Effects of substituting energy with capital on China's aggregated energy and environmental efficiency

Substituting energy with capital (SEC) in economic productions has become a common practice both for business owners and policy-makers to improve their energy and environmental efficiency. However, seldom previous studies on energy efficiency and/or environmental performance evaluation took this role into account. This paper aims to shed some light on the effects of SEC on China's aggregated energy and environmental efficiency (AEEE) within a parametric stochastic frontier analysis framework. Moreover, influencing factors of regional efficiency score are also discussed using a pooled regression model. The results indicate that SEC poses significant effects on improving China's AEEE, and this impact appears obvious regional variation that regions with lower efficiency scores hold more extensive potential to improve their AEEE by means of SEC. Furthermore, upgrading industrial structure and decreasing the proportion of coal in energy consumption make great sense to improve China's AEEE.

► We examine the effects of substituting energy with capital on China's energy and environmental efficiency.
► The efficiency value considering this substitution is higher than that without considering it.
► Hebei and Shanxi hold the largest potential of energy saving and SO2 emissions reduction.
► China's energy and environmental efficiency is affected by its energy mix and industrial structure.