Econometric analysis of industrial water use efficiency in China

Abstract

Low industrial water use efficiency has become a resource bottleneck to industrial development in China. The SBM-undesirable and meta-frontier models were used in combination with empirical data in 30 provinces in mainland China (Tibet excluded due to data missing from 1999 to 2013), to compare industrial water use efficiency in mainland China under meta-frontier and group-frontier, and explore the influencing factors. The empirical results of the study reveal that: (a) there is a large difference in the industrial water use efficiency between meta-frontier and group-frontier in mainland China, due to the heterogeneity in the levels of industrial water use technology; (b) given the low recycle rate of polluted industrial water, there is room for improvement in the industrial water use efficiency in the 30 provinces in mainland China. Further, the study finds that the current price of industrial water is distorted to some extent, failing to coordinate with the use of water resources. Policy implications indicate that industrial water use efficiency is not only related to technological heterogeneity in different regions, but also the control and treatment of industrial water pollution. Therefore, the current price of industrial water should be gradually raised. A scalar water pricing system as residential water could also be applied to industrial water.

Appendix

1.1 The derivation process of the shadow price of industrial water incorporating the industrial water pollution

The dual form of the SBM-undesirable model can be written as follows:

$$\begin{array}{*{20}l} {\hbox{max} } \hfill & {u^{g} y_{0}^{g} - vx_{o} - u^{b} y_{0}^{b} } \hfill \\ {{\text{subject}}\,{\text{to}}} \hfill & {u^{g} Y^{g} - vX - u^{b} Y^{b} \le 0} \hfill \\ {} \hfill & {v \ge {1 \mathord{\left/ {\vphantom {1 m}} \right. \kern-0pt} m}(1/x_{0} )} \hfill \\ {} \hfill & {u^{g} \ge \left[ {{{\left( {1 + u^{g} y_{0}^{g} - vx_{o} - u^{b} y_{0}^{b} } \right)} \mathord{\left/ {\vphantom {{\left( {1 + u^{g} y_{0}^{g} - vx_{o} - u^{b} y_{0}^{b} } \right)} s}} \right. \kern-0pt} s}} \right]\left( {1/y_{0}^{g} } \right)} \hfill \\ {} \hfill & {u^{b} \ge \left[ {{{\left( {1 + u^{g} y_{0}^{g} - vx_{o} - u^{b} y_{0}^{b} } \right)} \mathord{\left/ {\vphantom {{\left( {1 + u^{g} y_{0}^{g} - vx_{o} - u^{b} y_{0}^{b} } \right)} s}} \right. \kern-0pt} s}} \right]\left( {1/y_{0}^{b} } \right)} \hfill \\ \end{array}$$

(7.1)

where s = s1 + s2, and denote v ∊ R ^m, u ^g ∊ R ^s1 and u ^b ∊ R ^s2 as the virtual price of input, desirable output and undesirable output, respectively. Similarly, this paper isolates the dual variable (V _W ) of industrial water input from v. Assuming that absolute shadow price of the desirable output is equal to its market price, so the relative shadow price of industrial water compared with industrial production is as follows: $p^{w} = p^{{y^{g} }} \cdot {{v_{w} } \mathord{\left/ {\vphantom {{v_{w} } {u^{g} }}} \right. \kern-0pt} {u^{g} }}$. It can be interpreted as water price per unit industrial output, or the reduced industrial output by saving per unit water (Coggins and Swinton 1996; Lee 2005). The shadow price can measure the real price of industrial water when it cannot be got directly or distorted seriously. This paper mainly compares the average price of 30 provinces in mainland China with the shadow price to investigate whether the current price of industrial water has been distorted. In addition, this paper explores its effect on industrial water use efficiency.