We identified three macroeconomic factors that appeared to be primarily responsible for the energy-efficiency increases in China's economy between 1981 and 1987. They were (1) the extensive energy-conservation programs and policies implemented by the Chinese government since 1979, (2) the increase in overall economic efficiency, as a result of China's economic-reform program, which reduces central planning and increases the role of market mechanisms and incentive structures in the economy, and (3) the increase in energy prices, which provides additional incentives for energy-conservation practices and for investing in energy-saving technologies. We argued that the first two factors were much more important than the third one because despite energy-price increases, energy expenditures comprised a very small percentage of the total production cost in most sectors in the 1980s and were not that important in the overall scheme of production.
In the next chapter, we will conduct a case study of energy-efficiency improvements in China's iron and steel industry to complement our macro-level analysis of production-technology changes and to illustrate how the three macroeconomic factors identified were translated into energy savings. We will see that even in steel manufacturing, where energy represents about 10 to 15 percent of total production costs, many energy-efficiency gains achieved between 1981 and 1987 were not the result of direct efforts to reduce energy costs but of the indirect pursuits of other economic goals, such as capacity expansion, improved product variety and quality, and higher productivity.