Green growth: The economic impacts of large-scale renewable energy development in China

Many countries regard energy efficiency improvement and the development of renewable energy (RE) as two of the most effective measures for addressing environmental and climate challenges [1], [2]. Improved energy efficiency can reduce total energy consumption and emissions of greenhouse gasses (GHGs) and air pollutants while ensuring economic growth. Meanwhile, the substitution of fossil energy with RE can result in a cleaner and low-carbon energy structure, particularly in light of the abundant resource potential of RE [3], [4]. The rapid market penetration of renewable energy in recent years suggests that a fundamental revolution will come in the next decades and that RE may gradually become the main energy source.

Energy has supported China’s economic growth in the past three decades. However, environmental destruction and China’s limited fossil fuel resource endowment pose growing challenges as China becomes the world’s largest energy consumer and producer. To compound the challenge, China faces increasing international pressure to control its rising GHG emissions. In 2009 China responded by announcing an ambitious goal of lowering its carbon intensity in terms of GDP and increasing its share of non-fossil fuels [5]. In the latest submission of Intended Nationally Determined Contributions to the United Nations Framework Convention on Climate Change (UNFCCC), China pledged to increase the share of non-fossil energy in primary energy consumption to about 20% by 2030 [6]. These commitments have been reflected in China’s actual policymaking. By the end of 2012, the total installed capacity of RE power was 323 GW, accounting for 28.2% of the total power generation capacity, 19.9% of the total power generated and 9.0% of the total primary energy supply. In the long-term RE could change from a supplementary energy to a main energy source (CAE [7], CAE [8].

Developing RE may affect the economic development. Previous studies indicate that the formulation of a long-term energy roadmap and strategy requires ex-ante analysis to evaluate the technological costs and economic costs of different pathways [2], [9], [10]. Some studies explored the technical feasibility of achieving high share of RE in the energy system in Ireland [11], Portugal [12], Denmark [13]. However, they did not analyze the full macroeconomic impacts of such high penetration of RE. By applying econometric models, some studies analyzed the relationship between renewable energy development and economic growth in some specific countries, e.g. Turkey [14], Germany [15], [16], USA [17] and Brazil [18], or multi-countries such as Sub-Sahara African countries [19], emerging market economies [20], Central America [21], Latin American countries [22], low-, middle and high income countries [23], and 116 economies [24]. Ocal and Aslan [14] argue that the messages from the country-specific and multi-country studies are inconsistent, and there is no agreement on the existence or the direction of causality between renewable energy consumption and economic growth.

Computable general equilibrium (CGE) model is widely used to assess the impacts of RE development on macroeconomy, energy consumption and emissions. Sue Wing [25], Sue Wing [26] incorporated technology detail into the electricity sector of a CGE model and tested how the mitigation cost would change compared to the conventional CGE model without technology details in the power sector. Dai et al. [27] constructed a hybrid CGE model to assess the role of China’s non-fossil energy plan on achieving its Copenhagen Commitment. Böhringer et al. [28] argued that RE development in Germany had quite limited prospects for employment and welfare gains. Rivers [29] used a three-sector general equilibrium model to analyze the impact of renewable electricity support policies on the rate of equilibrium unemployment in the US, and found that RE support policies would lead to higher rates of unemployment. By using a hybrid CGE model, Fortes et al. [30] showed that the relation between renewable energy development and economic growth is not straightforward. Ruamsuke et al. [31] developed a global CGE model incorporating a bottom-up module for power generation sector and used it to analyze the energy and economic consequences in nine Southeast Asian countries under the uncertain global climate constraints. Cai et al. [32] developed global hybrid CGE model with the bottom-up engineering details of energy production, as an application, this model was used to assess the U.S. clean power plan [33]. Fujimori et al. [34] hard-linked a global CGE model with an energy end-use technology optimization model. Dai et al. [35] soft-linked a hybrid CGE model with bottom-up TIAM model to project the future regional energy and emissions of China toward 2050. Hwang and Lee [36] incorporated the bottom-up details of the power generation technology in a top-down type CGE model for Korea, and analyzed Korea’s electricity industry reform.

Based on the review of the literature we found two research gaps which are addressed in this study. Firstly, in the econometric studies RE is treated as a whole, and the effects by RE type (hydro, solar, wind etc.) are not differentiated. Secondly, the hybrid CGE models with power technology details have been used to analyze the impacts of RE development on carbon emissions, carbon mitigation costs, or the impacts on the aggregate economic indicators such as GDP growth; however, no economic impacts at the sectoral level are identified. This may be the reason for the mixed message that there is no agreement on causality between renewable energy consumption and economic growth. Consequently, none of the above studies has provided an in-depth assessment of the impacts of long-term and large-scale RE development on the economy, especially at the sectoral and RE type levels. The present study seeks answers to some fundamental questions in this context. First, will the large-scale development of RE cause a significant negative shock to the macro economy? Second, how will the development of RE affect other sectors? Third, how will RE development affect employment, environmental emissions, and carbon emissions? Since energy plays a vital role in all economic sectors and aggressive energy policy will have widespread effects across the whole economic system, we used a CGE model with distinguished modifications for the power sector to capture the effects of RE development across all economic sectors.

The remainder of this paper is organized into five sections. Section 2 introduces the model structure with a special focus on how the power sector is represented. Section 3 specifies two scenarios considering different levels of RE development. Section 4 demonstrates how RE development can be expected to impact future economic development, energy demand, and the environment. Section 5 discusses the results and provides policy recommendations. The paper ends with conclusions in Section 6.