Research Highlights Featured Chart

February 25, 2025

Regulation and conglomerate production

The response of major Chinese companies to stringent energy use regulations

Tyler Smith

Source: chuyu

China is the world's largest energy consumer and carbon emitter, but in recent years it has taken steps to increase energy efficiency and reduce pollution. One of these initiatives, the Top 1,000 Energy Conservation Program, was launched in 2006 to place energy use quotas on the country's most energy-intensive firms.

In a paper in the American Economic Review, authors Qiaoyi Chen, Zhao Chen, Zhikuo Liu, Juan Carlos Suárez Serrato, and Daniel Yi Xu found that while the program did lead regulated firms to reduce energy use, it did not result in increasing energy efficiency. Instead, targeted firms largely complied by cutting their output. Much of this reduction was offset as production shifted to other firms in their conglomerate network, a phenomenon known as “leakage.”

The authors drew their findings from China's Environmental Statistics Database, which tracks the production output and energy usage of major polluting enterprises in China.

Figure 3 from their paper shows how firms regulated by the “Top 1,000” program changed their behavior compared to similar unregulated firms, between 2001 and 2010.

Figure 3 from Chen et al. (2025)

Panel A  and Panel B show the logarithm of energy use by regulated firms (Top 1,000) and unregulated firms (Top 10,000) and the estimated differences between the two groups. (The blue vertical bars are 95 percent confidence intervals.) Before 2006, regulated and unregulated firms had similar patterns in their energy consumption. However, after the conservation program began, regulated firms decreased their energy use by roughly 13 to 16 percent relative to unregulated firms. This suggests the program was successful in its primary goal of reducing energy consumption at targeted firms. 

However, Panel C and Panel D demonstrate that targeted firms also reduced their production output by approximately 10 to 23 percent compared to unregulated firms. This shows that firms primarily complied with energy regulations by cutting production rather than becoming more energy efficient. Additionally, the authors show that firms within the regulated firm’s conglomerate network increased both their output and energy use. 

The authors argue that the government could have achieved more energy savings by simply regulating entire corporate groups rather than individual firms, preventing companies from shifting production to avoid regulation. The findings are an important reminder that efforts to reduce energy consumption and fight climate change can depend on the details of large business networks.