China's US$21b fossil fuel subsidy

PUBLISHED : Tuesday, 18 October, 2011, 12:00am
UPDATED : Tuesday, 18 October, 2011, 12:00am


China doled out US$21 billion of subsidies on pollution-prone fossil fuel consumption last year, hampering efforts to cut global greenhouse gas emissions, according to the International Energy Agency (IEA).

The subsidies increased 29 per cent from the US$16.52 billion dished out in 2009, but were lower than the US$43.9 billion in 2008, when energy prices broke records.

By segments, US$11.5 billion, or more than half of the US$21.3 billion subsidies, went to electricity, compared with US$7.77 billion to oil and US$2.01 billion to coal production and consumption.

The IEA, an inter-governmental policy adviser to 28 mostly developed nations, said in its World Energy Outlook report released just over a week ago that China's financial support to users of coal, oil, gas and electricity was the fifth-largest, after Iran's US$81 billion, Saudi Arabia's US$43.5 billion, Russia's US$39.2 billion and India's US$22.3 billion.

Support usually took the form of setting energy prices at levels below international benchmark prices.

The biggest subsidisers of energy use are either countries that are large oil and gas producers, such as Middle Eastern states, or those with a big consumer market, like populous China and India. In developed nations, where consumers can better afford international energy prices, energy subsidies are usually given to producers in the form of tax and other financial incentives.

The IEA said subsidies might induce greater production or use of fossil fuels than if they did not exist, as price and cost signals were key to changing consumption and production behaviour. Burning fossil fuels releases greenhouse gases such as carbon dioxide and nitrous oxide.

China, as part of the G-20 group of developing nations, pledged in 2009 to 'rationalise and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption', the agency said.

'Removing fossil fuel subsidies in emerging economies and developing countries could lead to a reduction in global greenhouse gases emissions by 10 per cent by 2050 compared to the baseline [business-as-usual scenario], and by as much as 30 per cent in some countries,' said a statement by the 34-nation Organisation for Economic Co-operation and Development, which established the IEA.

The OECD estimated that financial support given by its mostly developed member nations to fossil fuel producers and consumers amounted to between US$45 billion and US$75 billion annually in the five years to last year. This was dwarfed by the US$409 billion subsidies provided by developing and emerging nations last year, and US$299 billion in 2009.

It also estimated that removing energy subsidies in India would increase household income (net of inflation) by 2.5 per cent a year, and by 0.7 per cent a year in China, as a result of greater efficiency in using energy and the reallocation of resources into other economic activities.

Petroleum fuel consumption on the mainland is subsidised by state-controlled oil refiners such as PetroChina and China Petroleum & Chemical (Sinopec), whose fuel retail prices are set by the central government, while their crude oil prices are linked to international benchmarks.

They are prone to making losses when crude prices surpass US$100 a barrel, when Beijing usually fails to lift retail fuel prices by as much as crude prices to tame inflation and to protect less well-off diesel-using rural farming and fishing communities.

Beijing has also shielded electricity consumers, who comprise essentially the mainland's entire 1.3 billion people, from the full brunt of coal price increases.

This was particularly prominent in 2008 and in the first half of this year, when coal prices soared but retail power prices were frozen, plunging the mostly state-backed electricity generators and distributors into the red to the tune of tens of billions of yuan altogether.

Natural gas users have also been subsidised by gas producers, as Beijing capped prices at about half those in developed nations. PetroChina and China National Offshore Oil Corporation are absorbing combined losses of more than 15 billion yuan (HK$18.19 billion) a year on imported gas via pipelines and ocean-going tankers.

However, at the end of 2008, Beijing took small measures to reform its petroleum fuel pricing system, so that domestic fuel price movements are a bit more closely linked to international crude prices.

It has also enhanced the system's transparency and hence predictability of the producers' profits, as huge oil refining losses in the past had weakened refiners' financial health and ability to raise funds to build new refiners and meet demand.

In a research report, Sanford Bernstein analysts Neil Beveridge and Lou Ying said they expected Beijing to launch a new round of reform to the pricing system within six months, which will give greater visibility of refining profit margins. This will probably involve the shortening of the time lag between price adjustments to 10 working days from 22 days, and giving refiners more leeway in setting prices, within state-guided pricing.


Estimated subsidies, in US dollars, in fossil fuel usage in 2020 if there is no further reform, the World Energy Outlook report says