Energy plays a key role in a country's sustainable development and social stability (Samant et al. 2020). Excessive reliance on traditional energy sources not only exacerbates pollution, but it also contributes directly to global warming and the frequency of extreme natural disasters. Furthermore, as the global economy grows in size, overexploitation of traditional energy sources may cause premature and irreversible resource depletion (Jalalimajidi et al. 2018). Since the beginning of the century, the frequency of environmental constraints and energy crises has compelled an increasing number of countries to address the energy crisis. On the one hand, many countries have attempted to redistribute energy allocation in economic development through administrative and market regulation mechanisms with the goal of optimizing energy output efficiency and thus reducing consumption of traditional energy sources. However, increasing energy efficiency necessitates not only long-term policy support but also matching service and consumption demand (Shove 2018). On the other hand, developed countries such as Europe and the United States are transforming their energy consumption by developing new energy projects and promoting the development of new energy industries, thereby alleviating energy challenges. As a result, research on the energy consumption transition is both practical and urgent.
In fact, numerous literatures have been conducted to investigate the economic effects of energy consumption transition, but the results have been mixed and ambiguous1. According to the literature, renewable energy consumption has a positive effect on economic growth (Emir 2019; Koçak and Arkgüneşi 2017), indicating that optimizing the energy structure can effectively counteract downward economic pressures. However, there is literature that provides empirical evidence that the energy transition is unrelated to economic growth (Payne 2009; Feng et al. 2009). Payne (2009), for example, concluded that the impact of renewable and nonrenewable energy sources on output was statistically insignificant. Moreover, Destek and Aslan (2017) showed that the economic effects of energy consumption transition differ by country; for example, the effect of renewable energy consumption on economic growth was neutral in most emerging economies but positive in Peru. Existing studies also focus on the social effects of the energy consumption transition, and they all generally support the positive effects in terms of reducing pollution and improving air quality (Wang et al. 2019; Chen et al. 2018; Ozturk and Yuksel 2016; Sun et al. 2018).
However, existing literature seems to have neglected the impact of energy consumption transition on total factor productivity (TFP). TFP measures the efficiency of growth of output from the combined effect of input factors such as capital and labor (Solow 1957) and is the source of sustained economic growth (Krugman 2000). Global TFP growth has nearly stalled since 2010. As a result, the research on TFP has a broader connotation than simply examining the impact of energy consumption transition on output. While there is a small literature on the impact of renewable energy on TFP at the country level (Tugcu and Tiwari 2016; Sohag et al. 2021), the findings are inconsistent. At the same time, research on this topic still lacks a careful examination of micro-subject responses as well as strict causal inference. On the one hand, the cleaner energy consumption transition may encourage firms to increase their R&D investments in order to upgrade their original production facilities, and the impact of R&D investments on firms' TFP is crucial (Baumann and Kritikos 2016). On the other hand, an increase in TFP may have an impact on firms' market competitiveness, prompting them to take on more social responsibility (Campbell 2007) and change their current energy consumption structure. In summary, it can be seen that the mutual causal relationship between the two is highly likely to impact the credibility of causal inferences. Our research attempts to fill the gap in this area.
Based on existing research, theoretically, the energy consumption transition may have very different effects on firms' TFP. On the one hand, the energy consumption transition may increase the TFP. Along with the energy consumption transition, enterprises' existing production conditions cannot be adapted or satisfied; thus, in order to modify or upgrade the existing production conditions, enterprises will invest heavily in R&D and technological innovation, which will help promote the efficiency of internal resource allocation and increase the TFP. Furthermore, in the Chinese context, the energy consumption transition is part of a top-down environmental protection and regulation initiative. The government has supported several fiscal and financial policies, such as financial subsidies or credit concessions, to increase the incentives of enterprises, which may also help to increase the TFP. On the other hand, the energy consumption transition may also reduce the TFP, which may need to bear additional costs, such as upgrading equipment, compared to the original production and operation mode. This may increase the burden on enterprises, resulting in a decrease in profitability. When faced with market pressure, the managers may reallocate resources within the firm to meet performance targets, such as by discontinuing energy-intensive businesses in order to invest capital in low-threshold, high-return financial-based businesses, resulting in a significant decline in the TFP. While there is no direct empirical evidence that energy consumption pressures encourage corporate financialization, studies have shown that financialization is an important tool for firms to pursue returns and hedge uncertainty (Demir 2009; Kim and Kung 2017). In summary, it can be seen that investment preference may be an important channel linking the structural transformation of energy consumption to the TFP. If firms prefer real investment in the transformation, they may achieve metamorphosis and enhance TFP. Conversely, if firms prefer financial investment, it may lead to deviation from their main business and a loss of efficiency. If both of these effects are present, they might offset each other, making them unrelated. To summarize, the relationship between the energy consumption transition and firm TFP is ambiguous and requires further empirical support.
This paper draws on the exogenous shock of the construction of the NEDC in China to explain the response of firms in this process. The Chinese context was chosen for four main reasons. First, China provides a representative context for examining the energy consumption transition. Over the past decades, China's rapid economic growth has relied on a large number of energy-intensive manufacturing firms (He et al. 2020). The crude development type has resulted in China becoming a large consumer of traditional energy sources. China has been the world's largest energy consumer since 2010. According to the BP World Energy Statistical Yearbook (2022), China's share of global energy consumption in 2021 was about 26.5%. As a result, the research on energy consumption transition in the Chinese context is distinct. Second, China's green development concept provides an ideal experimental setting for our research. In recent years, the Chinese government has emphasized green growth and implemented several policies regulating energy consumption and environmental regulation (Zhang et al. 2022). The primary goal of these policies is to reduce pollution and carbon emissions, with the goal of reaching carbon neutrality by 2060 and a carbon peak by 2030. According to China's National Energy Administration, China reduced CO2 emissions by 1.79 billion tons and sulfur dioxide emissions by 8.64 million tons in 2020. This context helps us observe the responses of enterprises in the process of energy consumption transition. Third, in the existing literature, there are significant differences in the effect of energy consumption transition on TFP among different countries (Tugcu and Tiwari 2016; Sohag et al. 2021). Finally, in recent years, a large number of Chinese real sector firms have invested financial assets in the pursuit of higher returns (Yang and Chen 2022). This de-realization of the economy allows us to examine the changing investment preferences of firms in detail.
The concept of NEDC was first introduced in China's 12th Five-Year Plan for renewable energy development. The list of 81 demonstration cities (districts and counties) was released by China's National Energy Administration in January 2014. The demonstration cities aim to optimize the energy consumption structure and promote the development of an ecological civilization (Zhang et al. 2022). Using this policy shock, this paper constructs a standard differences-in-differences model to investigate the impact of energy consumption transition on firm TFP. The NEDC reduces firms' TFP by approximately 6.40%, according to the baseline regression results. We also consider various confounding factors and alternative explanations for the results, such as other policy overlays in the same period and control group selection bias, and the results remain conceivable. The channel test results indicate that the decline in TFP is driven by a change in firms' investment preferences. In other words, firms in the demonstration cities prefer financial asset investments after the policy, which shocks firm TFP. Furthermore, we also examine the motivations for the change in firms' investment preferences. According to the results, the NEDC has a negative impact on TFP mainly in private firms and firms located in lower marketization regions, and no difference was found across the firms with varying investment returns and profitability. This indicates that the NEDC has led firms to invest more in financial assets for precautionary motivations, resulting in a decrease in TFP.
This paper contributes to the literature in the following aspects. First, this paper contributes to and expands research on the economic effects of energy consumption, as well as clarifies the economic costs of structural energy consumption transition. The effect of energy consumption, particularly new energy consumption, on economic growth is ambiguous in existing literatures (Emir 2019; Payne 2009; Feng et al. 2009; Destek and Aslan 2017). Furthermore, the existing literature has mostly examined the effect of energy consumption transition on TFP from a macro perspective at the country level (Tugcu and Tiwari 2016; Sohag et al. 2021), but investigation on the response of micro subjects is lacking. To fill this gap, we examine the loss of firm productivity during the advancement of new energy consumption in China and identify the economic costs for developing countries when optimizing the structure of energy consumption through strict causal inference.
Second, this paper contributes to a better understanding of the impact of environmental policies on firm-level TFP. The NEDC policy is essentially an environmental policy, and its main goal is to reduce firm environmental pollution by guiding them to optimize their energy consumption structure through increased new energy consumption. However, whether the Porter Hypothesis holds is debatable in the existing literature (Rubashkina et al. 2015; Gray and Shadbegian 2003), and this paper provides a further answer based on the Chinese context. The answer in the context of China, which is the largest developing country in the world in terms of energy consumption and economic size, may be instructive and informative for the development of environmental policies in other countries.
Thirdly, this paper investigates systematically the channel of the NEDC effect on TFP. Our results indicate that firms may face significant extra costs as well as uncertainty when trying to implement new energy sources. This leads firms to choose a more conservative investment strategy, with the goal of maximizing profits by shifting to financial-based investments, and is primarily motivated by precautionary motives. This finding contributes to a better understanding of corporate behavior in developing countries as they encourage new energy strategies. Additionally, we also provide theoretical and empirical evidence on how to optimize energy consumption transition policies.
The remainder of the paper is organized as follows: In Section 2, we present background information about the new energy demonstration city policy in China and research hypotheses. In Section 3, we present the data and methodology, including sample selection, variable measurement, and identification strategy. Section 4 demonstrates the main empirical results and delves into addressing the central concern regarding the causal interpretation. Section 5 provides the discussion of the underlying channel. Section 6 investigates heterogeneity. Finally, the conclusions and implications are discussed in Section 7.
1 Much of the existing literature examines the energy transition from the standpoint of renewable and non-renewable energy sources. Although there are slight differences between new and renewable energy sources, the vast majority of new energy sources belong to the category of renewable energy. Therefore, this paper does not distinguish the differences between the two in detail.