{"id":33991,"date":"2016-06-07T09:32:00","date_gmt":"2016-06-07T09:32:00","guid":{"rendered":""},"modified":"2020-10-16T15:04:42","modified_gmt":"2020-10-16T15:04:42","slug":"8991-subsidies-blamed-for-overcapacity-in-china-s-coal-sector","status":"publish","type":"post","link":"https:\/\/dialogue.earth\/en\/business\/8991-subsidies-blamed-for-overcapacity-in-china-s-coal-sector\/","title":{"rendered":"Subsidies blamed for overcapacity in China\u2019s coal sector"},"content":{"rendered":"<p dir=\"ltr\"><span id=\"docs-internal-guid-47b5b6cd-2b33-3177-0644-4d58b85fc9b7\">In an exclusive interview with <\/span><em>chinadialogue<\/em>, a leading Chinese economist\u00a0says fossil fuel subsidies have distorted the allocation of resources and are now a major cause of China\u2019s current glut of coal-fired power.<\/p>\n<p dir=\"ltr\">In the following interview,\u00a0Liu Qiang,\u00a0Chinese economist and head of the energy office at the <a href=\"https:\/\/iqte1.cass.cn\/\">Chinese Academy of Social Sciences\u2019 Institute of Quantitative and Technical Economics<\/a>, says\u00a0the most important values to measure are those that gauge\u00a0the impact on people\u00a0\u2013 and so environmental and <a href=\"https:\/\/www.economicshelp.org\/blog\/glossary\/social-cost\/\">social costs<\/a> should be included when calculating the costs of electricity\u00a0generated from fossil fuels.<\/p>\n<p><strong><a href=\"https:\/\/dialogue.earth\/en\/business\/9458-china-coal-subsidies-undermining-renewables-investment\/\">See also: China coal subsidies undermining renewables investment<\/a><\/strong><\/p>\n<p><strong><span id=\"docs-internal-guid-47b5b6cd-2b33-3177-0644-4d58b85fc9b7\">chinadialogue<\/span> (CD): Subsidies are the use of public money to give certain products an artificial price advantage. When did these first appear in China?<\/strong><\/p>\n<p><span id=\"docs-internal-guid-47b5b6cd-2b33-3177-0644-4d58b85fc9b7\"><strong>Liu<\/strong> <strong>Qiang<\/strong> <strong>(LQ)<\/strong>: Energy bottlenecks have always affected China. Until 2012 the country [suffered power cuts and] had to limit electricity use, so energy security is very important to the government. That means the energy sector gets preferential treatment, which can take the form of subsidies.<\/span><\/p>\n<p>In a market economy, energy subsidies take three forms. Production subsidies involve the government using its powers to save the firm material costs and time, rather than the government directly transferring money to a firm.<\/p>\n<p>Compared with the US and most European countries, firms in China spend much less on land and environmental costs when setting up a new project, and less time in negotiations. This is particularly true for energy firms, which are often state-owned.<\/p>\n<p>Secondly, through capital subsidies, financing costs for state-owned firms are much lower than the average for private firms. When bad assets appear on the balance sheet, the state will hive them off.<\/p>\n<p>Investment in energy projects can easily run into the trillions of yuan (hundreds of billions of US dollars).<\/p>\n<p>The third is one of the most inconspicuous: government purchase of energy services. The Chinese government buys a high percentage of all domestic energy; this is another form of underwriting, which can be seen as a subsidy.<\/p>\n<p><strong>CD: China has suffered electricity shortages in the past. Are fossil fuel subsidies a response to energy security concerns? <\/strong><\/p>\n<p><strong>LQ<\/strong>: Reducing the cost of fossil fuels can actually threaten energy security. Originally, China\u2019s energy policy emphasised reliance on domestic resources \u2013 \u00a0primarily coal \u2013 to ensure a safe and steady supply. But excessive protection and subsidisation of coal output means resources are consumed too quickly.<\/p>\n<p>Although China has always been known as a vast land with abundant resources, the supply outlook for extractable coal in China hasn\u2019t been great. If you look at the ratio of reserves to extraction you find that, at the current rate, we\u2019ll run out before 2050.<\/p>\n<p><strong>CD: What direct or indirect effects do subsidies have on the energy industry?<\/strong><\/p>\n<p><strong>LQ<\/strong>: For the traditional energy industry, subsidies have a grave impact, resulting in surplus capacity. Why is China currently talking about supply-side reforms? Because we have too much supply, and to an extent that\u2019s because of subsidies.<\/p>\n<p>Particularly when it comes to production, land and the environment, subsidies mean huge capacity can be obtained at low cost. Low barriers to entry mean low-quality sources of energy appear and reach the market, reducing the incentives for the entire industry to develop in a better direction. We\u2019ve seen this constantly over the last few years and we don\u2019t know what the ultimate cost will be.<\/p>\n<p>My view is based on the economic theory that any production subsidy isn\u2019t warranted. Because companies make production decisions, the company should bear the costs of those choices \u2013subsidies distort the allocation of resources.<\/p>\n<p>Phasing out fossil fuel subsidies would increase the cost of electricity but that economic increase is worthwhile. It\u2019s a cost that consumers should pay, because human health (which would be improved by shifting away from coal) also has value. You can\u2019t just say commodities\u00a0are valuable, but people aren\u2019t.<\/p>\n<blockquote>\n<p dir=\"ltr\">If companies don\u2019t pay those costs, the public will. Damage to health affects everyone.<\/p>\n<\/blockquote>\n<p dir=\"ltr\"><span id=\"docs-internal-guid-47b5b6cd-2b33-3177-0644-4d58b85fc9b7\"><strong>CD: Would abolishing coal or oil subsidies impact the lives of the society\u2019s most vulnerable?<\/strong><\/span><\/p>\n<p><strong>LQ<\/strong>: Ordinary citizens, particularly vulnerable groups, need basic energy services: electricity and fuel. But these only account for a small part of public consumption as a whole, which means that increases in energy prices could be borne by bill payers.<\/p>\n<p>From another angle, upstream extraction of resources such as coal or oil has a huge environmental impact, including pollution of the air, land and water. If companies don\u2019t pay those costs, the public will. Damage to health affects everyone.<\/p>\n<p>Finally, continuing overcapacity and consumption are a waste of public resources. Subsidies come from public funds, and that means everyone is paying for them \u2013 and low-income groups may pay more than other\u00a0elements of society.<\/p>\n<p>So on the one hand, we need to ensure basic public services and the supply of energy; but on the other we need to control upstream firms. Also, it\u2019s not necessarily the case that shifting from polluting technologies to cleaner forms necessitates higher costs.<\/p>\n<p><strong>CD: Fossil fuel companies are pushing forward with cleaner technology, such as super-critical and ultra-critical coal-fired\u00a0power plants. Is there any environmental upside?<\/strong><\/p>\n<p><strong>LQ<\/strong>: The make-up of coal is complex, and differs depending on where it was mined. The law currently controls emissions of sulphur dioxide, nitrogen oxides and ash, but state standards can\u2019t control everything \u2013 such as phosphorous, arsenic and mercury. That\u2019s all going to end up somewhere, even if you use the newest technologies.<\/p>\n<p>There\u2019s another problem with fossil fuels \u2013 their use of water resources. Recently a 4-gigawatt coal-fired power plant in Gansu was approved, but water resources in the <a href=\"https:\/\/en.wikipedia.org\/wiki\/Hexi_Corridor\">Hexi Corridor<\/a> are very scarce.<\/p>\n<p dir=\"ltr\">Of course when the project was undergoing examination, the building of reservoirs to ensure supply would have been considered, but when overall water resources are scarce there\u2019s a limited supply of water for those reservoirs. If you provide water for the power plant you lose that water from\u00a0somewhere else.<\/p>\n<p><span id=\"docs-internal-guid-47b5b6cd-2b33-3177-0644-4d58b85fc9b7\"><strong>CD: The China-hosted\u00a0meeting of the G20\u00a0will be held in Hangzhou in September.\u00a0What are the key policy choices on the table? <\/strong><\/span><\/p>\n<p><strong>LQ<\/strong>: Whether you\u2019re trying to save energy, cut emissions or respond to climate change, all policies affect industry chains and ultimately impact on the consumer.<\/p>\n<p>When it comes to policy choices, I favour an \u201cenvironmental tax\u201d on energy and stronger technical standards. The energy sector in China is very profitable, so that\u2019s what we should target, and this is also more acceptable to the public. Manufacturing is one of the foundations of China\u2019s economy, and if downstream companies suffer too much then we\u2019ll see less innovation in manufacturing.<\/p>\n<p><strong>CD: Will energy pricing systems in China become more like those in the US and EU?<\/strong><\/p>\n<p><strong>LQ<\/strong>: In the US and EU there are competitive retail markets for electricity, and the EU has done particularly well here. Consumers can choose which company they will buy electricity from. Power plants are all hooked up to one grid, which delivers power for a transmission fee based on a fixed standard (for example, distance). Consumers can choose to use green electricity even if it is a bit pricier, for example. And the grid can decide to take a bit more green electricity.<\/p>\n<p>A full market-pricing system is entirely achievable, it is\u00a0not very difficult. The key issue is making the grid independent. If the grid also owns power plants, it naturally prefers to use power from those plants. You need an independent grid if you are to have competition both upstream and downstream.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Preferential treatment for state-backed coal firms has created financially\u00a0unviable\u00a0&#8216;stranded&#8217; assets,\u00a0says Chinese economist Liu Qiang<\/p>\n","protected":false},"author":2265,"featured_media":58763,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[758,757],"tags":[520,597],"hashtags":[],"country":[],"class_list":["post-33991","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business","category-energy","tag-coal","tag-technology"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.0 (Yoast SEO v26.0) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Subsidies blamed for overcapacity in China\u2019s coal sector | Dialogue 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