Feeding the Dragon: Time to embark on wholesale coal subsidy reform in China?

20-21 April—Beijing—Coal remains central to the energy sector in China despite the impact on air pollution and greenhouse gas emissions. Recognizing the problems associated with coal use, China has embarked on a programme to gradually reduce the role of coal and develop cleaner forms of energy. 

A key first step to breaking the hold of coal on the energy sector is to stop providing subsidies to the industry. To this end the Chinese government has signed up to the G20 pledge to phase out “inefficient fossil fuel subsidies that encourage wasteful consumption”. As host of the G20 this year China will play a pivotal role in the proceedings, including discussions of fossil fuel subsidy reform. Speaking at an event in Beijing—organized jointly by the Natural Resources Defense Council (NRDC) and the Global Subsidies Initiative (GSI) on 20 and 21 April 2016—Feng Shengbo, Deputy Director, Energy Research Institute, explained that China and the United States are now in the process of finalizing their joint peer review of “inefficient” fossil fuel subsidies. He also noted that "China has prepared a detailed blueprint on energy reform. More reform strategies covered power system reform, rationalized fiscal and taxation system, and a market-oriented pricing mechanism regarding natural gas, crude oil and coal”. 

Energy security also provides an impetus for reforming coal subsidies. Liu Qiang, Secretary General, Global Forum on Energy Security-Institute of Quantitative & Technical Economics, explained that at current rates of extraction, coal resources would only last for an addition 31 years and highlighted the need for a concrete plan to address coal industry reform. 

The importance of the issue of coal subsidies was also reflected in the media response to the event. A number of articles were subsequently published tackling the issues including China.org.cn, China Environmental, and China Economy

GSI have previously examined the influence of coal subsidies and externalities on the renewable energy industry and the current levels of subsidies to coal producers in China. The latter report is now available in Chinese.  

One aim of the event was to discuss how researchers can help to promote the reform of fossil fuel subsidies and place sustainability concerns at the heart of policymaking in China. To meet this goal some of the key barriers and challenges that stand in the way of reformers were discussed. A number of areas were raised where participants saw an important role for international non-governmental organizations to shed new light on the issue and the government’s reform process. These included: 

  1. The impact of subsidy reform, in terms of the effect on employment and the economy, on households and enterprises at the provincial level; 
  2. The scale and impact of the subsidy provided in the form of credit support given by below market-rate loans to coal producers; 
  3. The need to consider the cost to the economy of investment in assets that have become “stranded” due to the high levels of overcapacity in the coal industry. 

A key theme of these ideas is that to allow reforms to have the greatest chance of success and move from high level political commitment to implementation, it is essential to understand the impact of proposed reforms and to develop measures to mitigate negative consequences of reforms. The coal industry remains very important to the economy and to people’s lives right across China. Reforms will have to be based on a thorough understanding of the impacts of potential policy options. To build up understanding of these impacts through sharing experiences from other countries, consultation and modelling, there is a clear role for economic and policy research in order to address some of these knowledge gaps. 

On the road to reform of fossil fuel subsidies in China, the G20 Energy Ministers meeting at the end of June 2016 will be a milestone, but despite the meeting and any new commitments to phase out subsidies by a “date certain”, the hard work of actually implementing reforms will continue. The research community, including the GSI, should seek to provide long term support to help create a more sustainable energy sector and address the pressing environmental issues caused by the current reliance on coal.  




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