China and the United States announced in December 2013 that they would undertake a reciprocal peer review of their fossil fuel subsidies under the auspices of the G20. In the case of China, those invited participants were (in addition to the United States): Germany, Indonesia, the IMF, and the OECD. This report, after summarising key aspects of China’s energy landscape, addresses each stage of the supply chain for fossil fuels, discussing in detail the subsidies and other measures identified in the course of the review process. In particular, the report notes the central role that vertically integrated state-owned enterprises play in China. It also highlights the importance of recent changes such as the introduction of new ad-valorem resource taxes on fossil fuels and the challenges that low prices for coal and hydrocarbons pose for the industry.
The report mentions that many of China’s energy policies are in a state of flux, including reforms to move toward more market-based prices and taxes that better reflect the environmental damage that economic activities can cause. Specifically, the report identifies three inefficient subsidies for upstream activities—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. Chinese authorities have indicated their intention to reform all three measures, though at different time horizons. They noted, in particular, that urban land-use tax concessions might encourage a larger scale of production than would normally be the case. However, the report also emphasises the importance for China to continue to ensure that the most vulnerable segments of society are not adversely affected by the reforms.
Finally, the report also highlights that more information on fossil fuel subsidies, their effects, and their beneficiaries would make the necessary reforms easier to identify and would result in more efficient policies. Price reform should go beyond eliminating the fossil-fuel subsidies discussed above, and eventually capture the environmental externalities that arise from the production and consumption of fossil fuels through efficient pricing (or corrective taxation).