Markets and China’s Energy Consumption

Qiang Wang of the Chinese of Academy of Sciences had a letter in the 29 August Science magazine (behind paywall) about the critical issue of energy subsidies in China.

Rising global energy prices have caused a drop in consumption in the United States, but in China, not so much:

Source: EIA

Source: EIA

You can see that higher global energy prices have only barely dented consumption in China. Wang argues that China’s energy subsidies are a big part of the problem:

China’s energy prices are mainly decided and controlled by the government. Because the government emphasizes social stability (1) over scarcity of resources or environmental cost (2), it sets the energy prices very low. For example, Chinese gasoline and diesel prices rose by less than 10% (3) in 2007, when global oil price nearly doubled. Moreover, in January 2008, the Chinese government decided to freeze energy prices in the near term, even as international crude oil futures have continued to surge (1).

Energy conservation and efficiency are hard to achieve because government-set prices encourage excessive energy consumption and waste (4). The low energy prices send a distorted market signal to consumers that there is no shortage of natural resources, indicating that enhancing energy efficiency is unnecessary and waste is justified. In 2007, sales of cars with large engines (3 to 4 liters) increased by a factor of 4.5 compared to sales in 2006, and SUV sales increased by 50.09%. Meanwhile, sales of more energy-efficient cars with smaller engines (1 liter) dropped by 30.90%, also compared to 2006 sales (5).

One of the key global problems in aligning energy consumption and production is the allocation problem caused by government subsidies in places like China.


  1. China can subsidize oil for its citizens, but that subsidy money has to come from some other program, a program that China is not funding, milk testing comes to mind.

    China can choose to bankrupt themselves to keep internal energy prices down, but the outcome is predictable. The outcome is financial or technical collapse just as we have seen in Russia. China has the added problem that their one family, one child program has created a rapidly aging, socially unstable society.

  2. But Eric, the question is not whether China is setting up a recipe for economic disaster, but whether it will be able to keep the subsidy con going long enough that it won’t matter. Disastrous or not from a Chinese economic policy standpoint, a significant subsidy that extends into the mid 2010s would have truly scary ramifications on both environmental change and locking the Chinese into the same early 19th Century car/road system that has left us Americans in the fossil fuel death spiral we currently wallow in.

    And we all remember how long the Soviets persisted in Cold War budgeting beyond the point of making any economic sense whatsoever. Who’s to say how long a controlled economy shell game can go on?

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