The path to energy savings and CO2 emission reductions in China's industrial sector from the perspective of factor price distortions correction - Based on an extended capital vintage model

Exploring the endogenous driving mechanism of CO2 emission abatement from the perspective of factor price distortions is crucial for China to achieve the goal of carbon peaking and carbon neutrality. Despite its importance, there is a notable gap in current research as existing studies have failed to open the "black box" of factor price distortions affecting CO2 emissions. In this paper, we construct an extended vintage capital model under the imperfect factor market scenario to shed light on the intrinsic mechanism by which factor price distortions affect energy demands and CO2 emissions through the dynamic accumulation of energy-efficient capital vintage. Subsequently, based on compiling a unique "province-industry-year" three-dimensional panel dataset (from 1998 to 2013), this research further endeavors to systematically assess the energy saving and carbon reduction potentials of correcting factor price distortions in China's industrial sector. The results show that correcting factor price distortions could save the industrial sector an average of 225 million tonnes of standard coal of energy and reduce 793 million tonnes of CO2 emissions per annum over the period of the study by promoting the energy efficiency of capital vintage. Additionally, rectifying factor price distortions can lead to significant synergistic effects in reducing atmospheric pollutants as compared to aquatic pollutants.