Renewable and Sustainable Energy Reviews 42 (2015) 952–962

Contents lists available at ScienceDirect

Renewable and Sustainable Energy Reviews

journal homepage: www.elsevier.com/locate/rser

How does administrative pricing affect energy consumption

and CO2 emissions in China?
Ke Li a, Boqiang Lin a,b,n
a
Collaborative Innovation Center for Energy Economics and Energy Policy, China Institute for Studies in Energy Policy, Xiamen University, Fujian,
361005, PR China
b
Newhuadu Business School, Minjiang University, Fuzhou 350108, China

art ic l e i nf o a b s t r a c t

Article history: Despite reforms, China still largely applies the cost plus pricing mechanism for the energy sector.
Received 15 May 2014 Government administrative energy pricing leads to energy price distortions, which could result in not
Received in revised form only the excessive and wasteful energy consumption, but also environmental deterioration, thereby
18 August 2014
undermining energy conservation and emission abatement. Using fossil-fuel subsidies as a proxy for the
Accepted 21 October 2014
level of energy price distortions, this paper estimates the subsidy of 22 Chinese departments during the
period 2006–2010, and adopts the price-gap approach to analyze the impacts of subsidy removal on
Keywords: energy consumption and CO2 emissions for the various sectors and energy types. The results
Fossil-fuel subsidies demonstrate that removing energy subsidies would reduce energy consumption and emissions by
Sector
3.77% and 2.85%, respectively, but the effects vary across sectors. The transport, storage and post sector
China
and the electricity, gas and water supply sector are much more affected by energy subsidies removal
than other sectors. With respect to energy types, fuel oil and natural gas are sensitive to subsidies,
indicating the magnitude of their consumption. This suggests that removing subsidies on these fuel
types could significantly reduce CO2 emissions. Finally, we comprehensively discuss relevant policy
issues on energy price formation reform.
& 2014 Elsevier Ltd. All rights reserved.

Contents

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 952
2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 954
2.1. Energy consumption of each sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 954
2.2. Carbon emissions of each sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 955
3. Methodology and data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 955
3.1. Impacts of energy subsidy removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 955
3.2. Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 956
4. Results and discussion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 956
4.1. The effects of energy subsidy removal on energy consumption by sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 956
4.2. The effects of energy subsidy removal on CO2 emissions by sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 958
5. Conclusions and policy suggestions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 960
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 960
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 960
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 962

1. Introduction

n
Corresponding author at: Newhuadu Business School, Minjiang University,
China is the world’s largest energy consumer and CO2 emitter
Fuzhou, Fujian 350108, PR China. Tel.: þ 86 5922186076; fax: þ 86 5922186075. [1], and the international community has paid considerable
E-mail addresses: bqlin@xmu.edu.cn, bqlin2004@vip.sina.com (B. Lin). attention to her energy conservation and emission abatement

http://dx.doi.org/10.1016/j.rser.2014.10.083
1364-0321/& 2014 Elsevier Ltd. All rights reserved.
 K. Li, B. Lin / Renewable and Sustainable Energy Reviews 42 (2015) 952–962 953

efforts. Since 2006, the government has set obligatory targets for of the policy. First, according to estimated results from previous
energy-saving and emission-reduction in the Five Year Plan (FYP). studies, China’s fossil-fuel subsidies are substantial that they incur
Some measures, such as the objective responsibility system, heavy burden on government expenditure. Second, this policy
industrial structure adjustment, and technological progress, are creates inequality among various income groups, as the high-
introduced to ensure constant and steady reduction of energy income groups benefits more than the low-income groups due to
consumption and CO2 emissions per unit of GDP (i.e., energy the “free rider” effect [18]. For example, the high-income groups
intensity and carbon intensity, respectively). It is often argued that with cars gets more oil subsidies while the low-income groups
technological progress is a key solution for energy conservation without cars gets little.
and emission abatement. However, in addition to technological In order to measure the level of energy price distortions, or the
solutions that can increase supply, China will also need to find magnitude of energy price subsidies, IEA [19] introduced a price-
ways to reduce demand [2]. Energy price reform, which is an gap approach, which is calculated as the difference between end-
important element of market economy, frequently appears in use prices and reference prices. The former are observed in the
government’s policy documents, and is currently believed to be a energy market and incorporate price subsidies, while the later are
core and key economic policy for energy-saving and emission- the “efficient” prices that would prevail in the absence of sub-
reduction. The goal is to develop an energy pricing mechanism sidies. According to the latest data released by IEA, the average
which balances scarcity of resources, market supply and demand rate of China’s fossil-fuel subsidies was 3.4%, and equivalent to
and environmental costs. Thus, energy price subsidies, which are 0.3% of GDP in 2012. The majority of subsidies were directed to oil
the main cause of energy price distortions, become the focus of products, with a scale of about $12.9 billion. This was followed by
China’s energy reform. electricity, coal and natural gas at $10.2 billion, $3.3 billion and
China has concluded the 11th FYP (2006–2010), and is cur- $500 million, respectively.1
rently in the 12th FYP period (2011–2015). In the 11th FYP, the There are numerous literatures that confirm the negative
process of energy price reform was slow. Fossil-fuel subsidies scale impacts of energy price subsidies or distortions on energy con-
in China was equivalent to 1.84–3.31% of GDP during 2006–2010 servation. For example, Nwachukwu and Chike [20] proved that
period, and this greatly distorts energy market [3]. It is commonly fossil-fuel subsidy encouraged wasteful consumption. Even worse,
recognized that energy price distortions will promote energy- fossil-fuel subsidy decreases the external costs of energy use [21],
intensive products use and will hinder the promotion of energy- and inhibits or postpones energy consumption structure improve-
saving technologies, thereby resulting in over-consumption and ment [22,23], thereby disadvantage to emission abatement. Thus,
waste of energy as well as environmental deterioration. In the reform of inefficient subsidies will conducive to energy conserva-
light of this, a key question to ask is: did China’s energy price tion and emission abatement [24]. IEA [19] found that eight non-
distortions increase energy consumption and CO2 emissions dur- OECD countries’ energy consumption and CO2 emissions would
ing the 11th FYP period? In other words, what is the magnitude of decrease by 13% and 16% respectively as a result of energy
energy-savings and CO2 emissions-abatement under “real” and subsidies removal. This is equivalent to 3.5% and 5% of the world’s
“effective” energy prices or after energy subsidies removal in this energy consumption and CO2 emissions, respectively. Wang et al.
period? The answers to these questions will help to understand [25] suggested that government-regulated electricity pricing dis-
the relationship between energy-saving, emission-reduction and couraged energy conservation and efficiency improvement.
energy price reform. It will also provide new evidences for energy The first research on China’s fossil-fuel subsidies was con-
price reform with respect to the promotion of energy savings. ducted by Larsen and Shah [26]. They found that China has the
Many studies have confirmed the vital role of energy price in second highest level of energy subsidies (after the former Soviet
energy savings [4–11]. The main mechanism is that energy prices Union), which accounted for 5.49–6.12% of the total world fossil-
changes will affect energy costs, and inspires technological pro- fuel subsidies during 1985–1992. After removing subsidies, China’s
gress in the long term, which is conducive to energy conservation CO2 reductions would account for 9.36–13.21% of the world’s total
and emission abatements. According to Lin and Du [12], the energy emission reductions. Lin and Jiang [27] found that China’s fossil-
loss contributed to factor market distortions is accounting for fuel subsidies stand at 356.73 billion CNY in 2007, which equiva-
24.9–33.1% of the total energy loss, and eliminating the factor lent to 1.43% of GDP in the year. They also found that subsidies for
market distortions can increase energy efficiency by 10% and oil products consumption were the largest, followed by electricity
reduce energy consumption by 145 Mtce per year. This suggests and coal consumption. According to the research, removing energy
that the “real” and “effective” energy prices play important roles in subsidies would be beneficial for energy saving and emissions
energy conservation. For example, after implementing rising block reduction, but would also have negative impacts on macroeco-
tariff (RBT) in July 2012, China’s residential electricity price nomic variables. The results of Liu and Li [23] showed that China’s
become more reasonable and effective, and about 26.5% household total fossil-fuel subsidies was 386.4 billion CNY in 2007, account-
tend to save electricity and improve electricity efficiency [13]. He ing for 9.67% of China’s total fiscal expenditure and equal about
et al. [14] also proved that the optimization of the electricity price 4.1 times the environmental protection expenditure in 2007.
mechanism could achieve energy-savings and the maximum total Ouyang and Lin [28] indicated that the scale of fossil-fuel subsidies
social surplus. (including external costs) was 1.24 trillion CNY in 2010, accounting
In China, about 46% of coal and 80% of oil consumption are for 3.10% of the GDP in that year. Adopting a CGE model, Lin and Li
priced under government regulation in the 1990s [15]. Most of the [29] found that removing fossil-fuel subsidies was conducive for
government regulations has been eliminated since 1999, after energy savings, but the effects varied among different sectors and
which energy prices are mainly controlled by state-owned enter- families. Jiang and Tan [30] showed that China’s fossil-fuel
prises [16]. Therefore, energy price fluctuation is also due to the subsidies was 1214.2 billion CNY in 2008, which is equivalent of
changes in national policies, which means energy prices distor- 4.04% of GDP in the year. The majority of the subsidies go to oil
tions still widely exist. In theory, fossil-fuel subsidies are the products consumption, followed by coal and electricity consump-
primary means for ensuring energy access for low-income tion. They also found that energy subsidies removal had significant
families, and the original intentions are to promote economic negative impacts on energy-intensive industries, with oil subsidy
growth and alleviate energy poverty [17]. However, with the
increasing use of modern energy, energy poverty has been
basically eliminated in China, thereby highlighting the drawbacks 1
〈http://www.iea.org/subsidy/index.html〉.
954 K. Li, B. Lin / Renewable and Sustainable Energy Reviews 42 (2015) 952–962

Table 1
The ratio of energy consumption for each sectors to its aggregate (%).
Source: China Energy Statistical Yearbook (CESY).

Sector 2006 2007 2008 2009 2010

Agriculture, hunting, forestry and fishing 2.447 2.220 2.063 2.039 1.993
Mining and quarrying 5.508 5.433 5.850 5.735 5.662
Food, beverages and tobacco 1.967 1.902 1.946 1.886 1.696
Textiles and textile products 2.617 2.581 2.444 2.271 2.140
Leather, leather and footwear 0.141 0.138 0.133 0.125 0.121
Wood and products of wood and cork 0.384 0.373 0.399 0.402 0.383
Pulp, paper, paper, printing and publishing 1.662 1.490 1.567 1.524 1.404
Coke, refined petroleum and nuclear fuel 4.832 4.793 4.717 4.999 4.938
Chemicals and chemical products 11.101 11.215 10.901 10.350 10.532
Rubber and plastics 1.102 1.054 1.094 1.056 1.095
Other non-metallic mineral 8.751 8.239 8.736 8.767 8.455
Basic metals and fabricated metal 21.735 22.783 22.705 23.103 22.774
Machinery, Nec 1.486 1.508 1.506 1.519 1.576
Electrical and optical equipment 1.291 1.359 1.466 1.423 1.537
Transport equipment 0.869 0.880 0.938 0.989 1.154
Manufacturing, Nec; recycling 0.542 0.490 0.500 0.481 0.487
Electricity, gas and water supply 7.509 7.251 6.912 6.853 7.449
Construction 1.454 1.471 1.308 1.488 1.634
Wholesale, retail trade and hotel, restaurants 2.054 2.028 1.967 2.091 2.101
Transport, storage and post 7.842 7.828 7.863 7.726 8.023
Others 3.973 3.978 4.039 4.138 4.210
Residential consumption 10.734 10.985 10.945 11.036 10.635

removal having the largest effect. Examining energy subsidies and 2. Background
“rebound effect”, Li et al. [31] found that the total energy
subsidies scale in China in 2007 was 582 billion CNY, and According to China Energy Statistical Yearbook (CESY), energy
eliminating it would reduce the consumption of coal, oil, natural consumption can be disaggregated into 7 sectors and 47 subsectors
gas and electricity by 17.74, 13.47, 3.64 and 15.82 Mtce, respec- (industries). To facilitate data processing2 and to be consistent with
tively. Wang and Lin [32] studied the natural gas subsidies of international practice, we categorize the 47 subsectors into 22 divi-
different sectors. sions (hereafter sectors for convenience, and the details can be seen in
Lin and Ouyang [3] measured fossil-fuel subsidies and the Table A.1 in the Appendix), which are the objects of analysis in
effects of its removal during the 11th FYP (2006–2010). The results this paper.
indicated that China’s subsidies and its share in GDP increased
during the 2006–2008 period while it decreased significantly in 2.1. Energy consumption of each sector
2009 due to a new pricing mechanism for oil products as well as
sharp fall in international energy prices. The energy-saving poten- From Table 1, seven sectors, including “basic metals and fabri-
tial from subsidies removal amounted to 3.64% of the total energy cated metal”, “chemicals and chemical products”, “residential con-
consumption during 2006–2010, consequently reducing 3.72% of sumption”, “other non-metallic mineral”, “transport, storage and post”,
the total CO2 emissions during the same period. “electricity, gas and water supply” and “mining and quarrying”, are the
The contribution of this paper is twofold. First, it extends the main energy consuming sectors. Each of the sectors account for more
results of Lin and Ouyang [3] to measure the fossil-fuel subsidies than 5% of total energy consumption while all the sectors combined
scales for each sector during the 11th FYP (2006–2010) period, and account for more than 73% of total energy consumption each year. All
it also provides in-depth analyses on subsidies according to energy these sectors except “residential consumption” and “transport, storage
types. Second, it presents energy-savings and CO2 emissions- and post” are energy-intensive sectors (industries). In addition, the
reduction attributable to subsidies removal for each sector using proportion of China’s residents’ energy consumption in total energy
the price-gap approaches. Unlike Lin and Ouyang [3], which consumption is about 10%, which is much lower than in developed
focused on fossil-fuel subsidies scales, this paper pays more countries. For example, EU household energy consumption has
attention to the impacts of subsidies on energy consumption and exceeded that of industry since 1990s while the U.S. household
CO2 emissions. consumes more than 30% of the total energy consumption [33]. This
Research on the impacts of energy price distortions on energy suggests that the ratio of “residential consumption” in total energy
conservation and emissions abatement in different sectors in consumption will increase along with economic development.
China can provide further evidences for energy price reform. It Fig. 1 shows the structure of energy consumption of each sector
can also present a basis for designing a reasonable and fair energy during the 11th FYP. It shows that coal consumption accounts for more
policy for different sectors. These are greatly significant for policy than 50% of total energy consumption in 15 sectors. The “electricity,
making with respect to energy consumption control planning, gas and water supply” sector has the highest ratio at 98.71% while
energy conservation and emissions abatement targets, as well as “transport, storage and post” sector has the lowest ratio at 2.48%. In
price reforms for different energy types. addition, the ratio of natural gas to total energy consumption in all
The remaining parts of this article are organized as follows. sectors is very small, which indicates a huge room for energy
Section 2 briefly discusses energy consumption and CO2 emissions substitution. Although the substitution processes are costly, it will
of each sector during the 11th FYP period. Section 3 presents the benefit the environment.
method and data. The empirical results and discussion are pro-
vided in Section 4. Section 5 focuses on the conclusion and policy 2
Some subsectors have small amounts of energy consumption and CO2
implications. emissions, which are disadvantage for data processing.
 K. Li, B. Lin / Renewable and Sustainable Energy Reviews 42 (2015) 952–962 955

Fig. 1. Chinese energy consumption structure for sectors.

Source: China Energy Statistical Yearbook (CESY).

Fig. 2. CO2 emissions from energy consumption for each sector.

Source: Authous calculated by data from CESY.

2.2. Carbon emissions of each sector storage and post” sector, the contribution of coal consumption to
CO2 emissions is higher than 30% for all sectors, reaching over 90%
Using energy consumption data and the reference method for the “electricity, gas and water supply” sector. In addition, the
proposed by IPCC [34], we can calculate CO2 emissions for each contribution of diesel oil consumption to CO2 emissions is about
sector. The specification of the parameters in the reference method 55% for the “transport, storage and post” sector. It is worth noting
can be seen in Table A.2 in the Appendix. that the “basic metals and fabricated metal” sector, whose CO2
CO2 emissions are affected by both energy consumption and its emissions is mainly from coke consumption, contributes about
structure. As a result the characteristic of CO2 emissions is different 55.19% of total CO2 emissions.
from that of energy consumption across sectors. For example, the
“electricity, gas and water supply” sector accounts for 7.5% of total
energy consumption but it emits 33.27% of total CO2 emissions 3. Methodology and data
(Fig. 2). The main reason is that this sector consumed 49.01% of total
coal consumption during the period of the11th FYP. 3.1. Impacts of energy subsidy removal
In terms of the source of CO2 emissions, coal and diesel oil
consumption are the major contributors to CO2 emissions but their For convenience and data availability consideration, the “price-
contributions vary across sectors (Fig. 3). Except for the “transport, gap” approach with the constant-elasticity inverse demand
956 K. Li, B. Lin / Renewable and Sustainable Energy Reviews 42 (2015) 952–962

Fig. 3. CO2 emissions from different energy types by sectors. Note: “Others” including CO2 emission from consumption of coke, crude oil, gasoline, kerosene, fuel oil and
natural gas.
Source: Authous calculated by data from CESY.

function is adopted to calculate fossil-fuel subsidies for different 2006–2010 period. Due to lack of adequate data, meaningful sector-
sectors [19]. This approach is suitable when there is limited data. price for energy types cannot be computed. Therefore, this paper
The basic model is described as follow: adopts the same values of energy price, and it is present in Table 2.
Q ¼ Pε ð1Þ We provide some important explanations on Table 2. First, all
prices are given as the current prices, but they do not affect the
So, we can induce that: calculation results of formulae (3) and (4). Even though we can
ln Q 1 ¼ ε  ðln P 1  ln P 0 Þ þ ln Q 0 ð2Þ transform them into constant prices by the Producer Price Index
(PPI) for different energy industries, the transformation informa-
The impact on consumption is established by the formula: tion could be offset by ðln P 1  ln P 0 Þ in formula (2). Second, the
ΔQ ¼ Q 0  Q 1 ð3Þ reference prices are weighted average prices, in which the factors
are reference prices of domestic and import production while the
where ε is the long-run price elasticity of energy demand, P 0 and
weights are energy products from domestic and import produc-
Q 0 are the energy price and consumption respectively before the
tion. It is noteworthy that the reference price for fuel oil in Table 2
removal of price gap; P 1 and Q 1 are the energy price and
refers to import products because there are no subsidies for
consumption respectrively after the removal of the price gap. So
domestic fuel oil production. This means that we assume that
ΔQ is the decreased energy consumption when price gap has been
each sector has the same ratio of energy consumption from
removed.
domestic and import production. We believe the above data
Impacts of energy subsidy on CO2 emissions can be described
processing procedure will not have a significant impact on the
as Refs. [3,27]:
estimate results. One reason for this is that the imports of thermal
ΔCO2 ¼ ∑ ΔQ i  CO2 EF i ð4Þ coal, gasoline and diesel fuel are very small. Another reason is that
i
although the import of jet fuel and fuel oil products is large, their
subsidies are only for the transport sector. Therefore it only has
Here, ΔCO2 stands for the reduction of emissions; i stands for influences on the “transport, storage and post” sector.
the ith fuel; CO2 EF i indicates the CO2 emission coefficient of the In formula (2), we need the price elasticities of the different
ith fuel (Table A.2). fuels. Lin and Jiang [27] estimated them using econometric
Based on the “price-gap” approach, formulae (3) and (4) models, and its time period covered 2006–2010. Thus, this paper
provide the methods for calculating energy savings and CO2 adopts them, and they are present in Table 3.
emissions reduction respectively after the removal of subsidies
(hereinafter referred as energy savings and emissions reduction,
respectively). Furthermore, we define energy-saving rate as the 4. Results and discussion
ratio of energy savings to total energy consumption, and
emissions-reduction rate as the ratio of emissions reduction to 4.1. The effects of energy subsidy removal on energy consumption by
the total CO2 emissions. sectors

3.2. Data According to formula (3) and price information in section 3.2,
we obtain energy savings after subsidies removal. Table 4 shows
The most difficult aspect of estimating energy subsidies is energy savings for the different energy types and sectors during
getting reference prices and subsidized end-use prices for fossil the 11th FYP (2006–2010). After the removal of fossil-fuel sub-
fuels. Fortunately, Lin and Ouyang [3] provided the above sidies, the aggregate energy-savings are 615.54 Mtce, about 3.766%
price information for the different energy types in China for the of all sector’s energy consumption during 2006–2010 period. The
 K. Li, B. Lin / Renewable and Sustainable Energy Reviews 42 (2015) 952–962 957

Table 2
Price information for energy types.
Source: Authors calculate according to the data given by Lin and Ouyang [3].

2006 2007 2008 2009 2010

Power coal
Consumer price (CNY/t) 397.76 463.54 634.42 622.33 712.72
Reference price (CNY/t) 440.30 522.83 752.99 676.05 810.96
Oil products
Gasoline
Consumer price (CNY/t) 6505.67 6667.59 7467.36 7529.83 8596.44
Reference price (CNY/t) 7114.31 7538.03 8648.14 7583.63 8898.73
Diesel
Consumer price (CNY/t) 5171.09 5479.18 6503.25 6337.17 7335.92
Reference price (CNY/t) 6557.03 6845.72 8771.54 6389.66 7695.79
Jet fuel
Consumer price (CNY/t) 5820.00 6020.83 7583.64 5660.00 6069.67
Reference price (CNY/t) 7678.84 7441.48 9771.42 6709.81 8127.18
Fuel oil
Consumer price (CNY/t) 3331.17 3469.56 4096.56 3700.06 4573.39
Reference price (CNY/t) 4126.35 4296.46 5264.27 4568.61 5729.90
Natural gas
Industry
Consumer price (CNY/m3) 2.88 2.47 2.61 2.74 2.88
Reference price (CNY/m3) 5.51 5.75 4.95 5.33 5.51
Resident
Consumer price (CNY/m3) 2.47 2.15 2.28 2.42 2.47
Reference price (CNY/m3) 5.51 5.75 4.95 5.33 5.51
Public
Consumer price (CNY/m3) 2.68 2.09 2.39 2.56 2.68
Reference price (CNY/m3) 5.51 5.75 4.95 5.33 5.51
Electricity
Resident
Consumer price (CNY/MW h) 512.09 501.04 498.87 494.23 512.09
Reference price (CNY/MW h) 1131.92 1030.00 1095.92 1072.91 1131.92

Table 3
Price elasticity of demand. than other energy types, and the energy savings rates are 35.3%
Source: Lin and Jiang [27]. and 30.9%, respectively3. It is aforementioned that fuel oil sub-
sidies are only for imports; however, its consumption is much
Products and The price Products and The price
sectors elasticity sectors elasticity
more than domestic production. In 2009, its import consumption
was 5.63 times its domestic consumption. Therefore, removing
Coal Natural gas subsidies on fuel oil will have a significant impact on its
Power  0.529 Industry  0.584 consumption.
Oil products Resident  0.31
In 2009, oil prices decline as well as oil pricing mechanism
Industry  0.193 Electricity
Transport  0.269 Industry  0.600 reform reduced subsidies for oil products. Correspondingly, its
Resident  0.23 Resident  0.158 energy-saving rates also declined. Take fuel oil for example, its
energy-saving rate plunged from 36.7% in 2008 to 19.1% in 2009.
It is worth noting that a high value of energy-saving rate for
fuel oil in Fig. 4 does not conflict with a low value of energy-saving
“electricity, gas and water supply” sector has the biggest potential rate for oil products in Table 3 (3.2%). The reason is twofold. First,
for energy-savings, amounting to 343.38 Mtce. Besides, some the energy-saving rates for gasoline, kerosene and diesel fuel are
sectors, including “transport, storage and post”, “chemicals and very small (as shown in Fig. 4). Second, the proportion of fuel oil
chemical products”, “residential consumption”, “mining and quar- consumption in total oil consumption is small (about 14.8% in
rying”, and “other non-metallic mineral” have substantial poten- 2006–2010). The above factors reduce the energy-saving rate for
tial for energy-savings. From the point of view of energy-saving oil products.
rates, the top three sectors are “transport, storage and post”, Fig. 5 shows the energy-saving rates (all sectors’ energy-saving
“electrical and optical equipment” and “electricity, gas and water rates can be seen in Table A.3) of some sectors. In 2007–2008, the
supply” and their potential energy-saving rates are 8.06%, 7.02% energy-saving rates of all sectors except the “electricity, heat and
and 6.71%, respectively. water supply industry” sector decreased while the energy-saving
For energy types, Table 4 indicates that the highest energy-savings rates of all sectors dropped significantly in 2008–2009. From the
rate after the removal of subsides is in natural gas, and stands at foregoing analysis, the main reason for this is the changes in the
30.91%. From Table 2, it can be seen that the subsidized end-use prices oil subsidies. This conclusion confirms the result of Lin and Ouyang
are about 36–53% of reference prices during 2006–2010 period. In [3] from sectoral perspective.
other words, the subsidy rate of natural gas is very high. The main
reason is that the government takes great measures to substitute gas 3
This conclusion does not conflict with Lin and Ouyang [3], because we
for coal and oil in order to optimize energy consumption structure. estimate energy-saving rates rather than economic values of subsidies. In fact, the
Fig. 4 investigates potential energy-savings by energy type. Fuel economic values of subsidies for diesel fuel much higher than that for fuel oil due
oil and natural gas have much higher potential energy-saving rates to its huge consumption.
958 K. Li, B. Lin / Renewable and Sustainable Energy Reviews 42 (2015) 952–962

Table 4
Potential Energy saving after removal of fossil-fuel subsidies during the period of 11th FYP (104 tce).

Sector Product Total Shared

Coala Oilb Gas Electricityc

Agriculture, hunting, forestry and fishing – 293.8 – – 293.8 1.795

Mining and quarrying – 200.5 2,360.0 – 2,560.5 2.728
Food, beverages and tobacco – 119.1 86.5 – 205.6 1.364
Textiles and textile products – 120.8 28.9 – 149.7 1.212
Leather, leather and footwear – 29.2 1.0 – 30.2 4.852
Wood and products of wood and cork – 11.5 10.4 – 21.9 1.002
Pulp, paper, paper, printing and publishing – 95.4 32.9 – 128.3 0.820
Coke, refined petroleum and nuclear fuel – 1,144.3 608.5 – 1,752.8 0.526
Chemicals and chemical products – 967.2 4,242.8 – 5,210.0 5.068
Rubber and plastics – 90.2 36.6 – 126.8 2.983
Other non-metallic mineral – 1,222.8 801.9 – 2,024.7 2.244
Basic metals and fabricated metal – 558.6 534.2 – 1,092.8 0.526
Machinery, Nec – 62.5 198.7 – 261.3 3.087
Electrical and optical equipment – 125.6 189.7 – 315.2 7.017
Transport equipment – 54.1 212.9 – 267.0 4.671
Manufacturing, Nec; recycling – 10.5 2.4 – 12.9 0.568
Electricity, gas and water supply 30,744.6 1,299.6 2,293.3 – 34,337.5 6.709
Construction – 185.0 30.9 – 216.0 2.840
Wholesale, retail trade and hotel, restaurants – 84.0 434.7 – 518.7 4.624
Transport, storage and post – 6,814.4 1,576.6 – 8,391.0 8.057
Others – 390.6 478.7 – 869.3 3.348
Residential consumption – – 2,461.8 303.4 2,765.2 4.712
Aggregate 30,744.6 13,879.7 16,623.5 303.4 61,551.3
Shared 2.742 3.169 30.906 1.412 3.766

Note:
a
Subsidies only for thermal coal consumption.
b
Oil products, including crude oil, gasoline, kerosene, diesel and fuel oil.
c
Subsidies only for residential electricity consumption.
d
Share of energy savings in total energy consumption in 11th FYP (%); for comparability, each sector’s energy consumption is calculated by different energy types
according to “conversion factors from physical units to coal equivalent” in CESY, so it is different from “total energy consumption by sector” in CESY.

Fig. 4. Share of potential energy saving after removal of fossil-fuel subsidies by types (%). Note: There are no energy-saving rates for coke coal and crude oil due to no
subsides.

4.2. The effects of energy subsidy removal on CO2 emissions by The emissions-reduction rate is relevant to both the scale and
sectors structure of energy-savings. Therefore the conclusions of Tables 4 and
5 are not identical, but highly correlated. The potential CO2 emissions
Based on the sectoral energy-savings after the removal of reduction after subsidies removal was about 2.85% of the aggregate
fossil-fuel subsidies, we calculate the potential CO2 emissions CO2 emissions during 2006–2010. The top three sectors with the
reduction using formula (4). The results are shown in Table 5. highest potential CO2 emissions-reduction rates are “transport, storage
 K. Li, B. Lin / Renewable and Sustainable Energy Reviews 42 (2015) 952–962 959

Fig. 5. Share of potential energy savings in total energy consumption by sectors (%).

Table 5
Share of potential CO2 emissions reduction in total CO2 reduction by sectors (%).

Sectors 2006 2007 2008 2009 2010 Aggregate

Agriculture, hunting, forestry and fishing 2.550 2.332 2.953 0.096 0.506 1.682
Mining and quarrying 0.408 0.423 0.511 0.227 0.268 0.360
Food, beverages and tobacco 0.912 0.936 0.910 0.346 0.513 0.719
Textiles and textile products 1.131 1.183 1.173 0.348 0.533 0.888
Leather, leather and footwear 5.484 6.031 5.934 1.872 2.744 4.547
Wood and products of wood and cork 0.603 0.657 0.878 0.112 0.239 0.498
Pulp, paper, paper, printing and publishing 0.681 0.722 0.671 0.251 0.353 0.529
Coke, refined petroleum and nuclear fuel 0.372 0.367 0.271 0.111 0.594 0.350
Chemicals and chemical products 1.427 1.549 1.134 0.560 1.402 1.207
Rubber and plastics 2.918 3.139 2.679 0.884 1.273 2.133
Other non-metallic mineral 1.652 1.811 1.410 0.553 0.799 1.219
Basic metals and fabricated metal 0.309 0.320 0.253 0.082 0.111 0.207
Machinery, Nec 0.858 0.933 1.266 0.397 0.520 0.774
Electrical and optical equipment 5.441 5.864 5.266 1.400 1.985 3.726
Transport equipment 1.196 1.321 1.880 0.634 0.942 1.190
Manufacturing, Nec; recycling 0.511 0.577 0.742 0.181 0.087 0.425
Electricity, gas and water supply 5.661 6.454 8.789 4.333 6.655 6.375
Construction 2.769 3.529 4.040 0.697 1.305 2.392
Wholesale, retail trade and hotel, restaurants 1.317 1.599 1.275 0.455 0.700 1.052
Transport, storage and post 9.299 10.381 9.053 2.533 4.717 7.064
Others 2.137 2.270 3.030 0.322 0.796 1.684
Residential consumption 0.207 0.342 0.341 0.354 0.436 0.337
Aggregate 2.801 3.212 3.837 1.733 2.747 2.850

Fig. 6. Share of potential CO2 emissions reduction after removal of fossil-fuel subsidies by types (%). Note: There are no emission-reduction rates for coke coal and crude oil.
960 K. Li, B. Lin / Renewable and Sustainable Energy Reviews 42 (2015) 952–962

and post”, “leather, leather and footwear” and “electricity, gas and the scales of energy conservation and emissions abatement would be
water supply”. Even though the energy-saving potential of “leather, completely or partially offset, or called the energy “rebound effects”
leather and footwear” sector is low, leading to a small emissions [35], while fossil-fuel subsidies are one of important factors on
reduction (about 1.77 million ton of CO2 emissions), it emissions- rebound effects [31]. Technological progress enhances energy effi-
reduction rate is 4.547%. The “electrical and optical equipment” sector, ciency, and further reduces its price, which would strengthen rebound
which has huge energy-savings potential (Table 4), also has a high effect because of the effect of fossil-fuel subsidies. Hence, it is risky to
emissions-reduction rate (3.726%). rely entirely on technological progress to addressing energy consump-
Similar to Figs. 4 and 6, indicates that fuel oil and natural gas tion and climate change [2,36]. In other words, the effect of innovative
have much higher emissions-reduction rates than other energy energy systems on energy conservation and CO2 emission abatement
types, and the rates for oil products declined sharply in 2009. is closely related to energy pricing reform. For example, Diaz Arias and
van Beers [6] indicated that reducing subsidies and hence increasing
the electricity price of industrial electricity users provided a strong
5. Conclusions and policy suggestions incentive to invest in renewable energy technologies, in particular
solar technologies. Therefore, energy pricing reform is necessary to
China government still largely applies the cost plus pricing ensure the effectiveness of technology progress in energy conserva-
mechanism for the energy sector. Government administrative energy tion, or eliminating fossil-fuel subsidies would make energy prices
pricing results in substantial energy subsidies. We assume the final reflecting costs, which will weaken rebound effect and help energy
goal of China’s energy price reform is that energy price should play a conservation and CO2 emission abatement by energy systems
key role in energy-saving and emission-reduction. This measure is a innovation.
core economic policy for energy-saving and emission-reduction, and is Second, although energy subsidies policy is designed for energy
required for the ongoing air pollution clean-up. It is well understood consumption by energy types and not by sectors (except for
that the main reason for energy market distortions is the existence of energy subsidies on thermal coal consumption, which is for the
energy price subsidies. Based on previous literatures, this paper adopts power generation industry), it has various impacts across sectors
a “price-gap” approach to estimate the impacts of subsidies removal due to the difference in energy consumption structure of sectors.
on energy consumption and CO2 emissions for 22 sectors in China in Therefore, energy price reform will have various impacts across
2006–2010 (or during the 11th FYP). sectors. For example, thermal coal price reform will affect the
The empirical results indicate that if China had removed fossil-fuel “electricity, gas and water supply” sector while oil price reform
subsidies in the 11th FYP, energy consumption and CO2 emissions will mainly affect the “transport, storage and post” sector. Based
would have declined by 3.77% and 2.85%, respectively. After the on the above analysis, we suggest that when introducing energy
removal of fossil-fuel subsidies, the “transport, storage and post”, price reform for different energy types, more attention should be
“electrical and optical equipment” and “electricity, gas and water paid to the stability and development of related industries.
supply” sectors have much higher energy-saving rates than other Third, at present, the government introduces energy price
sectors while the “transport, storage and post”, “leather, leather and reform without considering the priorities among energy types,
footwear” and “electricity, gas and water supply” sectors have much while placing more attention to the actual conditions. Although
higher emissions-reduction rates than other sectors. these are very important, we suggest that policy-makers should
Energy price reform has various impacts on different energy types give priority to price reform programs for fuel oil and natural gas
due to various subsidies rate. Therefore, it also has different impacts on ahead of other energy types because both can produce significant
energy-savings and emissions-reduction by energy types. The results result in terms of energy-savings and emission-reduction.
show that fuel oil and natural gas are sensitive to subsidies. In other
words, their consumption scale is large, and eliminating their subsidies
will substantially reduce CO2 emissions.
This paper not only extends the existing literatures, but also Acknowledgements
presents some valuable understanding of China’s energy price
reform. Some policy suggestions are presented as follow. The paper is supported by Newhuadu Business School Research
First, the existence of fossil-fuel subsidies promotes excessive Fund (no. G-1311-19436), the China Sustainable Energy Program
energy consumption and CO2 emissions. We believe this is one of (no. G-1404-20905), Ministry of Education (Grant no. 10JBG013),
the important reasons for the declining rate of energy intensity as it National Natural Science Foundation of China (no. 71173074) and
was lower than the expected target during the 11th FYP period China Postdoctoral Science Foundation (no. 2014M560527).
(19.06%o20%). More importantly, China has taken energy technology
progress as a priority measure for energy conservation, and it has
invested substantially in technical reformation projects such as the
“combined heat and power production”. However, technological Appendix
progress not only improves energy efficiency, but also promotes
economic growth leading to higher energy demand, which means See Tables A1–A3.

Table A.1
Sector integration.

Sector integrating Industries in CESY

Agriculture, hunting, forestry and fishing Agriculture, forestry, animal husbandry, fishery and water conservancy
Mining and quarrying Mining and quarrying
Food, beverages and tobacco Processing of food from agricultural products
Manufacture of foods
Manufacture of beverages
Manufacture of tobacco
Textiles and textile products Manufacture of textile
Manufacture of textile wearing apparel, footwear, and caps
 K. Li, B. Lin / Renewable and Sustainable Energy Reviews 42 (2015) 952–962 961

Table A.1 (continued )

Sector integrating Industries in CESY

Leather, leather and footwear Manufacture of leather, fur, feather and related products
Wood and products of wood an cork Processing of timber, manufacture of wood, bamboo, rattan, palm, and straw products
Manufacture of furniture
Pulp, paper, paper, printing and publishing Manufacture of paper and paper products
Printing, reproduction of recording media
Coke, refined petroleum and nuclear fuel Processing of Petroleum, Coking, Processing of Nuclear Fuel
Chemicals and chemical products Manufacture of raw chemical materials and chemical products
Manufacture of medicines
Manufacture of chemical fibers
Rubber and plastics Manufacture of rubber
Manufacture of plastics
Other non-metallic mineral Manufacture of non-metallic mineral products
Basic metals and fabricated metal Smelting and pressing of ferrous metals
Smelting and pressing of non-ferrous metals
Manufacture of metal products
Machinery, Nec Manufacture of general purpose machinery
Manufacture of special purpose machinery
Electrical and optical equipment Manufacture of electrical machinery and equipment
Manufacture of communication equipment, computers and other electronic equipment
Manufacture of measuring instruments and machinery for cultural activity and office work
Transport equipment Manufacture of transport equipment
Manufacturing, Nec; recycling Manufacture of artwork and other manufacturing
Recycling and disposal of waste
Electricity, gas and water supply Electric power, gas and water production and supply
Construction Construction
Wholesale, retail trade and hotel, restaurants Wholesale, retail trade and hotel, restaurants
Transport, storage and post Transport, storage and post
Others Others

Note: CESY stands for China Energy Statistical Yearbook.

Table A.2
Parameters for estimate CO2 emissions in China.

Energy types Average low calorific value IPCC (2006) emissions factor Carbon oxidation Conversion factors from physical unit
factor into coal equivalent

Value Unit Value (kg/GJ) Value Unit

Raw coal
Soft coal 20,908 kJ/kg 25.8 0.99 0.7143 kgce/kg
Anthracite 26.8 1
Weighted average 26.0 1
Coke 28,435 25.8 1 0.9714
Crude oil 41,816 20.0 1 1.4286
Gasoline 43,070 20.2 1 1.4714
Kerosene 43,070 19.5 1 1.4714
Diesel fuel 42,652 20.2 1 1.4571
Fuel Oil 41,816 21.1 1 1.4286
Natural gas 38,931 kJ/m3 15.3 1 1.3300 kgce/m3

Note: There is no emissions factor for raw coal in IPCC [34]. For China, soft coal accounts for about 80% of total coal production, while anthracite is about 20%, and this proportion
changed very little over the years. So, we calculate emissions factor for raw coal by weighted average of emissions factor for soft coal and anthracite, respectively [37].

Table A.3
Share of potential energy savings in total energy consumption by sectors (%).

Sectors 2006 2007 2008 2009 2010

Agriculture, hunting, forestry and fishing 2.713 2.488 3.161 0.102 0.541
Mining and quarrying 2.461 2.965 2.840 2.707 2.655
Food, beverages and tobacco 1.393 1.531 1.558 1.035 1.311
Textiles and textile products 1.382 1.481 1.584 0.659 0.901
Leather, leather and footwear 5.930 6.483 6.252 2.139 2.874
Wood and products of wood and cork 0.856 0.983 1.517 0.823 0.831
Pulp, paper, paper, printing and publishing 0.912 1.007 0.989 0.506 0.710
Coke, refined petroleum and nuclear fuel 0.520 0.569 0.433 0.267 0.802
Chemicals and chemical products 5.133 6.537 4.801 4.003 4.923
Rubber and plastics 3.542 3.954 3.483 1.832 2.330
Other non-metallic mineral 2.492 2.952 2.534 1.566 1.806
Basic metals and fabricated metal 0.605 0.689 0.592 0.372 0.420
Machinery, Nec 2.404 3.094 3.942 2.824 3.143
Electrical and optical equipment 8.196 9.725 8.087 4.350 5.922
Transport equipment 3.463 4.447 5.670 4.673 4.891
Manufacturing, Nec; recycling 0.616 0.704 0.871 0.247 0.388
Electricity, gas and water supply 5.857 6.798 8.991 4.746 7.137
962 K. Li, B. Lin / Renewable and Sustainable Energy Reviews 42 (2015) 952–962

Table A.3 (continued )

Sectors 2006 2007 2008 2009 2010

Construction 3.348 4.322 4.448 0.951 1.578

Wholesale, retail trade and hotel, restaurants 3.905 5.426 4.502 4.388 4.839
Transport, storage and post 9.886 11.040 9.908 4.035 6.126
Others 3.293 3.996 4.664 2.225 2.670
Residential consumption 3.233 4.860 4.739 4.868 5.614
Aggregate 3.573 4.259 4.681 2.661 3.720

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