Estimates of energy subsidies in China and impact of energy subsidy reform

For a transitional economy such as China, some energy subsidies are reasonable, and sometimes even necessary for achieving social goals. However, with rising energy prices and environmental concerns, we see conflicts emerging between energy subsidies, energy demand/supply fundamentals and climate change considerations. Energy subsidies have important implications for sustainable development through their effects on energy use, efficiency and the choice of fuel source. This paper applies the price-gap approach to estimate China's energy subsidies. Results indicate that China's energy subsidies amounted to CNY 356.73 billion in 2007, equivalent to 1.43% of GDP. Subsidies for oil products consumption are the largest, followed by subsidies for the electricity and coal sectors. Furthermore, a CGE model is used to analyze the economic impacts of energy subsidy reforms. Our findings show that removing energy subsidies will result in a significant fall in energy demand and emissions, but will have negative impacts on macroeconomic variables. We conclude that offsetting policies could be adopted such that certain shares of these subsidies are reallocated to support other sustainable development measures, which could lead to reducing energy intensity and favoring the environment.