With 2.2 trillion  USD in 2020 – China leads global fossil fuel subsidies but has embarked on a path to reduction

According to an IMF working paper on fossil fuel subsidies, East Asia and the Pacific region account for 48% of global energy subsidies. By country, China has been the biggest subsidizer in absolute terms, contributing 2.2 trillion  USD in subsidies in 2020, or nearly 15% of GDP and approx. 1,600  USD per capita. However, different organisations estimate subsidies based on different input factors. The IMF report includes so-called explicit and implicit subsidies, such as the social cost of carbon, issues related to air pollution, and other externalities specific to sectors, such as the cost of congestion in transport. Other organisations limit their estimates to explicit or direct subsidies, for example, tax rebates, tariff reductions, preferential taxes, price caps, and similar incentives. Thus, values tend to be lower than in the IMF report. The organisation, Global Subsidies Initiative, offers a break-down of different subsidies calculation across relevant controlling organisations:

Subsidies address both users of fossil fuels and producers of fossil fuel products. National, regional, and local authorities regulate the prices of fossil fuels in China. The NDRC is ultimately responsible for price setting and competition regulation in most energy market segments.

National-level support for fossil fuel consumption in China comes, for example, in direct payments under the petroleum price-reform support programmes. This measure was initiated in 2006 in order to compensate fossil fuel users like taxi drivers, public transport, and primary industries for changes in fuel pricing. In 2015, the Chinese government spent a total of 145.3 billion CNY (~21.2 billion  USD) on this measure. Such subsidies are provided by all levels of government – central, provincial, and even municipal. In March 2019, the government lowered the VAT rate for refined oil products from 16% to 13%, while the VAT rate for fossil fuels used for heating and other residential purposes was a lower 9%.

An important policy supporting producers of fossil fuel products was the introduction of a price floor of 40 USD per barrel and a price ceiling of 130 USD per barrel for crude oil in 2016. This mechanism prevents the prices for refined oil products from dropping below what they would cost if crude oil remained at 40 USD per barrel. When the international price of crude oil drops below 40 USD per barrel, the difference is collected in a special “risk reserve fund” set by the central government and used to fund programmes on energy saving, oil quality improvement, and other projects. Similarly, if the oil price exceeds 130 USD per barrel, the government will subsidise oil companies to keep the price below the 130 USD per barrel mark.

A special per-unit subsidy to encourage developing and utilizing unconventional gas, such as shale gas, was introduced in 2012. As a result, the initial per-unit value of CNY 0.4 /m3-of-output paid in 2012 and 2015 was gradually reduced to CNY 0.3 /m3-of-output in 2016 and then further to CNY 0.2 /m3–of-output in 2019. Estimates say this policy cost the Chinese government around 2.7 billion CNY (~400 mio USD) in 2017.

Yet, China’s coal industry receives the most significant amount of subsidies. The Global Subsidies Initiative estimates that in 2015 some 121 billion CNY (18 billion  USD) of subsidies were given to support coal-based electricity generation in 2015, plus 36 billion CNY (6 billion  USD) in support of the production of coal in 2013. Additionally, coal-fired heating plants providing heat for residential users have been subsidized with VAT exemptions on the fees charged by heat utilities. However, two-thirds are operating at a loss due to the persistence of regulated, below-cost heat tariffs for residential users.

Several of these subsidies are, however, slated for a phase-out. In 2016 China was among the first countries to agree on undertaking a voluntary review of its fossil fuel subsidies in the context of a G20 peer review. The aim was to identify and eliminate inefficient subsidies. A list of relevant subsidy policies to be phased out was submitted by China and then peer-reviewed. They include:

Subsidies for the exploration, development, and extraction of fossil fuels

  • A consumption-tax policy of “refund after payment” for refined oil produced by oil (gas) field enterprises for own use
  • A policy of exempting China National Petroleum Corporation (CNPC) from land-use tax
  • A policy of land-use tax exemption for China National Offshore Oil Corporation (CNOOC)

Subsidies for the refining and processing of fossil fuels

  • A policy of consumption-tax exemption for oil consumed by refined oil manufacturing enterprises for their use
  • Subsidies for power and heat generation
  • A policy of exempting thermal power stations from land-use tax in cities and towns
  • A policy of VAT exemption for heating fees of heat supply enterprises for individual residents
  • A policy of exempting heat-supply enterprises from real-estate tax and urban land-use tax

Subsidies for fossil fuels used in transport

  • A Series of Subsidies Derived from Petroleum Fuels Price and Tax Reform
  • Subsidies for fossil fuels used in the residential sector
  • A preferential tax-rate policy of value-added tax (VAT) on coal gas and liquefied petroleum gas

The peer review identified 2016 several inefficient subsidies for upstream activities (exploration, extraction of oil, coal, or gas): one excise-tax refund for refined petroleum products used in oil and gas extraction and two urban land-use tax exemptions benefitting the upstream activities of state-owned CNPC and CNOOC. One inefficient subsidy was identified at the refining stage: an excise tax refund for refiners’ use of refined petroleum fuels.

Several additional policy reforms have since been initiated. For example, payments under the Petroleum Fuels Price Reform have been gradually reduced to 60% in 2020. In addition, the NDRC has been working on the liberalisation of the electricity price market by moving away from set on-grid wholesale prices or natural gas prices, which since 2015 have been tied at the city-gate level to prices applying in the urban market for fuel oil and LPG. Furthermore, since 2018, China has been working on pilot projects to build a national electricity spot market.

In addition, direct financial support by the central government to state-owned oil and gas companies (CNOOC, PetroChina, and Sinopec) to compensate for losses that they had incurred downstream due to differences between domestic regulated prices and import prices seem to have been phased out, possibly due to lower oil prices.

With policies encouraging energy saving, air pollution control, and the introduction of market-based tools to balance energy use and the generation of emissions – such as the Emissions Trading Scheme – China has initiated many efforts to address its landscape of fossil fuel subsidies. Whether it will be able to abandon all of them will need to be seen. As one inside voice once said, many of China’s subsidised state-owned petro- and petrochemical companies are often the sole providers of employment, infrastructure, and livelihoods in structurally weak areas. Their survival is essential to the survival of whole communities in these areas. Therefore, subsidies that compensate for the financial losses of these companies but ensure social peace in these communities will be harder to phase out.

This Post was submitted by Climate Scorecard China Country Manager Annette Wiedenbach

Engagement Links:

Parry, Ian; Simon Black and Nate Vernon. IMF Working Paper: Still not getting energy prices right: a global and country update of fossil fuel subsidies. September 2021. https://www.imf.org/en/Publications/WP/Issues/2021/09/23/Still-Not-Getting-Energy-Prices-Right-A-Global-and-Country-Update-of-Fossil-Fuel-Subsidies-466004 (last accessed March 29, 2023)

https://www.iea.org/data-and-statistics/data-product/fossil-fuel-subsidies-database (last accessed March 29, 2023)

OECD. Fossil Fuel Support Country Note – China, June 2020 in https://www.oecd.org/fossil-fuels/data/ (last accessed March 29, 2023)

https://www.iisd.org/gsi/faqs/china (last accessed March 29, 2023)

https://www.apec.org/docs/default-source/publications/2021/11/standstill-options-for-apec-economies-on-ffs/221_cti_standstill-options-for-apec-economies-on-ffs_rev.pdf?sfvrsn=9088c2ed_2 (last accessed March 29)


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