China's energy-water nexus: Spillover effects of energy and water policy

The nexus between water and energy is drawing increasing attention in China. The large water requirements for energy production are driving us to consider the spillover effects that energy and water policies are having on both resources. The present study builds a multi-sectoral dynamic computable general equilibrium (CGE) model with an energy tax module to study the impact on energy and water resources. Based on the proposed model, different policy designs with different ad valorem tax rates are simulated. The results show that energy production and demand would be negatively affected by the reform in terms of output shrinkage in most sectors and that the effect will be larger with a higher tax rate. The energy structure would be improved, with sharp decreases in fossil fuel production and demand, whereas cleaner forms of energy would increase. The water resources required for energy production would be significantly decreased based on the energy effect of the energy tax, which would also contribute greatly to the achievement of the 3 Redlines goals of water conservation. Water conservation policy decreases the amount water used by thermal power plants, but increases energy consumption. Hence, site-specific factors should be considered when determining the sustainable management of water and energy in different regions of China.