The Chinese Consumers' Attitudes towards their 'Willingness to Pay' for Renewable Electricity

An Analysis of Economic and Environmental Factors

Master's Thesis, 2016

54 Pages, Grade: 2,0


Table of contents

List of abbreviations

List of figures and tables

1. Introduction

2. Previous Research
2.1 Overview of China’s energy situation
2.2 Government policies
2.2.1 The renewable energy policy in China
2.2.2 The Green Electricity Scheme in Shanghai
2.3 Evidence from other countries
2.4 Development of factors influencing WTP
2.4.1 Income of Chinese residents
2.4.2 The price of electricity
2.4.3 Government support policies
2.4.4 Environmental conditions

3. Hypotheses

4. Methodology
4.1 Methodology
4.2 Data description
4.3 The econometric model
4.3.1 Dependent variables
4.3.2 Independent variables
4.3.3 Control variables
4.3.4 Descriptive statistics

5. Model testing

6. Results

7. Robustness check

8. Discussion

9. Conclusion

10. References


List of abbreviations

illustration not visible in this excerpt

List of figures and tables

Figure 1: The composition of China’s energy consumption

Figure 2: China’s energy consumption structure and amount (2009)

Figure 3: Residential energy consumption vs GNI per capita

Figure 4: China’s income distribution

Figure 5: Electricity price of OECD countries vs China

Table 1: Reference categories

Table 2: Descriptive statistics of variables used in regression

Table 3: Bivariate statistics

Table 4: Regression test results

Table 5: Results for robustness check

Table 6: Correlation table of independent variables

Table 7: Results for White’s test

Table 8: Result for interaction effect

1. Introduction

Even though China has become the world’s largest environmental polluter in terms of greenhouse gas emissions, the country advanced at the same time to a leading investor in renewable energy amidst rapidly increasing energy consumption (The Economist, 2013; Christensen, 2015). In accordance with steadily rising economic growth figures, the energy demand in China has also increased (Hast et al., 2015). In order to sustain high economic growth rates, China’s energy demand has been met through the exploitation and burning of conventional energy sources like coal, as the primary source of energy. The downsides of using predominantly fossil fuels, however, indicate that China’s current carbon dioxide emissions are likely to double in the near future (Ma & Oxley, 2012).

Nonetheless, it is broadly pointed out that China’s energy production and consumption in form of electricity will increase in terms of using renewable energy sources. In the end of 2012, China excelled to have the highest capacity of CO2-free power worldwide with nearly 20 percent of China’s electricity demand, of which solar energy accounted for approximately 0.6 percent and wind generated energy for 9.4 percent. The remaining 10 percent was met by other CO2-free energy sources like nuclear and hydro power (Hast et al., 2015; IEA, 2016). However, renewable or green energy in China can be seen as an emergent, despite its increasing production rates, and the structuration of this new field is still continuing and open-ended (Christensen, 2015). The extensive development of green energy and the implementation of energy policies by the Chinese government can be explained by the country’s growing concerns about the rapid aggravation of its own environment and overall climate change issues. Furthermore, the government’s worries grow in terms of economic slowdowns which arise in parallel to worsening environmental conditions. Heavy air pollution, contamination of lakes and rivers, and the overall impurification coming mainly from the Chinese industrial sector play a crucial part in contributing to the concerns of not only the Chinese government, but also China’s consumers that are greatly exposed to those problems stated (Yuan & Zuo, 2011; Stern, 2006).

In order for the Chinese government to implement large-scale renewable energy projects, social acceptance of consumers regarding the application of new systems seems to be a prerequisite. This issue needs to be addressed directly if certain policies are to be implemented successfully as it is stated by Yuan et al. (2011), Sardinaou and Genoudi (2013) and Wüstenhagen et al. (2007). Hence, with regards to the growing concerns mentioned, the aim of this paper is to focus on the Chinese consumers’ side and to both identify and quantify factors that influence the consumers’ attitudes towards green or renewable electricity in a national context. In order to conclude any potential relationships, an econometric approach will try to measure both economic and environmental effects on the consumers’ willingness to pay for green electricity. A national-based social survey named the “Chinese General Social Survey” (CGSS) conducted by the Renmin University of China and institutes around China in the year 2010 will be used for reaching econometric results. The survey contains an environmental module comprising cross-sectional data with 25 different questions, including 3,672 observations used for this study.

The aim of this paper will focus on the following research question that will eventually lead to the econometric analysis:

What role do environmental and economic factors play for the Chinese consumers’ willingness to pay for green electricity?

The contribution of this paper to the previous research is to measure the effect of both economic factors as e.g. income and government support on the one hand, and environmental factors as e.g. air pollution affecting a consumer’s health condition on the other hand, on the consumers’ willingness to pay (WTP) for green energy using micro-level data. The existing literature on China so far considers these factors as well, but does not explicitly explain causal effects that can be achieved to some extent by applying econometric regression models. In fact, the motivation behind this paper is to investigate these effects even though no complete causal inferences can be drawn as this remains the main issue within cross-section analyses. Nonetheless, the purpose of this thesis is to provide the reader with the best underlying explanations of consumers’ behavior with a focus on renewable electricity in order to infer whether energy policies implemented by the government are able to bear fruit.

The remainder of this paper is structured as follows: at first, the issues at hand will be analyzed in a broader picture by providing an overview of China’s current situation in terms of energy supply and consumption. This section is followed by an explanation of a shift from conventional towards renewable energy sources. The next part focusses on previous research done by other authors to see whether consumer behavior differs across economies. Following this, both economic and environmental factors regarding consumers’ WTP will be considered. Next, reasonable hypotheses will be derived regarding the previous findings. The subsequent methodology part will introduce the econometric models that are applied. After that, the results will be presented, followed by a robustness check and the discussion section that will investigate the findings and their limitations. The paper will finish off with a conclusion by making recourse to the research aim and the research question in particular.

2. Previous Research

Within this chapter, already existing literature will be used in order to first provide information regarding the current energy situation in China and to further indicate which policy measures have been taken into account by the Chinese government. As the focus then lays on the consumers’ side in terms of their WTP for green electricity, other countries besides China will be analyzed with particular regards to certain factors influencing their consumers’ WTP. In order to provide some limits to the literature review, studies and articles that have been published in major energy journals such as Sustainable Cities and Society and Energy Policy will be used as those journals seem to cover most of China’s renewable energy situation. Additionally, the latest China Statistical Yearbook and the China Energy Statistical Yearbook will be applied to provide certain statistics on energy consumption in China.

2.1 Overview of China’s energy situation

After China has initiated the so-called open door policy in 1978 which included several economic reforms, the country transformed from a rather closed to a capital-intensive and gradually more export-oriented economy. Those reforms undertaken by the Chinese government resulted in spectacular economic growth rates and declining numbers of people living in poverty (Tang et al., 2015). Today, China is the second largest energy consuming economy worldwide, right after the USA. In order to keep its GNP growth stable with an annual growth rate between 8 and 9 percent, China is more or less dependent on an enormous amount of energy for both the industrial and the household consumption. Additionally, it can be pointed out that primary energy consumption has increased by 8.1 percent in the OECD countries and by 24.6 percent for the whole world with regards to the last two decades. The rise for China, however, has been nearly 100 percent during the same period, which further indicates the tremendous impacts this vast energy consumption has had on both the economy and the environment on the national and worldwide scale. Eventually, this phenomenon made China into a target source of global political tensions (Ma et al., 2010).

Furthermore, China’s situation in terms of energy production and consumption is heavily a coal-based one. Raw-coal energy production takes up for most of China’s primary energy supply and not only industries’, but also household consumers’ consumption is mainly based on this type of fossil-fuel (Ma & Oxley, 2012). Interesting to note is that the consumption of coal differs unevenly across regions in China: even though this type of fossil fuel can be found everywhere throughout the country, the major deposits are located in the North (Shanxi and Inner Mongolia), Southwest (Guizhou and Yunnan) and Northwest (Shaanxi) of China (Ma & Oxley, 2012).

As can be taken from the diagram below, coal consumption in China has been pervasive throughout the last 35 years and took up 66 percent of China’s total primary energy consumption in the year 2013. On top, coal production surpasses coal consumption and hence China faces a surplus of coal-generated energy (China Statistical Yearbook, 2014). As a surplus of coal seems to be rather difficult to export according to China’s ‘easy to import and difficult to export’ policy, the excess will be stored in times of energy shortages. Hence, this appears to be a favorable measure in order to meet China’s increasing energy demand (Liu & Wang, 2008).

China’s share of CO2-free energies, including nuclear power, hydro energy and wind energy, takes up only 55 percent of the world’s average which comprised approximately 6.8 percent of the total energy consumption in 2007 in China (Ma et al., 2010). Nonetheless, the consumption regarding renewable energy is steadily increasing in the country and may presumably account for 11.4 percent in 2015 and 15 percent of total energy consumption by 2020 (Qi et al., 2013). The amount of renewable or green energy to the energy mix will hence increase continuously in China (Yuan & Zuo, 2011). First indicators can be taken from figure 1 in which the share of renewable energies from the beginning of the economic reforms starting in 1978 until today is displayed.

Figure 1: The Composition of China’s Energy Consumption

illustration not visible in this excerpt

Source: China Statistical Yearbook (2014a)

According to Midilli et al. (2006), green or renewable energy is defined as an energy source that has zero or minimum environmental impact and is hence rather sustainable to the environment. However, it is stated that renewable energy sources only take up less than 10 percent of the world’s total energy consumption currently, even though its potential is vast due to its unlimited supply and also cleanliness in overall use (Chang et al., 2003). The sources used for green energy are mainly wind, hydropower, solar energy, geothermal power, wave power and biomass. However, due to the problems of deforestation that can come with the production of biomass, China’s residents try a gradual reshaping of the pattern regarding energy consumption away from biomass to cleaner and more sustainable energy sources. This is the reason why energy produced from biomass is still at an early stage in China. Additionally, this is also due to the rather low preference and understanding of the Chinese population regarding this kind of energy’s potentials and consequences (Ma & Oxley, 2012). Green generated electricity for consumption usage is based on the other named renewable energy sources and is marketed as being environmentally friendlier than conventional energy sources as, for instance, coal and oil (Salmela & Varho, 2006). Therefore, energy produced by using fossil fuels refers to conventional energy of unrenewable production which will eventually create harmful impacts on the overall environment (Hansla et al., 2008).

It is essential to point out that the majority of China’s primary energy is consumed by its industries. As can be seen in figure 2, the manufacturing sector takes up the largest portion of China’s entire energy consumption with 71 percent (Xiang et al., 2013). Chinese households seem to play a minor role in the distribution of energy consumption with a contribution of eleven percent, whereas in the EU-28 household consumption accounts for approximately 29 percent which is equivalent to approximately 304.09 Mtoe (Yuan et al. 2014; Hansla et al., 2008; Zografakis et al., 2010).

Figure 2: China’s Energy Consumption Structure and Amount (2009)

illustration not visible in this excerpt

Source: Xiang et al. (2013)

However, the role of Chinese households and individuals will further gain importance regarding their use of energy. This can be explained by the prediction that the energy demand of Chinese households will increase between 3.0 and 3.5 percent in the year 2016 (Hill, 2016). The increase in energy demand can be described by the fact that China has advanced from a previously low middle income country in 2001 to an upper middle income country in 2010 and hence the overall GDP per capita has increased significantly. This indicates that more Chinese households and individuals are actually able to afford more goods, as for example household appliances, and therefore the usage of energy in form of electricity is generally increasing (Yuan et al., 2014; Wang et al., 2012). For instance, household air conditioners and microwave ovens have been trebled over the years 2003 to 2009, from 30 and 17 to 88 and 51 per hundred urban households, respectively (Ma & Oxley, 2012).

A greater usage of energy by not only Chinese consumers, but consumers on a worldwide level indicates that mankind is confronted with two major global climate issues as pointed out by Chang et al. (2003): these are firstly global warming or rather the greenhouse effect that is predominantly caused by the emissions of CO2 in form of GHG discharges. Secondly, another climate issue comprises acid rain that is caused mainly by SOx and NOx. These two main problems are again caused by the over-usage of fossil fuels such as coal and oil which take the main proportion of China’s primary energy consumption. Even though several authors (Chang et al., 2003; Zografakis et al., 2010; Hast et al., 2015) point out that fossil fuel energy sources will be drained in the future mainly due to government actions that will take place, it is important to involve the power of the Chinese consumers as well. This means that it has to be taken into account whether they perceive the usage of renewable energies as a mandatory measure in order to not only stabilize the Chinese economy, but also to protect the overall environment.

2.2 Government policies

China faces large barriers in order to successfully develop green electricity due to the competitive advantage of rather cheap and abundant coal production. In order to combat the issues resulting from the usage of fossil fuels like coal and oil to a large extent as stated above, the Chinese government has been eager to implement favorable policies and energy projects for the middle- and long-term development of renewable energy resources. This aims at both the security of energy supply and the protection of the Chinese environment (Chang et al., 2003). In the following, certain government implementations regarding the improvement of China’s energy situation will be worked out.

2.2.1 The renewable energy policy in China

Against the background of China being faced with a rather unfavorable energy situation in terms of heavy reliance on fossil fuels and the insubstantial amount of attention given by the Chinese government towards energy savings, the regulation and implementation of certain energy laws found an increasing importance throughout the last years in China (Ma & Oxley, 2012). For instance, the ‘Energy-Saving Law’ has been first drafted in 1997, has then been issued one year later, was revised in 2007 and has been finally reissued in 2008. The Chinese government succeeded to increase the energy intensity in terms of electricity consumption thanks to the implementation of certain laws, besides other factors like structural changes that emerged in China. Therefore, the electricity intensity ratio, that is the ratio between the gross inland energy consumption and the country’s GDP, improved from 0.66 in 1980 to 0.11 in 2012 (EEA, 2013; China Statistical Yearbook, 2014b). Even though China uses its energy resources more efficiently than in the past, there seems to be lots of room for improvements to make (Ma et al., 2010).

However, besides laws that aim to save up energy resources including conventional energies like coal and oil, the Chinese government tries to put more effort into the development of its own renewable energy sources. For this purpose, the Standing Committee of the National People’s Congress of China has implemented the Renewable Energy Law which came into effect in 2006 and has been revised in 2009 (Berrah et al., 2001; MOFCOM, 2013). The Renewable Energy Law is the leading legal basis regarding the use of renewable energy sources in China and has been mainly implemented to not only promote the development and utilization of renewable energy, but also to remove market barriers and to form markets for these renewable energy sources (Hast et al., 2015). The main intention behind the implementation is to legitimize the subsidization of renewable energy by the Chinese government for companies located in China in order to promote further sustainable development of energy usage (Christensen, 2015). Therefore, it seems that the law is mainly focused on the supply side, but less on the demand side, that is the end-users. For instance, the law fixes targets for grid companies to purchase all generated renewable electricity. Additionally, price authorities of the Chinese State Council set the on-grid electricity prices for renewables to promote the purchase of renewable energy for China’s state power grid companies and petrol wholesale companies (Yu, 2011; Li, 2011).

Subsequently, in connection with the implementation of the Renewable Energy Law, the Chinese government published the Medium and Long Term Renewable Energy Development Plan in August 2007 (Lo, 2015). With focus on this renewable energy development plan, the Chinese government tries not only to set its focus on the supply side, but also aims to involve the Chinese consumer-side including environmental aspects as it is stated within its specific objectives section: “China will also aim to provide electricity to people in remote off-grid areas and resolve fuel scarcity problems in rural areas through the use of renewable energy, doing so according to local conditions and at the same time effectively protecting the ecological environment” (NDRC, 2007: 8).

Interesting to note is that the plan puts its focus mainly on rural energy consumption and hence strives for implementing pilot programs. Those aim to make full use of all forms of renewable energy sources including mainly solar power, wind energy and biomass. This seems to be a reasonable approach as the rural areas not only have the natural resources of solar and wind power that are rather rare in the urban areas, but they also have abundant land to set up solar and wind power plants and to promote the usage of biomass energy. In order to successfully implement those policies, the Chinese government is eager to apply favorable price policies and government investments to actually reach the target share of 15 percent of renewable energy within the primary energy consumption by 2020 (Tang et al., 2015; Qi et al., 2013).

2.2.2 The Green Electricity Scheme in Shanghai

It can be pointed out that both the Renewable Energy Law and the Medium and Long Term Renewable Energy Development Plan set the legal foundation upon which the municipality of Shanghai has been able to launch pilot programs with a focus on renewable electricity. Interestingly, Shanghai is the first city of a developing or rather emerging country that implements such a voluntary-based green electricity pilot project called the Green Electricity Scheme which started in 2006 (Yu, 2011) . Within the first year, the incremental price premium was set for 0.53 RMB per kWh which will sum up to an end price of 1.14 RMB per kWh for green electricity. This will make the new electricity product called Jade Electricity approximately twice as expensive as ordinary electricity (0.61 RMB per kWh) and will lead to an additional price premium of approximately 29 RMB or 3.70 USD per month[1] (Li, 2011). As this renewable electricity product will only take up a small proportion in total electricity consumption ranging from 5 to 25 percent, depending on the consumers’ annual electricity utilization, the overall increase in the price premium is rather low (Berrah et al., 2006). As the program already failed within the first year, no other prices have been set with regards to the upcoming time periods.

The Shanghai Municipal Government assured that the additional payments for green electricity would be used to develop further electricity for consumption usage. Remarkably, this scheme built the first arrangement in China to offer Chinese consumers the option to subscribe to electricity produced from renewable energy sources including mainly wind power and photovoltaic solar power generated in Shanghai (Berrah et al., 2001). Additionally, the scheme is exceptional as it on the one hand sets its focus on the consumer demand for the purchase of a renewable electricity product instead of concentrating on the supply side only. On the other hand, it also gives Chinese consumers the opportunity to actually freely choose its electricity provider which is normally fixed by the Chinese local governments (Hast et al., 2015). The target group is rather large as the product is not only available to non-household consumers, as industries, but also to household and commercial customers as well (Yu, 2011).

In order for consumers to buy this new electricity product, the Chinese government offered certain incentives for potential customers in order to subscribe. These incentive mechanisms comprise, for instance, the publication of a list including those people that signed up for the voluntary program and awarding them with honorary certificates, an emblem or even medals (Li, 2011). Despite these incentives, such methods proved to be rather ineffective and hence the subscription rate remained somewhat low, that is below 1 percent of all residents and firms in Shanghai (Zhang et al., 2011). Therefore, the scheme has not been successful when regarding this case (Yu, 2011).

The question arises why this voluntary-based Green Electricity Scheme could not find enough customers in order to be a successful pilot program. According to Hast et al. (2015), the main barriers regarding the development of green electricity in the case of Shanghai have been the higher costs compared to conventional electricity and the overall lack of consumer awareness. When interviewing several Shanghai residents in April 2016[2], it can be pointed out that the assumption made by Hast et al. (2015) is partly in accordance regarding their statements. As an illustration, Yang Kai, a 36-year old Chinese resident living in Shanghai since he was born, stated that he had never been aware of the option to engage in the Green Electricity Scheme. He said, if “I would have been aware of the option to choose an environmental friendlier energy source, I would have definitely subscribed to this program. The additional costs involved would not be a hindrance in order to purchase green electricity as doing something good for the improvement of the people’s environment is much more important than saving this money”.

Li (2011) states that people in Shanghai do not automatically fully realize the environmental merits that come with adopting green electricity since the usage of it is still a new concept in China. Hence, as renewable electricity is more expensive than conventional electricity, consumers seem to be more reluctant to pay this additional cost. According to Guo Li, a 57-year old production worker who also has not been aware of the option in 2006 to purchase green electricity, he would not have subscribed to the program as “there are no visible benefits for me in the short run. Why should I spend more money on something that I will not benefit from directly? My income is just high enough to pay my current electricity bill. How can I afford more expensive renewable electricity then?”

As it is pointed out, the barriers for subscribing to a voluntary-based program differ across environmental and economic factors. They involve several problems that need to be addressed in order to successfully implement such a scheme. In the following, the focus will be laid on other countries, which shall display which cases seem to be successful in both developing green electricity and promoting the purchase of it to its potential consumers and which are also still struggling with implementing this renewable energy source.

2.3 Evidence from other countries

Different from China, it can be seen that in liberalized energy markets the consumers can freely choose their own energy supplier according to their respective preferences. It has been studied in many countries which factors will have a certain impact on the decision-making for the consumers’ WTP for green electricity (Hast et al., 2015). WTP can be defined in both relative and absolute terms as well as an increase in the amount of an electricity bill in the form of a premium payment (Zorić & Hrovatin, 2012). For this purpose, mainly Western and hence developed economies, which have already made large progress in the development of renewable energy sources, have been investigated in most of those studies (Liu et al., 2013). As it is stated by Wüstenhagen et al. (2007), social acceptance plays a crucial role when it comes to a successful implementation of certain energy policies in a country. For instance, in Germany with the largest number of installed wind turbines per capita on a worldwide level, the media reports on local resistance to new wind energy projects due to higher relative visible impacts those turbines create. But also countries that are only at the beginning of the diffusion curve in terms of renewable energies like the UK, Switzerland, the Netherlands and France face huge debates on local and sometimes national levels with regards to new energy projects. Hence, as social acceptance plays a determining part in order to successfully implement renewable or green electricity policies in certain countries, the issue of consumers’ WTP needs to be urgently addressed throughout the world.

In several studies it is pointed out that certain constraints and push-factors exist when it comes to social acceptance and the WTP for green electricity. Those studies pick up on both the definition and analysis regarding constraints and barriers to WTP on the one hand, and the benefits and incentives for buying renewable electricity on the other. Investigations have been made throughout several countries, whereas the focus has been laid on how various demographic variables have affected the general public’s WTP for a certain premium in order to obtain renewable electricity sources. For instance, Zarnikau (2003) describes in his paper how residential customers would be willing to pay a price premium on their monthly electricity bill in order to support the utility investment in renewable energy and energy efficiency projects in Texas, USA. Within this study, the author is controlling for both economic and demographic factors like a consumer’s age, the gender, educational background and income. His findings are consistent with the so-called ‘green consumer’ profile indicating that an educated, affluent and under 55 year-old male is willing to pay the highest premium of 10 USD per month in order to support renewable and energy efficient investments. As it is stated by Borchers et al. (2006) and Roe et al. (2001), there seems to be a real and increasing interest among several consumers for environmentally friendly energy production with focus on the USA, which creates optimal conditions for some consumers to pay a voluntary premium. Even though the results within those papers are statistically significant, the economic significance regarding the slightly increased marginal price premium appears to be rather limited.

However, in contrast to some of the US states and in accordance with China, the Japanese consumers cannot freely choose their respective electricity provider. Nonetheless, surveys conducted by Murakami et al. (2014) indicate that Japanese consumers are potentially more prone to buying renewable energy sources in the form of wind and solar power[3]. This seems to be mainly due to the increase in public interest after the Fukushima nuclear crisis in 2011.

Nonetheless, the case seems to be different for European countries where a certain product differentiation exists. As Salmela and Varho (2006) point out, the number of household customers consuming green electricity remains rather low. That is, in the year 2000 only 0.07 percent of the consumers in the UK had actually signed up for paying green electricity tariffs. The same holds for the majority of Finnish consumers who have not been willing to change their electricity supplier in order to obtain environmentally friendlier energy. This seems to be a surprising result given the fact that the Finnish electricity market has been liberalized in the 1990s and since 1998 all consumers have been able to buy green electricity. The study indicates that this consumer’s choice is mainly based on the price-sensitivity regarding renewable energies and hence price seems to be a barrier for buying green electricity (Salmela & Varho, 2006; Mewton & Cacho, 2011; Hast et al. 2015).

Interesting to investigate is the case of Sweden, where the Swedish Parliament has passed a ‘green electricity certificate’ law in 2002 due to a desired switch from conventional to a more renewable energy usage by both the Swedish government and the consumers. The law obligates electricity suppliers and household consumers to buy a certain quota of green electricity from electricity producers, whereas the quota has been 7.4 percent in 2003. This measure introduced by the Swedish government seemed to bear fruit as by now almost two-thirds of the Swedish primary energy consumption come from renewable energy sources. The idea of quota-based obligations has also been imposed in other European countries as in Belgium, Poland and Italy with the same idea to more or less forcefully implement the usage of renewable energies (Hansla et al., 2008; Chang et al. 2003). Additionally, the Swedish government implemented further policy measures such as investment subsidies and tax reliefs for both firms and consumers in order to primarily promote the generation of wind power and usage for consumers (Ek, 2005).

As it is stated by Zorić and Hrovatin (2012) in the case of Slovenia, the willingness to participate in green electricity programs depends heavily on the factors regarding education and environmental awareness. Nonetheless, the parameter of household income plays the major role when it comes to the WTP of Slovenian consumers to buy green electricity. However, both authors point out that the results in different papers stating the WTP for a certain product can differ heavily from each other as these studies cover different countries and time periods. Furthermore, the methods used and the setup of the questionnaires applied are different from one another and therefore the outcomes will not always be similar. This is important to acknowledge when analyzing the data and the outcome regarding the paper at hand.

Additionally, it seems to be crucial to make a differentiation between the willingness to pay for higher prices and the willingness to pay for higher taxes. The distinction has been made in order to measure the effect of the so-called free-rider problem that is explained by basic game theory: the benefits regarding the consumption of green electricity can be seen as a collective good problem as not only one specific person but rather all surrounding people receive marginal benefits from the adoption of renewable electricity as it has positive impacts e.g. on the environment. However, in the case where only certain individuals pay higher prices for the consumption of this renewable electricity source, some other people do not monetarily contribute to the consumption power. Hence, they profit from this public good while not paying for it. In the second case, however, all people have to pay higher taxes and therefore everybody is involved in the process of adopting green electricity, despite the high incentive and possibility to free-ride (Stern, 2006; Salmela & Varho, 2006; Zografakis et al., 2010).

2.4 Development of factors influencing WTP

In the foregoing chapter, various factors have been mentioned that proved to have certain impacts on the consumer’s WTP for renewable electricity. In the light of the present study, the most important factors will be further investigated, as they seem to be dominant for the consumption choice of green electricity. In order to answer the research question, the focus will be laid on the following economic and environmental parameters: income of Chinese residents, the influence of electricity price, government support policies in form of subsidies and tax reliefs with a focus on renewable energies and environmental factors including the effects of health conditions in China.

2.4.1 Income of Chinese residents

Since China’s opening-up policy and the implementation of economic reforms in the late 1970s, the country has been able to increase its Gross Domestic Product (GDP) per capita which led to an overall surge in poverty reduction. As in 1978 when reforms began, the capita GDP of China has only reached a level of 155 USD, whereas only 23 years later in the year 2001 the GDP per capita has risen to 1,042 USD. These numbers indicate that China has entered into a low middle income level by the beginning of the new century. In the year 2010, China reached a GDP per capita of 4,000 USD and hence advanced to the upper middle income level (Yuan et al., 2014).

In terms of China’s income development, it can be said that it seems to go hand-in-hand with the increase of the Chinese energy consumption. As can be drawn from figure 3 below, with an increase in Gross National Income (GNI) per capita for Chinese residents after the implementation of economic reforms until recently, the average annual residential energy consumption per capita has also increased over the years. When focusing on the split between urban and rural residents, it can be seen that the average consumption for people living in urban areas is still remarkably higher than for rural residents even though the gap has narrowed slightly over the years.

Figure 3: Residential Energy Consumption vs GNI per capita

illustration not visible in this excerpt

Source: the World Bank (2016a); China Energy Statistical Yearbook (2010)

With regards to figure 3 it can be said that with an increase in income and the advancement of China to an upper middle income group, the consumption of energy will increase for both rural and urban residents as well. As it is stated by Hansla et al. (2008), a low income indicates living in a rather small apartment and therefore the electricity costs are in general low. When applying this point to the case of China, it can be stated the other way around: With a gradual increase in total income, Chinese residents are able to afford bigger apartments and houses. This leads to an increase in overall electricity consumption and electricity costs. Nonetheless, it has to be pointed out that China still has the status of a developing or emerging economy and hence the gradual increase of overall income is just at the beginning of keeping up with the developed countries. Hence, there seems to be lots of growth potential (The World Bank, 2016b).

As it is the case in many developed economies that the income is distributed rather unequally across its residents, also China shows to have developed such a trend over the last decades. With the economic reforms and especially with the labor retrenchment program in the mid-1990s, the Chinese government initiated the removal of employment guarantees for state-owned workers. The reason behind it is that the Chinese government wanted to create a shift from a previous planned labor allocation system to a well-functioning labor market (Appleton et al., 2005). Finally, this state-initiated approach has led to significant employment shifts both within and between sectors and resulted in rather high rates of unemployment and unequal distribution of income (Dong & Xiao, 2009).

As can be drawn from figure 4, the gap between the poorest and the richest people in China seems to widen in terms of income distribution. According to the Economist (2012), 57 percent of the national income has been earned by the upper 10 percent of Chinese residents in the year 2010. However, the numbers differ across studies as the World Bank (2016a) shows that almost half of the income is held by the richest 20 percent of China’s population which can be seen in figure 4. As this share has been increasing over time, income inequality seems still to be an apparent occurrence in China.

Figure 4: China’s income distribution

illustration not visible in this excerpt

Source: The World Bank (2016a)

When comparing the income distribution between urban and rural residents, income disparities between those two groups are prevalent as well. As Xue and Gao (n.d.) point out, the income gap between rural and urban residents has been widening since the mid-1980s and seems now to be the highest in the world. According to the National Bureau of Statistics (2012), the net income of rural residents accounted for 6,799 RMB which seems rather little when compared to 23,979 RMB for urban residents in 2011. Even though the real income growth rate is 3 percentage points higher for rural residents (11.4 percent) than it is for urban residents (8.4 percent), the income disparity still seems to be significant and influences the electricity consumption behavior for both groups. Assumedly, rural residents just might not have the financial endowments to being able to afford green electricity.


[1] Calculated based on China Statistical Yearbook, 2007; China Energy Statistical Yearbook, 2007; Chinability, n.d.

[2] Semi-structured interviews have been conducted when having a field trip to Shanghai in April 2016. In total, eight Chinese residents have been interviewed face-to-face. The responses were given mainly in Chinese and have been translated into English accordingly. The questionnaire can be found in the appendix.

[3] Approximately 80 percent of the people included in the survey.

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The Chinese Consumers' Attitudes towards their 'Willingness to Pay' for Renewable Electricity
An Analysis of Economic and Environmental Factors
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Title: The Chinese Consumers' Attitudes towards their 'Willingness to Pay' for Renewable Electricity

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