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Pull the plug of over-consumption

By Li Jing (China Daily)
Updated: 2008-09-15 14:55

With international crude oil prices falling back toward $100 a barrel, as well as the recent easing of China's inflation rate, experts from both home and abroad have advised China to lift energy subsidies.

Xinhua News Agency quoted Nobel Laureate Andrew Michael Spence as saying that China should gradually cut energy subsidies, and let energy prices go up to the global level in order to make the economy more energy efficient.

Many countries have energy subsidies, but these are in the process of disappearing, which is good, according to Spence, as it is quite "expensive" for the governments to maintain them.

Although China can afford the subsidies, "it's still a bad idea", he says, adding that lifting subsidies would help China's energy saving and technology improvement goals.

Zhou Dadi, deputy director of the China Energy Research Society, holds a similar perspective, saying that the energy subsidy system is a departure from the country's goal to shift to a sustainable and energy efficient mode of economic development.

"It is impossible for China, with such a large population, to duplicate the economic model that relies on high energy consumption which many developed countries have done during the process of industrialization," Zhou says.

The current consumption structure determines that the subsidies tend to favor energy-intensive industries, which in turn encourages energy consumption.

Take electricity for example. In China, about 76 percent of the electricity is used by the industrial sector, among which more than 40 percent is consumed by energy-intensive industries. Only 11 percent of the electricity consumption is for civilian use, according to Zhou.

"As a result, the industries with high energy consumption benefit most from the low price of electricity," Zhou says.

"Similarly, the subsidy goes to richer families who have larger houses and use more household electrical appliances, instead of going to poor families.

"So the low price is sending out a distorted signal that encourages energy intensive industries, which is contrary to the government's goal of energy conservation," Zhou says.

Over the past year, China has managed to hold down the prices of electricity and refined oil products, which is seen as an effort to rein in inflation. But the move has led to the loss of energy producers, which then chose to suspend part of their operations as soaring oil and coal prices ate into their profits.

In June, the government raised retail gas and diesel prices by 0.8 yuan and 0.92 yuan per liter, as well as electricity charges for commercial units by 0.025 yuan per kWh.

Discussions have focused on when the next round of price hikes will come.

After hitting a peak $147 per barrel in July, a slowdown in international demand has sent the price of oil back toward the $100-mark recently. Meanwhile, China's annual consumer price inflation fell to a 14-month low of 4.9 percent in August.

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