Stricter Energy Regulations and Water Consumption: Firm-Level Evidence from China

Abstract

Coordinating water and energy saving contributes to the sustainable development of China's industrial sector and alleviates the resource shortage risk. Taking the mandatory energy-saving targets outlined in the “11th Five Year Plan” as a quasi-natural experiment, in this study, the difference-in-differences strategy is employed to examine the real impact of stricter energy regulations on water consumption intensity. The results show that after strictly restricting energy input, the water consumption intensity of industrial enterprises has increased significantly. This result is reliable according to several robustness checks. The increased water consumption intensity caused by stricter energy regulations is particularly apparent in regions with high energy-saving targets, non-state-owned enterprises, large-scale enterprises, and high-energy consuming sub-sectors. The imposition of stricter energy regulations has not changed the input preference and substitution relationship between water and energy; therefore, it does not significantly impact the total water consumption of enterprises. However, the decline of energy input leads to an imbalanced factor input structure, which reduces the technical efficiency and output level. The total water input scale of enterprises has not been adjusted synchronously with the decreasing output level, resulting in an increase of consumed water per unit output.

Keywords: Mandatory energy-saving targets, Stricter energy regulations, Water consumption intensity, Difference-in-differences, Technical efficiency