FOSSIL ENERGY SUBSIDIES REFORM AND THE

SUSTAINABILITY OF CHINA’S ENERGY SYSTEM

Li Hong (Corresponding Author)

School of Economics, Peking University, Haidian District, 5 Yi HeYuan AV., Beijing, 100871, P.R.

China

Dong Liang (Corresponding Author)

National Institute for Environmental Studies (NIES), 16-2 Onogawa, Tsukuba-City, Ibaraki 305-8506,

Japan

Graduate School of Environmental Studies, Nagoya University, Furo-cho, Chikusa-ku, Nagoya City,

464-8601, Japan

Wang Di

Institute of Population Research, Peking University, Haidian District, 5 Yi HeYuan AV., Beijing, 100871,

P.R. China

Corresponding to:

lihongpku2012@163.com (Prof. Li Hong). Tel.: +86-1367-136-6001, 86-010-62755658; Fax:

86-010-62751460.

dong.liang@nies.go.jp (Mr Dong Liang). Tel.: +81-080-4090-2595; Fax: +81-029-850-2314.

Contact details for the lead author:

Name: Li Hong

Title: Professor

Organization: School of Economics, Peking University.

Address: Haidian District, 5 Yi HeYuan AV., Beijing, 100871, P.R. China

Phone/Fax/Email: Tel.: +86-1367-136-6001, 86-010-62755658; Fax: 86-010-62751460.

Abstract:

Sustainable development is big topic for China, which under rapid economic growth,

environment deterioration and resource depletion. And in this theme, energy system

sustainability is special important due to the role it plays in the national economy.

This paper focused on the interaction between energy subsidies policy and the

sustainability of energy system in China. With price-gap approach, subsidies scale

was calculated. The fossil energy subsidies scale in China was 535.01 billion CNY in

2006, 582.0 billion CNY in 2007 and 700.28 billion CNY in 2008 respectively. Based

on the triple-bottom line principle of sustainable development, assessment indicators

for the sustainability were established. Then a hybrid physical input and monetary

output model was constructed to simulate the effects of removing subsidies. Results

indicated that the subsidies reform would contribute to the improvement of the

sustainability in terms of money saving, energy saving and pollutants reduction.

However, in terms of societal well-being, proper policy implication needed to be

proposed.

Key words:

Fossil energy subsidies; Sustainability; HPIMO model; China

1 Introduction

“Sustainable development” (SD), which was defined best by the Brundtland

Commission, pursuit the development that “meets the needs of the present without

compromising the ability of future generations to meet their own needs”[1]. SD

focused on three-triple issues included economy, environment (energy) and society

(Figure 1). Energy is central to improved social and economic well-being, and is

indispensable to most industrial and commercial wealth generation. As a result,

enhance the sustainability of energy system is essential for SD [2, 3].

Figure 1 Triple Bottom Line of the sustainable development

Source: http://en.wikipedia.org/wiki/File:Triple_Bottom_Line_graphic.jpg

However, there is no doubt that energy consumption and efficiency, as well as

the sustainability of the energy system had become a gigantic topic for China’s

sustainable development. One the one hand, under rapid economic growth, China has

faced more and more apparent conflict between energy supply and demand, as well as

the related environmental problems. In 2007, China became the world’s largest CO2

emitter1 and in 2010, China overtook United States becoming the world largest

energy consumer, share 20.3% of total worldwide energy consumption2.

On the other hand, as human being’s socio-economic system became more and

more complex, different matters like energy, environment, economy and society are

more and more highly interacted. Multi energy and environmental problems in China

under rapid growth further enhanced the difficulty to realize SD (Figure 2). Therefore,

systematic thinking was needed to improve system sustainability.

1Source: BP Energy Statistics, 2008 2Source: BP Energy Statistics, 2011.

(a) China GDP growth from 1980 to 2010

Note：Year 2000 unchanged price

Data Source: World Bank

(b) China’s energy consumption from 1980 to 2010

Data Source: China Energy Statistic Yearbook

(c) China’s CO2 emissions and comparison with the world

Data Source: BP World Energy Statistics, 2011

(d) Comparison of energy consumption structure between

China and the world, 2010

Data Source: China Energy Statistic Yearbook; BP World

Energy Statistics, 2011

Figure 2 Multi energy and environmental problems in China under rapid growth

(a) GDP growth;（b）Surging energy consumption;（c）Increasing GHGs emissions;（d）

Unreasonable energy consumption structure

Energy subsidies reform was just a systematic measure to improve the

sustainability of the whole system. The energy subsidies policy was used as a major

method by governments worldwide, through substantial financial investment in the

field of energy subsidies, to improve and promote economic development, technology

innovation, energy consumption structure and social stability. According to the GSI

(The Global Subsidies Initiative)’s statistics, the world’s annual energy subsidies

amounted to 500 billion US dollars, accounting for 1% of the world’s GDP. In which,

subsidies for the fossil-fuel are much more than the renewable energy (as shown in

0

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the Table 1). However, worldwide researches proved that converse to its initial

intention. Subsidies caused a series of negative on the economy, energy, environment

and society[4-13]. For example, huge and ever-increasing subsidies stimulated

fossil-fuel’s excessive consumption, resulting in huge emissions of CO2 and other

greenhouse gases (as shown in the Table 2): global CO2 emission increases 1.82 times

from 1980 to 2010, while its emission in China increases5.7 times during this period.

Also it decreased the energy efficiency [5, 6, 9, 13, 14] and enlarged the societal

inequity [11, 15-18]. As a result, multi studies paid attention to the subsidies reform,

and considering the socio-economic-environmental system as a network, subsidies

reform would be beneficial to the sustainability of the system[9, 10, 19]. At the same

time, in order to realize the energy system’s sustainability further, formulating

reasonable renewable energy subsidies adapting to fossil-fuel reform is also a policy

priority of governments [20, 21]. In the international environment and the practical

needs of China’s sustainable development, an energy subsidies reform with

consideration of system sustainability is becoming a neglected problem of Chinese

government to build its sustainable energy system.

Table 1 Energy Subsidies Scale of the World (Unit: USD Billion, Nominal)

Category 2007 2008 2009 2010

Fossil fuels 342 554 300 409

Oil 186 285 122 193

Gas 74 135 85 91

Coal 0 4 5 3

Electricity* 81 130 88 122

Renewables 39 44 60 66

Biofuels 13 18 21 22

Electricity 26 26 39 44

Sources: IEA (2012) World Energy Outlook 2011

*Fossil-fuel consumption subsidies designated as “electricity” represent subsidies that result from the under-pricing of electricity

generated only by fossil fuels, i.e. factoring out the component of electricity price subsidies attributable to nuclear and renewable

Table 2 World’s and China’s Carbon Emissions in 2002-2010 (Unit: MILLION METRIC TONS)

Year Category 1980 1990 2000 2007 2008 2009 2010

World’s

Carbon

Emissions

(Million

Tons)

Sum 18434.180 21615.452 23738.368 29724.51 30399.50 30313.25 33508.90

Coal 6522.656 8350.216 8647.247 12431.85 13005.84 12900.19 14231.38

Oil 8825.198 9118.028 10174.173 11143.91 11077.06 10888.81 11174.56

Gas 3086.332 4147.208 4916.948 6014.69 6235.12 5988.69 6374.42

China’s

Carbon

Emissions

(Million

Tons)

Sum 1448.464 2269.709 2849.750 6256.70 6800.47 7706.83 8240.96

Coal 1161.753 1904.961 2156.606 5086.859 5575.120 5971.864 6946.305

Oil 255.872 334.558 643.113 959.177 995.196 1059.743 1165.718

Gas 30.839 30.190 50.031 138.059 151.117 173.278 208.940

Sources：EIA International Energy Statistics 2012

Under this background, this paper would focus on two interacted issues, energy

subsidies reform and the sustainability of energy system in China. Based on the

price-gap approach, we made a comprehensive calculation for the fossil energy

subsidies in China from 2005 to 2007, and the features of the subsidies were

identified. Based on this, a hybrid physical input and monetary output model (HPIMO)

was established to simulate the co-benefit of subsidies reform, based on the

triple-bottom line of SD. Furthermore, based on the calculation of HPIMO, we made

an evaluation on the contribution of subsidies reform to the sustainability of energy

system of China. Finally, policy issues about subsidies reform, especially renewable

energy subsidies design were proposed and discussed.

2 Literature Review on Energy Subsidies Research in China

International studies about energy subsidies were numerous but few focus on

China, which is an increasing powerhouse due to its rapid economic growth. Thus this

section mainly provided the literature review on the energy subsidies studies in China.

2.1 Estimation of China’s Fossil-fuel Subsidies Scale

In China, Li Hong[22] focuses on the fossil-fuel subsidies reform issue

comprehensively and systemically. She considers that cutting or cancelling fossil-fuel

subsidies is an inevitable choice of China to achieve economic and environment

sustainable development and construct a low carbon society.

On the basis of discussion on the connotation and classification of energy

subsidies, Li Hong combs and analyzes systematically these major energy subsidies

scale evaluating methods as spread, snapshot, producers subsidy equivalent, consumer

subsidies equivalent, specific project and effective subsidy rate[14, 22]. And

meanwhile through spread method, she estimates China’s fossil-fuel subsidies in 2007

is 386.4 billion yuan, of which 271.8 billion yuan for oil, 71.6 billion yuan for gas, 43

billion yuan for coal [14], accounting for about 9.67% of China’s financial

expenditure that year, and being equivalent to 4.1 times of that year’s national

environmental expenditure[13]. Li Hong and others [11] also estimate China’s gas

subsidies in 2007, which is 87.057 billion yuan with 23.56% average subsidy rate, and

residents’ electricity power subsidies of 195.626 billion yuan with 52.43% subsidy

rate.

2.2 Research on Influence and Barrier of China’s Fossil-fuel Subsidies Reform

Many scholars around the world have analyzed and researched about the barrier

and influence of fossil-fuel subsidies reform on economy, environment and society. In

China, Li Hong and others discuss these issues comprehensively and

systematically[11, 18], which including: 1) Analysis on the fossil-fuel subsidies

reform’s influence on urban and rural, especially low-income, residents. First, on the

basis of considering Chinese residents’ economic inequality and regional difference,

their research introduces concept of the “energy budget” and designs core index as

“influence index” and “tolerance index”, combining with input-output model, from

both direct/indirect aspects to discuss influence of cancelling gas and electricity

subsidies on residents with different income. Results show that, people’s income is

lower, the influence on them is larger and their tolerance is worse. When comparing

urban and rural areas, results tell low-income in rural area affected much more than

others. Meanwhile, energy price’s change will further influence related products and

service’s prices. Which will be transferred to consumers, and lead to a increase of

residents’ total living expenditure. This indirect influence is more significant on

low-income people. Second, from climate conditions, energy consumption and

regional income part, Li Hong and others research on direct/indirect influence of

cancelling fossil-fuel subsidies on urban residents from different regions[23]. The

climate condition is a decisive factor of direct influence, with 91.1%-94.51% average

contribution rate. Residents living in low or high temperature areas have more direct

influence. And residents’ consumer expenditure structure is a decisive factor of

indirect influence, with 87.92%-93.3% rate. 2) Analysis on the fossil-fuel subsidies

reform’s influence on environment, economy and employment. Through establishing

a CGE model with a pollutant emissions account and a CO2 emissions account, and

bringing the concept of environmental economy into pollutants emissions’ potential

value, simulating subsidies reform’s background, from macro and micro, short and

long term point analyzing reform’s influence on urban and rural residents, especially

people with low-income deeply, their research point out that, in a short term, reform

will reduce the employment rate and increase the poverty rate, while in a long term, it

will improve residents’ whole welfare level including environment, society and

economy[13, 22, 23].

Third, combining with China’s own political and economic environment, for the

first time based on OECD’s Pressure-state-response (PSR) model, creating a three

hierarchical analysis model as Agent- Objective-Execute (AOE), research have done

an in-depth and comprehensive analysis on the barriers of the fossil-fuel subsidies

reform[24].

3 Methodology

3.1 Price-gap approach

The Price-gap approach focuses on consumer-side subsidies and quantifies the

gap between reference prices and subsidized end-user prices. The methodology is

described as follow [6]:

CPGS iii

(1)

PMPG iii (2)

Where, iS is the subsidies scale of energy product i; iPG is the price-gap of

energy product i. iC is the consumption of energy product i; iM is the reference

price of energy product i (refers to the price without subsidies). iP is the end-use

prices of energy product i.

According to the methodology, with the information of reference price and

end-use price, the subsidies scale could be gain. Usually the end-use price could be

available from statistics, thus, the key point to apply the methodology is to calculate

the reference prices, which needed the information of international trade prices, taxes,

transportation costs, and so on. In this paper we focus on three primary fossil energy

including coal, oil and natural gas, and the secondary energy, the electricity.

For coal, China is the net exporter for coal and net importer for oil products.

According to (IEA, 1999) the related reference prices of coal are adjusted as follows:

i i iM FOB D VAT (3)

Where, iFOB is free-on-board export price selected as starting point price. iD is

internal distribution cost which is added to reflect variations in modes of

transportation and distances between the ports and the consumed market. VAT means

value added tax.

For oil products and natural gas, the reference prices were calculated according

to equation (4):

TaxDpricenalInternatioM iii _ (4)

Tax includes VAT , customer tax, etc.

For electricity, the reference price is long-term marginal price[12]. The detail

description of price-gap approach was showed in our previous research [11, 13].

3.2 Evaluation indicators for the sustainability of energy system

Indicators is used widely for the evaluation of sustainable development[25], and

as mentioned previously, sustainable development focus on the triple-bottom line

principle, thus the evaluation for the sustainability of energy system also included

economic, environmental and societal aspects [2, 25, 26].

To combine the analysis on subsidies reform, we design the following indicators

(Figure 3): (1) expense saving: how much money would be saved through subsidies

reform; (2) energy saving and emissions reduction: how many raw fuels could be

conserved and how many related pollutants could be reduced through the reform; (3)

well-being improvement: how energy subsidies reform could contribute to the social

welfare.

Eco

nom

ic

Sustainability

En

viro

nm

ent

（E

nerg

y）

Society

Indicator Set

Property

Calculation

Quantitative+

QualitativeQuantitative Qualitative

Brief

definition

The scale of

subsidies Use HPIMO

Qualitative

analysis

Saving moneyEnergy saving

+pollutants

reduction

Improve well-

being

Expense Saving

Energy saving

emissions

reduction

Well-being

improvementIndicator

Figure 3 Evaluation indicators based on the triple-bottom line principle

3.3 HPIMO model

Hybrid input output model is a useful tool to estimate the co-benefit issues as it

could calculate the inherent relationship between material flows and economic

flows[27]. Inspired by the previous work of the physical input-output model and

material physical input and monetary output model in environmental study

fields[28-32], in this paper, we proposed an improved hybrid physical input and

monetary output model (HPIMO) to simulate how energy subsidies reform could save

energy, gain economic revenue and reduce pollutants.

The HPIMO model was based on 2007 China monetary input-output table, and

physical energy input was compiled with energy flow analysis. We integrated the 42

sectors into 7 sectors according to the sector features and energy consumption data

availability. Pollutants were main air pollutants, which were classified into three

categories in this case, which were carbon dioxide (CO2), sulfur dioxide (SO2) and

nitrogen oxide (NOx). They were the main sources of climate change and acid rain.

As for the other pollutants like dust and PM2.5, the data were unavailable.

For the inputs, the energy resources were in both mass and energetic units, and

the output was in monetary units, and air pollutants were in mass units. The model

could quantitatively represent the correlations between economic sectors by monetary

input output table (MIOTs) and the connections between the ecological system and

the economic system by the method of energy or material flow analysis (EFA or

MFA). Table 3 showed the structure of HPIMO model. The n×n matrix M indicated

monetary interactions among sectors, it was calculated based on the China energy

balance table and China Energy Statistical Yearbook. The m×n matrix E indicated

physical energy interactions among sectors. The n×1 column vectors of Y and X

indicated final demand and total output of the sectors in monetary forms. The n×k

matrix P indicated the pollutants emissions in each of the sectors.

Table 3 The structure of hybrid energy input monetary output model

Monetary Input Intermediate Monetary Output

Sector

Final

demand

Total

output

Pollutants

emissions

Y X P

Intermediate

monetary input

1

M

Y1 X1 P11

…

Pkn

… … …

n Yn Xn

Added value V

Total monetary

output X

Physical energy input Physical input distribution

Energy resource

1

…

m

E

The direct monetary consumption matrix A and Leontief inverse matrix (I-A)-1

as well as the row balances were illustrated in various studies about I-O analysis

[33-35]. The row balances were shown in Eq.(5) and Eq.(6):

AX+Y=X (5)

X=(I-A)-1

Y (6)

The m×n matrix E could be seen as the energy intensity among the sectors, or

direct energy consumption matrix. The n×k matrix P could be seen as the pollutants

emissions intensity among the sectors. They could be obtained based on the energy

input data, pollutions emissions data and economic output data of each sector.

Relationships between total energy consumption and final demand, pollutants

emission and final demand was shown in Eq.(7) and Eq.(8):

D=EX=E(I-A)-1

Y (7)

W=PX=P(I-A)-1

Y (8)

Where, D is the total or cumulative energy consumption. W is the total or

cumulative pollutants emissions.

Based on above mathematical relationships, resource consumption and pollutants

emissions could be inherently connected with economic activities. One can conduct

the analysis by making one of the parameters exogenous. The performance of the

system, both ecologically and economically, can be simulated from different aspects

by changing one of those parameters. It was noted that in this study, we allocated the

electricity to each sectors.

4 Energy subsidies calculation

Based on the price-gap approach, the subsidies scale from 2005 to 2007 was

calculated. The energy resources included coal, oil products, natural gas and

electricity. The general trend was increasing, which highlighted the urgency of energy

subsidies reform. Figure 4 showed the consumption for the different energy types.

According to the calculation results (Figure 5), the fossil energy subsidies scale in

China were 535.01 billion CNY in 2006, 582.0 billion CNY in 2007 and 700.28

billion CNY in 2008 respectively. Several Chinese special features for the subsidies

were identified:

For coal, it was noted that China has special coal market condition, apart

from the coal exchanged in the market, there is additional contract price

exiting. The contract price refers to the price that made by the power

generators and the coal producers in special annual “Coal Order meeting”,

according to the survey and published reports, the price in the meeting is

lower than the market price by 20 CNY per ton3 in general.

3 In 2007, the average market price in China is 306 CNY per ton (the contract price is 285-330 CNY per ton),

while the lowest contracts price in Coal Availability will is 285 CNY per ton.

Data Source: Production marketing of coal in Shanxi. China coal resource web, http://www.sxcoal.com.

For oil products and natural gas, the raw oil market was totally opened, but

for the oil products natural gas, the government regulated the price. As a

result, the subsidies were much more than coal.

For electricity, cross subsidies existed. The price for industry was higher than

reference price, while the price for households was lower. Therefore, in

China, industrial sectors subsidized for the households.

(a) China’s coal consumption from 2006 to 2008

Unit:10000 tons

(b) China’s oil consumption from 2006 to 2008

Unit:10000 tons

(c) China’s natural gas consumption from 2006 to 2008

Unit:108 m3

(d) China’s electricity consumption from 2006 to 2008

Unit:108 kWh

Figure 4 Consumption of different energy types in China from 2006 to 2008

Note: for contract coal, data from unpublished report and survey, for the other, come from China

Energy Statistical Yearbook.

0

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Steam coal Contract coal

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Gasoline Diesel fuel Fuel oil Kerosene

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For households Industrial Public and commercial

0

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2006 2007 2008

Households Industrial Commercial

Figure 5 Fossil Energy subsidies in China from 2006 to 2008

Unit: 108 CNY

5 Analytical results

The newest available China economic I-O Table was in the year of 2007, as a

result, we conducted the case study with the subsidies scale in 2007. Based on the

methodology in section 3.3, 2007 China HPIMO was constructed.

As subsidies lower the end-use prices, we use the constant-elasticity inverse

demand function to calculate the impacts of removing the subsidies on energy

consumption.

Pq (9)

QQq10

(10)

Where, q is the energy consumption. ε is the long-term demand elasticity. q is

the change in consumption after removing the subsidies. Q0 and Q1 are the quantity

2006 2007 2008

electricity 1809.85 1956.00 2373.89

natural gas 506.00 716.00 800.00

oil 2610.33 2718.00 3177.00

coal 424.06 430.00 651.89

0

1000

2000

3000

4000

5000

6000

7000

8000

before and after removing the price-gap respectively. With price-gap and the data of

price elasticity, how the price would change after removing the subsidies could be

gain. The results of price-gap of the energy in 2007 and the price change were shown

in Table 4 and Table 5.

Table 4 Price-gap of energy in 2007

Energy products End-use prices Reference prices Price-gap

Coal (CNY per ton)

Steam coal 480.3 500.7 20.4

Coal contract 285.0 306.0 21.0

Oil products(CNY per ton)

Gasoline 6464.1 7652.5 1188.4

Diesel 5548.2 7105.9 1557.8

Fuel oil 3526.7 4088.1 561.4

Aviation kerosene 5106.7 6893.7 1787.0

Natural Gas(CNY per m3)

Industry 2.47 3.41 0.94

Resident 2.15 3.41 1.26

Public service 2.09 3.41 1.32

Electricity ( CNY per KWh)

Resident 0.49 1.03 0.54

Table 5 Price change of different energy resources after removing the subsidies

Energy sources Subsidy rate Price elasticity Source Price change after removing

the subsidies

Coal 6.46% -0.35 (Li et al., 2012) +6.37%

Oil 19.52% -0.27(Transportation)

-0.19(Industry) (Lin, 2010)

+18.26%

+18.98%

Natural gas 23.56% -0.31 (Lin 2010; Liu and Li,

2011) +20.42%

Electricity 52.43% -0.16 (Qi et al., 2009; Liu and

Li, 2011) +46.55%

With the help of the formula (9) and (10), the change of the final demand of each

sectors were gain (Table 6). Then, with the HPIMO model, the energy saving and

pollutants reduction were simulated. The advantage of I-O model was able to

calculate the cumulative consumption from the perspective of life cycle (Figure 6).

Results were shown in Figure 7. Removed energy subsidies would save energy 124.57

million tce, and reduced CO2, SO2 and NOx 332.61 million tons, 1.36 million tons

and 0.12 million tons respectively.

Table 6 Change of final demand of each sector

Sector Change of Final demand

The first industry 0

Mining industry -1.45%

Manufacturing industry -1.45%

Energy manufacturing and supply -1.45%

Construction industry -1.45%

Transportation -6.47%

Service and the other -11.21%

Figure 6 Cumulative energy consumption and pollutants emission for each sector

Note: the units for energy and CO2 emission were 10000 tce and 10000 tons respectively; for

SO2 and NOx, was 100 tons.

The firstindustry

Miningindustry

Manufacturing industry

Energymanufacturing and supply

Constructionindustry

Transportation

Service andthe other

cumulative energy consumption 7344.14 15004.20 301974.58 138895.86 8544.39 32295.93 32414.35

cumulative CO2 emission 19608.86 40061.23 806272.14 370851.93 22813.52 86230.13 86546.32

cumulative SO2 emission 604.80 8454.82 195446.68 253622.12 1809.29 16524.62 52778.18

cumulative NOx emission 0.00 0.00 20288.14 19992.15 0.00 9600.52 0.00

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

Figure 7 Cumulative energy saving and emissions reduction through removing energy subsidies

Note: the units for energy and CO2 emission were 10000 tce and 10000 tons respectively; for SO2

and NOx, was 100 tons.

For the impacts on the societal aspects, it is difficult to quantify, thus we made a

qualitative analysis. Based on the evaluation indicators proposed to analyze the

sustainability and the results of subsidies scale calculation and simulation with

HPIMO model, we made a comprehensive assessment for the contribution of

subsidies reform to the sustainability of Chinese systems (see Table 7).

The firstindustry

Miningindustry

Manufacturing industry

Energymanufacturi

ng andsupply

Constructionindustry

Transportation

Service andthe other

cumulative energy saving 0.00 -217.56 -4378.63 -2013.99 -123.89 -2089.55 -3633.65

cumulative CO2 emission reduction 0.00 -580.89 -11690.95 -5377.35 -330.80 -5579.09 -9701.84

Cumulative SO2 emission reduction 0.00 -122.59 -2833.98 -3677.52 -26.23 -1069.14 -5916.43

cumulative NOx emission reduction 0.00 0.00 -294.18 -289.89 0.00 -621.15 0.00

-14000

-12000

-10000

-8000

-6000

-4000

-2000

0

Table 7 Analysis anf evaluation based on the indicators

Indicator Analysis and Evaluation

Economy Saving

Fossil energy subsidies were 582.0 billion CNY (76.6 billion USD) in

2007, thus removing the subsidies could save 76.6 billion USD for the

government.

Energy Saving

Emissions reduction

Save energy 124.57 million tce in the whole supply chain.

Reduce CO2, SO2 and NOx 332.61 million tons, 1.36 million tons and

0.12 million tons respectively

Well-being improvement

This issue was complex. On one hand, removing fossil energy subsidies

would improve the distortion of energy market, improve the economic

efficiency and energy efficiency, which further contribute to the

well-being improvement of the whole society. However, on the other

hand, studies also proved that improper reform would increase the

social inequity and decrease the living quality of poor people. Thus for

this aspects, careful and proper policy design was required.

6 Conclusion and discussion

Applied with price-gap approach, the fossil energy subsidies scale in China were

535.01 billion CNY in 2006, 582.0 billion CNY in 2007 and 700.28 billion CNY in

2008 respectively. Relative high subsidies would bring a series negative effect on the

economy, environment and society.

Based on HPIMO model, environmental benefits of subsidies reform was

simulated. Removed energy subsidies would save energy 124.57 million tce, and

reduced CO2, SO2 and NOx 332.61 million tons, 1.36 million tons and 0.12 million

tons respectively.

Then based on the proposed sustainability indicators, the benefit and cost of

subsidies reform and its contribution to the improvement of the sustainability of

China’s energy system were discussed in-depth.

Finally, several policy implications were proposed:

According to its special political and economic environment, China needs to learn

international experience in order to formulate operable fossil-fuel subsidies reform

plan.

1) In the aspect of fossil-fuel subsidies reform, assessment on negative factors of

economy and society as poverty and employment rate before the reform’s

implementation is necessary. And based on this to make an overall careful planning,

pushing the reform gradually in one step and at one point. At the same time, to build a

scale estimation and information disclosure mechanism for fossil-fuel subsidy. To

reduce reform’s influence on low-income residents, make corresponding

compensation measures. On the one hand, by taking effective and targeted measures,

to strengthen supports on the low-income residents and ensure them to enjoy modern

energy. On the other hand, to strengthen laid-off workers from energy industry’s

re-employment training, and create new jobs.

2) In the aspect of developing and constructing the renewable energy subsidy’

approach and structure, China should according to its own market environment

characteristics, innovate the subsidy mechanism, improve the forced internet payment

mechanism, and establish a new FIT model including capital payment and energy

payment based on the market.

Acknowledgement

This study is financially by the Ministry of Education of the People’s Republic of

China, Philosophy Social Planning project, “Renewable energy industry’s financing

risk management and policy support system building--- based on life cycle theory”,

2012(12YJAZH056); The Energy Foundation (USA) projects, “Energy subsidies

reform and the sustainable development of China's economy”, 2011(G-1111-15134);

Post-doctoral Scientific Fund projects, “Sustainable development and social equity:

based on energy subsidies theory and the practice of policy”, 2009(20090460202).

We also thank the editor and reviewers for their comments.

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