Over three decades, China modernized the aluminum, cement, iron and steel, and paper industries. It provided incentives and reformed institutions to encourage enterprises to adopt state-of-the-art technologies. Without these changes CO2 emissions from the four industries would have been nearly 2.3 times higher. Nevertheless, increases in output in these industries led to substantial increases in CO2 emissions despite declines in CO2 intensity. Further progress will require facing challenges in continued technological modernization and closing remaining small and backward enterprises. Attempts to create technologically sophisticated national champion enterprises have not been entirely successful, and there is good reason to worry about the anticompetitive effects of this strategy. Given China’s fragmented industrial structure and its decentralized industrial governance system, it will continue to be challenging to close energy-inefficient and polluting facilities. Nevertheless, China’s experience shows the advantages of combining energy sector policies with market liberalization and technology upgrading policies.
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