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China’s Fossil Fuel Subsidies, and Means to Reform.

September 29, 2010

The massive expansion of energy use in China has obvious implications from a global energy and greenhouse gas security perspective.  For this reason, this blog has examined a number of issues in relation to China’s energy consumption and production.

The extent to which subsidies are promoting fossil fuels in China’s energy economy, which is so dominated by coal combustion and oil, is a critical isssue.  A recent effort by the Global Subsidies Initiative to understand the mechanics of these subsidies is informative and discussed below.

The Global Subsidies Initiative quotes the International Energy Agency’s 2008 World Energy Outlook of $400bn per annum subsidy to fossil fuels in non-OECD including $40bn in China.  In fact the IEA 2010 World Energy Outlook  specifies the existence of over $550bn in non-OECD subsidies in 2008. 

The chart below demonstrates that oil receives substantially higher absolute subsidy than coal in China.

Fossil Fuel Subsidies – by Economy and as a Share of GDP, 2008

Source: International Energy Agency

Energy subsidies were addressed at the Montreal G20 summit in Montreal.  The IEA 2010 flagship report the ‘World Energy Outlook’ will be published in November and will have a special report on the subject.

In an environment in which even China’s subsidy of renewable energy is being challenged as illegal under WTO provisions – by the United Steelworkers Union in the United States – (however curious!) – energy subsidies in China come under renewed examination.

Primary Energy Production in China 1980-2006

Source: Lawrence Berkeley National Laboratory China Energy Group 2009

 In a previous post on this blog we have examined the curious potential for a quasi-‘rebound’ effect associated with the subsidy of diesel fuel in China, whereby the upward  price effects on world oil prices of artificially stimulated demand in China may reduce consumption and increase efficiency elsewhere.

The Global Subsidies Initiative was initiated in 2005 and has attained new relevence with the 2009 and 2010 OECD and G20 ambition to reform and reduce fossil fuel subsidies. 

Within the Global Subsidies Initiative programme ‘Untold Billions: Fossil-Fuel Subsidies, their Impacts and the Path to Reform’ there are a number of reports on the methodologies, calculation efforts, and status of fossil fuel subsidies. 

In one of the reports, Mapping the Characteristics of Producer Subsidies: A Review of Pilot Country Studies’ published in August 2010, the extent and characteristics of fossil fuel subsidies in China is asssessed as a case study. 

The case study attempts to understand data quality and sources, the various types of subsidies across China’s energy economy, and extent of their importance.

The authors reveal aspects of the political economy of energy in China which conspire to hinder attempts to cohesively identify and implement opportunities at subsidy reform:

  • Paucity of data;
  • Quality of data;
  • Government ownership of fossil fuel enterprises;
  • Favourable credit terms and other subsidies to power generation and other infrastructure including coal rail haulage and electricity transmission;
  • Royalty waivers;
  • Geopolitical energy acquisition diplomacy;
  • Tax expenditure; and
  • Price controls

Within the 2010 Lawrence Berkeley National Laboratory’s China Energy Group’s ‘Energy Primer’, published in November 2009, the author identifies that at least from 2000 under the “10th and 11th Five Year Plan for the Development of the Electric Power Industry” as well as the “11th Five-Year Plan for the Development of Energy”, there are significant energy market reform ambitions.  Market and electricity pricing reform, tariff promotion of renewable energy, re-constitution of coal production and transport, and energy efficiency have all received significant prominence.

Attempting to reform the pattern of incentives is no easy task – particularly in a context in which, as the authors point out, some state-owned fossil fuel energy companies are nominally ‘senior’ to the Government departments which are deemed to be their regulators. 

As the Global Subsides Initiative case study infers, it is a real challenge to get to the bottom of the extent and nature of the myriad subsidies to fossil fuels that exist in China.

The forthcoming 2010 World Energy Outlook in November will again put the spotlight on the value of correcting these market subsidies.

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2 Comments leave one →
  1. October 5, 2010 11:34 am

    Editor: Thanks to IISD staff for corrections to this article.

  2. October 30, 2010 3:54 am

    In the light of this, the recent Obama administration decision to investigate China’s renewable energy subsidies looks like a sick joke!

    The petition by United Steelworkers completely misses the fact that global subsidies for renewable energy ($27Bn according to GSI) are vastly outweighed by subsidies for fossil fuels (£700Bn according to IEA, or 1% of global GDP.

    Not to mention the vast subsidies that went to the fossil fuel industry during its development (like so many other industries today – nuclear, arms, Boeing).

    To tackle global energy security and climate change, as well as clean technology transfer, we must urgently call for an agreement on removal of fossil fuel subsidies.

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