Impact of Removal of City Gas Subsidies on Chinese Urban Residents

Trans. Tianjin Univ. 2012, 18: 309-314Do|10.1007/612209012-1944Impact of Removal of City Gas Subsidieson chinese urban residentsLIAO Hua(廖华)2, ZHU Zhishuang(朱治双)2, WANG LU(王璐),2(1. School of Management and Economics, Beijing Institute of Technology, Beijing 100081, China;2. Center for Energy and Environmental Policy Research, Beijing Institute of Technology, Beijing 100081, China)e Tianjin University and Springer-Verlag Berlin Heidelberg 2012Abstract: The current cost-plus natural gas pricing mechanism makes the gas price too low, resulting in a lot of consumer-side subsidies and over-consumed natural gas. This paper applies the price-gap approach and input-outpanalysis technology to quantitatively analyze both the direct and indirect effects on urban residents under the conditionthat natural gas subsidies are cancelled in China in 2007. It is shown that the gas price will increase by 33.3%r41.6%,and the residential consumption expenditure by 0.26%--0.33%. The low-income groups are mostly affected, so differ-ent subsidies should be implemented to make subsidies more efficient.Keywords: price subsidies; price-gap approach; input-output analysis technologySince the 1990s natural gas market in China has en- istence of institutional barriers, energy subsidies usuallytered a period of rapid development. Consumption of cannot achieve their declared objectives. with the devel-natural gas grew from 15.25 billion m'in 1990 to 109.04 opment of energy industry, the drawbacks of energy sub-billion min 2010. During the same period, natural gas sidies have gradually emerged. First of all, many of themproduction increased from 15.30 billion mto 96.76 biI- have increased the government's financial burden. TEAlion mt, and the natural gas subsidy increased signifi- estimated that the average energy subsidy rate in Chinacantly.was 10.9%, and the total welfare loss was equivalent toAccording to the Organization for Economic Coop- 0.36% of GDP. In 2005, only electricity and natural gaeration and Development(OECD)2I and the Interna- subsidies were over $12 billion, accounting for 0.54%oftional Energy Agency(IEA)DI, in a broad sense, subsidy GDP in that year 6. Ref[5] used the price-gap approachmeans that the government takes action to raise the pur- and computable general equilibrium(CGE)model to eschase price of producers, and reduce production costs or timate China s energy subsidies, finding that China's enprice charged on consumers. In a narow sense, subsidy ergy subsidies reached 356. 73 billion Yuan only consid-means that the government transfers payments or tax ering the terminal energy subsidies, which meant 1.43%credits to producers and consumers. Different forms of of GDP in China. Secondly, energy subsidies are harmfulenergy subsidies will have different effects on producers to improve the energy efficiency and energy consumptionor consumers+. In terms of subsidy ways, energy subsi- structure. Moreover, energy subsidies distort the pricedies can be classified into direct and indirect types; in signal, which is not conducive for transition countriesterms of the subsidy objects, they can be categorized into (e.g, China)to cultivate the market economy. Last butproduction- and consumer-side types. In China, energy not the least, the rich will benefit more than the poor, duesubsidies are often carried out by the government to regu- to the limitations of the subsidy mechanism design, thuste energy prices, thus the prices are lower than the full exacerbating the social unfaimess Iconomic cost]. Therefore, Chinas energy subsidies are However, the removal of energy subsidies will alsomainly consumer-side subsidieshave some negative impacts. Ref [8] proved the existenceIn practice due to the lack of strict standards and ex- of energy subsidies in Nigeria, and recommended a grad-Accepted date: 2012-05-17中国煤化工Supported by Strategic Priority Research Program of Chinese Academy of SHHCN MHGINatural Science Founda-tion of China(No, 71041006 and No, 70903066).ComespondencetoLIAOHua,E-mail:biao@bit.edu.cn.Transactions of Tianjin University Vol 18 No 4 2012ual removal to weaken the negative impact on economy. this paper uses the price-gap approach to estimate theRef [5] concluded that the removal would lead to a sub- scale of city gas subsidies for residential users. It is notestantial decline of energy consumption and carbon emis- worthy that this paper is limited to the static impact of thesions, but at the same time also had a negative impact on removal of gas subsidy, and the dynamic impact may bethe macroeconomic variables. Specific to a certain type greater. Therefore, the result of subsidy removal in thisof energy subsidies, Ref [9] pointed out that the subsidies paper is the lower boundon kerosene and electricity in Ethiopia did not improve 1.1 Price-gap approachthe total expenditure of the residents significantly in theWe can measure the size of energy subsidiesenergy sector. Ref [10] suggested that with the elimina- through calculating the gap between reference pricetion of subsidies in Kuwait, the welfare losses suffered by formed in the competitive market and the end-use pricethe residents should be returmed to offset the resistance to before the removal of energy subsidiesthe tariff reform and achieve a win-win situation.According to IEA, the price-gap approach is speci-Compared with intermational studies, Chinese schol- fied as followsrs paid less attention to energy subsidies, especially forS=(M-P)xCnatural gas subsidies. Ref [1l] estimated that the electric- where S is the size of subsidies: M is the referenceity subsidies were 209.76 billion Yuan, or about 0.84% of price; P is the price before the removal of price gap;GDP in 2007, and pointed out the inefficiency of the C is the scale of consumption: and i is the type of en-electricity subsidy mechanism. Ref [12] calculated the ergy, i. e natural gas in this paper.scale of natural gas and electricity subsidies in 2007, and 1.1.1 Reference price of natural gasconcluded that the low-income residents, especially thoseIt can be seen from Eq. (1)that the key to determin-in rural areas, would suffer a greater loss due to the re- ing the scale lies in the reference price of natural gasWith the composition of natural gas price, the referenceConsidering the rapid development of city gas,price can be expressed as followspaper takes the city gas as the research object, whoseReference price= ex factory price transmissioners come from residential users, transport and commer- and distribution fee+taxes(2)cial fields. Residential users were the biggest consumers,Eq.(2)can be explained as follows.which accounted for 58% in 20073. Therefore, this pa(1)Ex-factory price. Chinas current natural gasper selects residential users as a representative case. Be- prices are under government control, which does not re-cause the urban consumed more than 90% of the residen- flect the upstream mining costs and the incentive for furtial gas in 2007, we choose it as the study object here. ther exploration costs. On the other hand, UK, USASince different income groups have different elasticities Canada and other western countries have relaxed controlof demand for natural gas, the removal of the natural gas on gas industry since the 1970s. In order to avoid arbi-price subsidies will have effects on them. Reasonable trariness, and also to ensure the sensitivity of referencemeasurements of the scale of natural gas subsidies and price this paper selects the EU CIF (EUcif), Japan LNGcalculations of the effects on different income groups are CIF (Japancif), U.S. Henry Hub(Henry Hub),im-necessary for the design of natural gas pricing mecha- ports of Central Asian natural gas border settlement pricenism and the development of reasonable subsidy policies. in China(CA) and the heat value Price(HVP) asthe ex-factory reference price1 Estimation on city gas subsidies for resi-2)Transmission and distribution fee. We deter-dential usersmine the average transmission and distribution coststhrough the gap between the average end-use price andThere are many methods of estimating the scale of the average ex-factory priceenergy subsidies, including price-gap approach, producer In 2007, the average market price of residentialbsidy equivalent method, consumer subsidy equivalent natural gas of China's 36 large-and medium-sized citiesmethod, specific projects and effective rate of assistance, was 2among which price-gap approach is the most effective majorway to estimate the consumer-side subsidies. Because angH中国煤化工(-factory price of theCNMH Gg Yuan/m! in 2007most of China s natural gas subsidies are consumer-side, therefore the average fee of transmission and distribution310一LIAO Hua ef al: Impact of Removal of City Gas Subsidies on Chinese Urban Residentsin China was about 1. 4 Yuan/mresidents in Chinas 36 large- and medium-sized cities(3) Taxes and fees. Chinas value-added tax (vaT) was 2. 15 Yuan/m, and the consumption of natural gason natural gas product in 2007 was 13%, which was lev- for urban residents was 17. 707 billion m3[14ied on gas exploration sectors, so VAT was 0.104 Yuan/m. 1.2 Estimation of city gas subsidiesBased on Eq. (2), the reference price of natural gasin China in 2007 can be calculatedfrom 22.03 to 34.60 billion Yuan, and the subsidy rate1.1.2 End-use price and consumption of city gas for was 36.65%-47.61%, accounting for 0.08%-0.13% ofGDP in 2007In 2007, the average end-use price of natural gas for The results are listed in Tab. ITab 1 Size of subsidies and subsidy rate of residential gasNatural gas reference priceActual price/Gas consumption/Size of subsidies/(billion Yuan)Subsidy rate/%EUcir3.722.1517.7127.7442.1542.17Henry Hub3.3917.7136.653460HVP17.712.1 Classification and characteristics of each resi-t of removing natural gas dent group based on natural gas consumptionsubsidies on different income groupsAccording to the data released by China StatisticalYearbook 2008) and Chinese City(Town)Life andThe removal of natural gas subsidies will inevitably Price Yearbook 2008, urban residents are classified intolead to rising gas prices On the one hand, rising natural three groups based on disposable income per capita,asgas prices will make consumers pay more by themselves. listed in Tab. 2. It can be seen that with the increase ofThis paper defines it as the direct impact on the residents. disposable income per capita, energy consumption perOn the other hand, the increase of natural gas price will capita gradually increases, but the proportion of energylead to changes in the prices of related industries' prod- consumption in the total consumption gradually declinesucts, therefore leading to changes in the consumer expen- Therefore, the removal of subsidies will exert differentditure. Here we define it as the indirect effects on resi- effects on different income groups.Tab 2 Classification and expenditure/incomeof urban residents'Income groupDisposable income I Consumption expenditure C Energy expenditure E? (E/%5357334835243.7lMiddle244288926381252.5429509041931753405.212.2 Direct impact of the removal of natural gas after the removal of subsidies, repectively, and 4Q is thesubsidiesThe removal of subsidies will affect the price of Residents will adjust the consumption of natural gasatural gas, as follows1.when the price fluctuates. The actual rise of gas prices(3) after the removal of subsidies should consider the price(a elasticity of demand for natural gas, i.ewhere g is the natural gas consumption; P is the natural中国煤化工gas price; e is the long-term price elasticity of demand forrhCNMHGnatural gas; g and g are the consumption before and31lTransactions of Tianjin University Vol 18 No, 4 2012where t is the rate of increase after the removal of subsi- 3 Indirect effects on different incomedies;e is the subsidy rate; P and P are the end-use groups after the removal of subsidiesprices before and after the removal of subsidies, respec-3.1 Input-output analysis technologyThe price elasticity of demand for natural gas differs 3.1.1 Input-output tablein literature due to differences in data and methods. acInput-output analysis was first proposed by Leontiefcording to Ref [4], this paper applies-031 as residential in 1936. It is a scientific method for analysis realizednatural gas price elasticity of demandthrough the compilation of input-output table, which canNatural gas demand elasticities of different income reveal the quantitative ratio between technical and eco-groups are not the same. In general, the higher the in- nomic links among industriescome, the greater the absolute value of elasticity of de-For sector i, there are four equations as follows:ly high, itwill be insensitive to price changes. Therefore, the mid-dle-income's absolute value of the elasticity of demandthe biggest, i.e. -0.31, and we assume that the elasticityof demand for the low-income is-0. 21, and the high4=qincome-0.26According to the elasticity values of different groups(10)identified above, combining with Eq. (5)and Eq. (6), where x, is the product produced by sector i and con-we can calculate the direct impact on different groups sumed by sector j: q, is the total product value created bybe seen from the results that the low-income groups su. Sector i y, is the final product value created by sector i:after the removal of subsidies, as shown in Fig. 1. It cannis the national incomecreated by sector within afer most, as the gas price increases within 33. 30%year; and41.57%;the impact on middle-income group is the small- 3.1.2 Direct consumption coefficientest, as the gas price increases from 31. 82% to 38.96%,Also known as the intermediate input coefficient,and a gap of 1. 49%--2.60% between the two groups can direct consumption coefficient refers to the amount ofalso be observed. Therefore, in the reform of the existing intermediate inputs consumed by a sector for the outputsubsidy mechanism, more attention should be paid to the of product per unit. It is used to reflect the direct input-low-income group. In addition, the price gap will change output relationship between sectors i jif different reference prices are applied. The referenceprice of CA plus the average transmission and distribu-(11)tion costs imposes the largest impact on the residents,while USA Henry Hub plus the average transmission andBy substituting Eq. (11)into Eq. (7), we can gedistribution costs is the smallest. The gap between theEq.(12),two reference prices is about 8%.ay q, ty=qr(12)Eq. (12)can be expressed in a matrix formAQ+r=Q(13)02 where A =(a)m is the direct consumption coefficientmatrix;Y =l, y2, """ yn) is the final product colt0.26百vector; and Q=(q1, g2, "" gm) is the column vector ofthe total prodIf Q is known, we can calculate Y,Y=(1-AQ(14)中国煤化工followsFig1 Direct impact on different income groups after theremoval of natural gas subsidiesCNMHGntief inverse m312JIAO Hua et al: Impact of Removal of City Gas Subsidies on Chinese Urban Residents3.2 Indirect effects on residents after the removal sion and distribution costs smallest. However, the gapof gas subsidesbetween the two reference prices is less than 0.06%.As an important raw material or fuel, natural gas It is worth noting that whether the impact is direct orwith rising price will cause the closely related product or not, the welfare loss of the low-income group is greater(and)service prices to change, thus making the change than the high-income group after the removal of subsi-in consumer expenditure, which is called the indirect ef- dies. Therefore, in the reform of natural gas pricingfects on residents after the removal of price subsidies. mechanism, it is the low-income group that should beThe input-output tables measuring the linkages among paid more attention tosectors can be used to calculate the changes of other sec-tor price caused by the removal of subsidies, and ulti- 4 Conclusions and recommendationsmately measure the changes of final consumer price indifferent groups of residents. The formula is as followsWith the growing concern on the issue of climate(△P,AP2,…,APA,AP4…△Pchange, natural gas is widely used as a relatively cleanfossil energy. However, the resource endowment in(Cu,C2x…,C1u,C…u,…、Cn,y.△B(6 China is"rich coal, less oil and gas shortage". Till the endAP,Q.i+kof 2010, the proven gas reserves in China were 2.8 tril-(17) lion m, accounting for only 1. 5% of those in the worldHowever, the total consumption of natural gas in Chinawhere Cy is the element of (-A)": AP Gi=1, 2, " n) is in 2010 accounted for 3.4% of the whole world consump-the relative change of each industrial product price; 2, is tion. With domestic natural gas production growth lagthe consumption of sector i for residents: and n is the ging behind the demand growth for a long time, the con-additional proportion people have to spend in order to tradiction of supply and demand for natural gas in Chinamaintain the original consumptionhas become drastically prominent. Furthermore, China'sThe results are shown in Fig. 2. It can be seen that if current natural gas pricing mechanism makes the domes-subsidies are removed, expenditure burden for different tic natural gas price too low, which leads to a serious de-income groups will increase at significantly different viation from its market value, resulting in the excessiverates. Specifically, the increase in the expenditure of low- consumption of natural gas, further exacerbating the im-income group ranks the highest, from 0.26% to 0.33%, balance of the natural gas supply and demand. In addi-while the welfare loss of the middle-income group is the tion, with the existing natural gas subsidy mechanism, onsmallest, from 0. 25% to 0.31%. The price gap slightly the one hand. most of the subsidies are beneficial to thediffers when applying different reference prices. The ref- high-income groups who do not need the subsidies actu-erence price of Ca plus the average transmission and ally, leading to excessive consumption of natural gas;ondistribution costs imposes the largest impact on the urbanresidents, while USA Henry Hub plus average transmis. the other hand, the low-income group, to whom subsidiesare fairly important, only get small portion, simply forHVEthe reason of lacking access to natural gas. Above a rangeof issues, the existing natural gas pricing mechanism andsubsidy mechanism have been widely criticized. The ap-0.20peal for reform is increasing. Under such circumstances,we carry out this research and find the following conclu-SIonsDOS(1)There are a large number ofend-useIneome grounatural gas consumption, among which residential naturalgas subsidies accounted for 0.08%-0.13% of GDPNote: Changes in expenditure of residents caused by changes of gas prices 2007. With the further development of natural gas indus-themselves are not included: The input-output table in this paper istrysubsidies will makefrom Ref[16]H中国煤化工thele if the existing pol-Fig 2 Indirect impact on the residents after the rise of natu-CNMHG313Transactions of Tian in University Vol 18 No 4 2012(2)Natural gas subsidy mechanism without differ-Subsidies[M]. oECD, Paris, france, 1998entiation is inefficient, exacerbating the imbalance of gas [3] IEA. World Energy Outlook 1999[M]. IEA, Paris, france,se among different income groups, as high-incomegroup consume more incited by low-cost subsidies[4] Li H. Fossil cnergy subsidies and carbon reduction: Sum-(3)With the relatively small elasticity of demandmary of the theoretical methods to measure the scale of en-and the relatively high proportion of consumer spendingergy subsidies and empirical analysis []. 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