010), but not during the expanded program under the Twelfth Five-Year Plan (2011–2015). We show that the non-compliance rate increased with the expansion of the program, and publicly-reported reasons for non-compliance vary widely. We find that firms that are large, and new program entrants, as well as firms in cities with low growth exhibit higher non-compliance rates after program expansion. Our findings demonstrate that although expanding coverage increases potential energy savings, regulators must grapple with increased heterogeneity in firms’ internal energy-saving opportunities and capabilities as well as in the degree of external accountability to regulators. Introducing a market for energy saving or CO2 emissions may help to solve the problem of uneven abatement costs, but differences in the strength of accountability relationships could undermine performance.