World Energy Outlook 2007

to bring domestic oil prices closer to those prevailing on global markets. Rebates
on exports of energy products and energy-intensive manufactured goods have
been removed, while tariffs on imports of similar goods are being selectively
dropped in order to help reduce domestic energy demand. Reforms have long
been considered that would make electricity prices more responsive to demand.
More recently, mechanisms for incorporating external costs into energy prices are
under discussion. Future tax and pricing policies will help determine how quickly
efficiencies are exploited along the whole chain of energy supply and use.
SPOTLIGHT
How Big are China’s Energy Subsidies?
Until very recently, substantial energy subsidies remained in place in
China (Figure 8.6). For example, China has long protected end-users,
such as farmers who use diesel for tractors and irrigation pumps, from
the effects of oil price increases by keeping domestic oil product retail
prices significantly lower than those on the international market. The
preferred method has been to squeeze refiners’ margins through control
of refinery gate prices. One effect has been to suppress the incentive to
improve end-use efficiency that would flow from exposing consumers to
higher market prices.
After thirty years of gradual convergence with world prices, progress has
been much faster since 2005. We estimate that total consumption
subsidies (net of taxes) in China amounted to around $11 billion in
2006. This is a reduction of 58% compared to 2005 (see WEO-2006
for information on the methodology used).
In absolute terms, coal is today the most heavily subsidised form of
energy, followed by oil products. Nominal subsidies to oil products and
coal have fallen sharply, despite rising international prices – the result of
even faster increases in wholesale and retail prices. Subsidies to oil
products amounted to $3 billion in 2006. Consumption subsidies on
road-transport fuels have now been largely eliminated, but some
subsidies to household heating and cooking fuels remain. In percentage
terms, under-pricing is biggest for natural gas and coking coal. On
average, consumers pay a little over half the true economic value of the
gas they use. Some subsidisation is also present in the LPG and steam
coal markets.
One of the major reforms contained in the 11 th Five-Year Plan concerns
the system of energy pricing and taxation. It will involve a further
upward adjustment of oil product and natural gas prices (along with
subsidies for renewable energy sources).
280 World Energy Outlook 2007 - CHINA’S ENERGY PROSPECTS