Evaluating the energy efficiency-enhancing potential of the digital economy: Evidence from China

Improving energy efficiency can go a long way in helping China address environmental problems it currently faces and help deliver on its pledge of achieving carbon neutrality by 2060. At the same time, innovative production technologies based on digital solutions continue to attract significant attention, owing to their potential to provide environmentally sustainable development opportunities. This study explores whether the digital economy can improve energy efficiency by facilitating input reallocation and promoting better information flows. We rely on a panel of 285 Chinese cities for the period 2010-2019 and a so-called slacks-based efficiency measure incorporating socially undesirable outputs to obtain energy efficiency from the decomposition of a productivity index. Our estimation results demonstrate that the digital economy can promote better energy use efficiency. More specifically, a 1-percentage point increase in the size of the digital economy leads to an average increase of around 14.65 percentage points in energy efficiency. This conclusion still holds under a two-stage least-squares procedure used to mitigate endogeneity. The efficiency-enhancing impact of digitalization is heterogeneous and depends on factors such as resource endowment, city size, and geographical location. Additionally, our results suggest that digital transformation within a particular region has an adverse effect on energy efficiency in that region's neighboring areas due to negative spatial spillover effects. These negative spillovers outweigh the positive direct effect on energy efficiency that can be attributed to a growing digital economy.