Energy Subsidy Policies and Their Reform: Providing economic incentives for climate change mitigation

Transcription

1 Letters Article ID: (2007) Suppl Energy Subsidy Policies and Their Reform: Providing economic incentives for climate change mitigation Zhuang Guiyang Research Centre for Sustainable Development, Chinese Academy of Social Sciences, Beijing , China Abstract: The subsidy, as a measure, is widely applied by governments at all levels around the world as a way of policy interventions. However, there are two completely opposite opinions of subsidies on energy and environmental protection. The only reason for subsidy in existence is the internalization of external benefit. The paper firstly examines the energy subsidy policies relevant to climate change mitigation in China and their effectiveness, then points out the deficiency existing in energy conservation policies and renewable energy development policies, and finally suggests that China should exert positive role of subsidy policies and reduce negative effects in promoting climate change mitigation. Key words: energy subsidy; climate change; emission reduction effectiveness; economic incentives system 1 Subsidy is one means of the government s intervention Subsidy is a widely-used way for governments to exert policy intervention, namely by using subsidy policies the government makes consumers faced with a lower commodity price than the market level, or makes a higher production price than the market level. In other words, the character of subsidy is that the government supports consumers or producers by direct or indirect means to reduce cost and increase income, so as to realize various policy targets. Subsidy is various in term of the difference of classification criterion. The way of subsidy can be divided into money and policy subsidies according to the difference of subsidy modality; subsidy also can be sorted to price control (subsidy), preferential tax revenue, preferential interest rate and subsidy for the loss of enterprises etc.; in terms of policy s transparency, subsidy can be classified into explicit and implicit subsidies. For example, govern- ment agencies might sell pesticides to farmers at less than their cost of production or provide credit for buying pesticides at below-market interest rates. In both cases government funds are being used to reduce the cost of the pesticide for farmers. We call such policies explicit subsidies. The cost of pesticides to farmers can also be reduced by other ways, more indirect means, such as allowing pesticide imports at preferential exchange rates. Although such policies do not rely on explicit expenditures of government funds, they artificially reduce the cost of pesticide use to farmers and thus have exactly the same effect on behavior as an equivalent explicit subsidy. We call such policies implicit subsidies. Subsidies prevail at all levels of governments around the world. Subsidies probably total US$ one trillion per year and account for a staggering 4% as a percentage of the world GDP (see Table 1). Around two thirds of subsidies occur in OECD countries. Those subsidies are heavily concentrated on agriculture, mining, road transport and manufacturing, and the agricultural subsidies in OECD Received: August 1, 2006; revised: Decembe 4, 2006 Corresponding to Zhuang Guiyang ( zhuang_gy@yahoo.com.cn) 2007 National Climate Commission of China. All right reserved 92

2 Table 1 Estimates of yearly mean world subsidies over1994j1998 (unit: 10 9 US$) Sector OECD Non-OECD World OECD as of the World / % Natural resource sectors Agriculture Water Forestry Fishery Mining Energy and industrial sectors Energy Road transport Manufacturing Total Total as of GDP/% Source: OECD (2003) countries account for over 30% of all subsidies. Non-OECD countries mainly subsidize energy, water, fisheries and some agriculture [1]. Subsidies policies have broad purposes including maintaining employment and income of special colony, promoting regional and rural economic development, protecting and developing special industries, encouraging research and education training, protecting environment, recycling resource, saving energy, developing new and renewable energy, and assisting special colony and manufacturers to adapt themselves to economic, social and environmental conditions. However in fact, the subsidy policy sometimes becomes a kind of distortion, which often brings results opposite to good original intention. From the view of economy, subsidies lead to inefficiency and resource waste, such as museums without visitors, seaports without shipments, airports without airplanes. From the view of finance, subsidy is the meaningless burden to taxpayers and governmental finance. From the view of society, subsidy is often unfair and brings the colony with vested interest. From the view of environment, subsidy sometimes is harmful to environment. 2 Energy subsidy policies and their effectiveness Energy is the engine of economic growth. Many researchers demonstrated the causality between energy consumption and economic growth [2]. Some study goes a step further and argues that the cost and availability of energy is a major factor promoting economic growth. The energy sector given its importance for the economy as a whole has traditionally been a sector of strong government involvement. Governments intervene in the energy sector for a variety of reasons and in a variety of ways. Many instances and types of intervention are explicitly designed or intended to support energy policy goals and are specific to the energy production and supply industries or to the use of energy. Governments can tax or subsidize the use of energy sources and can, by these actions, encourage or discourage the use of special fuels. In the developed nations, major problems associated with energy consumption involve air pollution, global warming and traffic congestion. In these countries it would make sense to tax petroleum fuels heavily and encourage the use of nuclear power and gas against coal, and make electric power freely available. In the undeveloped and developing world, major problems associated with energy consumption involve environmental protection, energy supply and energy security. Therefore obviously a policy of affordable energy supply should be guaranteed, in particular, infrastructure construction such as electric network and gas pipeline systems should be encouraged. Actually, subsidy for energy production or consumption is one of common forms of intervention in both industrial and developing countries. Governmental intervention 93

3 Zhuang Guiyang: Energy Subsidy Policies and Their Reform: Providing economic incentives for climate change mitigation influences energy supply and demand, and final energy price, consequently influences economic growth and development. Consumers would be subsidized if consumer prices are kept lower than free-market levels, while producers would be subsidized if producer prices are higher than that without intervention. It is possible and common for both types of subsidies to coexist. In general, energy subsidies in developing countries tend to favor consumers, while subsidies in industrial countries tend to favor producers. Whatever form energy subsidies take, the result is that prices fail to reflect the true economic costs of supply. Low consumer prices result in overuse, inefficient use, and wastage of energy. High producer prices encourage excessive production and the operation of high-cost, uneconomic units that would otherwise be uncompetitive. Production patterns become more and more energy-and capital-intensive (non-labor-intensive). Subsidies also tend to drain government budgets, often resulting in higher taxes, displacement of private investment by government loans, and higher external debt levels, all of which can have negative effects on economic output and growth. As greenhouse gases emissions are mainly produced from energy activities, energy subsidy policies and their reform have direct or indirect mitigation effects. Removal of price distortions may, in the long run, result in improving energy production and use efficiency, promoting higher economic growth. Because energy plays such an important part in economic activity, subsidy removal is likely to have substantial general equilibrium effects, making the prediction of the impact of reforms difficult. In general, where inter-fuel substitution is possible, price reductions may affect the composition rather than the total quantity of fuel use. Since the environmental effects of various fuels differ, such changes in the composition of fuel use can affect the level of environmental damage. Subsidy removal affects energy use and production patterns only if individuals and firms respond to prices [3]. Currently, China is the second energy consumer in the world. China provides subsidies for production and consumption of major energy directly or indirectly all the times. With the economy development, since 1993, China became a net oil importer. Any price fluctuation in international oil market will influence Chinese economy. Although the prices of raw and product oil have realized to fluctuate together with the international markets, its rate of rise is lower than that of international market. The Chinese government controls pricing of three petroleum and natural gas enterprises, namely China National Petroleum Corporation (CNPC), China Petrochemical Corporation (SINOPEC) and China National Offshore Oil Corporation (CNOOC), and accordingly reduce oil price, which equals to provide subsidies for all oil industrial system and consumers. Although oil price is soaring, the fuel oil prices in China are much lower than the level in the international market. There are three adverse effects of excess price subsidies: firstly, much lower profit margin restricts development of energy industries; secondly, cheap product oil price results in low efficiency of energy use, social economy can t reflect real demand for energy; thirdly, governmental finance is aggravated due to oil price subsides. In addition, the impact of fuel price subsidies on international oil price can t be neglected. Cheap domestic oil price stimulates the demand, drives international oil price up, which will increase import fuel subsidies. With increasingly dependence on oil importation due to economy develop-ment, Chinese economy will get into a vicious circle and its own economic interest came under attack. However, it is not sensible to assess simply China s subsidies of oil price. At present, oil market is still in a monopoly situation, several larger oil enterprises in monopoly position are easier to form some kind of price federation. Meanwhile, as supervising system of oil market is incomplete, it is not mature for China s oil price fluctuating with international oil price. For such important strategic resource, it needs to be careful to wait for the right time and prepare sufficient countermeasures so as to realize the linkage between domestic oil price and international one. China is the number one nation of coal production and consumption with the dominating coal in energy mix. China consumed about 2.23 billion tons of coal equivalents in Since 1987, the State began to loose coal price governance and carry out two-track system of coal price. Since 1993, the State began to abolish instruction price of coal in state-owned mines. At the time of July 1994, excepting coal for electricity generation, coal production, transportation and sale entirely came into market. Since 2002, the price of coal for generating power has been determined by market entirely. Coal is major energy resource in China, as well as the major source of GHGs. Loosening coal price makes price reflect real demand, as thus helps the improvement of coal production and use efficiency. 3 The reform of energy subsidy policies: providing incentives for climate change mitigation The only reason of subsidy existence is the 94

4 internalization of external benefits. Major viewpoints agreeing with subsidies on energy and environmental protection argue that, subsidies may help industries to adapt to new environmental regulations, to assist new emerging industry and to improve competitiveness in international market. In a short time, subsidies can reduce pollutant discharge, encourage energy conservation; in a longer time, subsidies can promote investment in pollution control so that reducing pollution, saving energy, promoting economic growth, benefiting future revenue and employment. However, major viewpoints against such subsidies argue that, some pollution companies will continue to survive due to subsidies on reducing pollutant discharge otherwise they would exit the market, meanwhile new companies are attracted into this pollution industry; subsidies on investment cost interfere companies with selecting ways freely to reduce environmental damage. Subsidy itself has no effect on environmental protection, but long-term result may make industrial structure moving towards high energy and pollutant intensive industries. Although individual pollution source emits less pollution, total pollution emissions will be larger, environmental quality will deteriorate due to the expansion of industrial scale [4]. International experiences tell us that developed countries pay more attention to the role of incentives such as tax and levy in climate change mitigation. According to IPCC Fourth Assessment Report, policies that provide a real or implicit price of carbon could create incentives for producers and consumers to significantly invest in low- GHG products, technologies and processes. Such policies could include economic instruments, government funding and regulation. Government support through financial contributions, tax credits, standard setting and market creation is important for effective technology development, innovation and deployment [5]. Improving energy efficiency and developing renewable energy are two important measures for China to combat climate change, but past practice showed that incentives in such two aspects were relatively deficient. Fortunately, the situation is changing. Although incentives are still imperfect, the direction to make efforts has been identified. All these incentives are well stressed in the Renewable Energy Law = and the Medium- and Long- Term Specific Planning of Energy Conservation K = China has set ambitious target to cut the energy intensity of GDP by 20% and pollution emissions by 10% during the 11th Five-Year Plan period, which represents a 4%-plus annual reduction in energy demand growth versus GDP growth. According to the statistics provided by National Bureau of Statistics (NBS), the rising trend of energy intensity since 2001 was restrained. However, except Beijing, all other provinces, municipalities or autonomic regions didn t realize the scheduled targets in Under such situation, Comprehensive Working Plan on Energy Conservation and Emissions Reduction was promulgated on 3 June 2007 by the State Council. One of the means is to perfect policies and form penalties and restriction mechanisms. Firstly, actively and reliably boost price reform of resource products; Secondly, perfect and promote financial policies of energy conservation and emissions reduction; Thirdly, set down and perfect revenue policies encouraging energy conservation and emissions reduction; Finally, strengthen financial service in the fields of energy conservation and environmental protection. Energy conversation is the best and biggest emission reduction of GHGs emission. If the 20% energy intensity reduction target should be realized, China would reduce CO 2 emission at least 339 million tons in 2010 relative to business as usual scenario [8]. It is a complicated issue to assess effectiveness of subsidy policies as different stages in development, shortterm and long-term effects, and industrial difference as well should be taken into account together. Due to lack of perfect incentive policies and corresponding positive studies, it is difficult to assess effects of subsidy policies relevant to climate change mitigation in China. Practice shows that China has contributed substantially to global actions in climate change mitigation through improving energy efficiency and developing renewable energy. Active policies of returning farmland to forest and grassland have also brought positive effects from the view of increasing carbon sink. All in all, decision makers have recognized that subsidies as a kind of policy measures, their positive role should be maximized and negative impacts should be minimized. Acknowledgements The work was a part of Promotion of Low Carbon Development Through Incentives project sponsored by UK GOF. The Renewable Energy law was passed by National People s Congress in February 2005 The Medium- and Long-Term Specific Planning of Energy Conservation was issued in late 2004 by NDRC 95

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