Substitution between energy and classical factor inputs in the Chinese steel sector

China’s steel sector is the largest in the world and has been a major driving force behind China’s high rate of economic growth. This sector, however, is also a major consumer of energy and, in particular, coal. As a result, the iron and steel sector in China is a major contributor to greenhouse gas emissions and other pollutants. In this article we examine the potential for inter-factor substitution between capital, energy and labor in the Chinese steel sector and find that capital and energy and energy and labor are substitutes. This result suggests that removal of price ceilings on energy would tend to reduce energy use and increase capital intensiveness. While the potential for substitution between energy and labor is less than that between energy and capital, the elasticity of substitution between energy and labor is high compared with previous findings for other countries. This fact suggests that there may be potential for substituting labor for energy, given China’s abundance of labor.