China
The People’s Republic of China (hereafter “China”) is the largest producer of coal and lignite in the world, capturing 51% of the world’s total in 2022. While domestic coal meets most of China’s needs, imports in 2022 still amounted to 293.20 million tonnes, making the country the largest importer of coal. The bulk of imports come from Australia and Indonesia, the world’s top two coal net exporters. China also relies heavily on imported oil and natural gas, a fact that underlies the country’s recent efforts to develop unconventional hydrocarbons (e.g. shale gas and coal-bed methane). In 2022, fossil fuels continue to dominate the power sector with more than half (63%) of electricity being generated from coal, followed by hydro (14%) and solar and wind (9%), nuclear (5%), natural gas (3%) and biofuels and waste (2%).
Energy production and sales of energy products have historically been strictly regulated in China. State-owned companies play a crucial role at various stages of the supply chain, and many of these firms retain monopoly power in key segments relating to the production, distribution, or consumption of fossil fuels.
The State-owned Assets Supervision and Administration Commission (SASAC) of the State Council, nominally supervises China Energy Investment Corporation (CEIC). Meanwhile, the National Development and Reform Commission (NDRC) regulates the energy sector and has anti-trust responsibilities, including the authority to fine oil and gas firms that breach price controls.
China’s thermal-coal production involves a wide range of public and private actors, though problems of overcapacity are increasingly driving consolidation towards larger state-run actors. The largest consumers are public power utilities (e.g. the Huaneng Group) that are subject to price regulation by the NDRC on their electricity and heat output. Despite an increasing focus on renewables as a cleaner power source, coal remains the dominant fuel in power generation. To meet the growing demand for natural gas, China significantly increased its import capacity through capital expenditures on pipelines and LNG terminals. State oil and gas companies (e.g. PetroChina or Sinopec) and partner companies retain an effective monopoly on crude-oil imports, processing, and domestic extraction.
National, regional, and local authorities regulate prices of fossil fuels in China. The NDRC is ultimately responsible for price setting and competition regulation in most segments of the energy market. Since 2015, natural-gas prices in China have been tied at the city-gate level to prices applying in the Shanghai urban market for fuel oil and LPG. In 2016, stricter regulation policies on gas transmission and distribution tariffs have been introduced, as well as the liberalisation of gas prices for fertiliser. For electricity, the NDRC and its regional counterparts set on-grid wholesale prices received by utilities administratively; retail electricity prices are set for each province and are regularly adjusted. Reforms implemented in 2017 progressively liberalise electricity tariffs at the wholesale level. Since 2018, China began pilot projects to build a national electricity spot market, further liberalising electricity pricing. On-grid power price is negotiated between the utilities and consumers, while NDRC regulates the transmission and distribution price. For crude oil, a price floor of USD 40 per barrel and a price ceiling of USD 130 per barrel were also introduced in 2016. This mechanism prevents the prices for refined oil products from dropping below what they would cost if crude oil remained at USD 40 per barrel. When the international price of crude oil drops below USD 40 per barrel, the difference with the domestic price floor 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 oil price exceeds USD 130 per bbl., the government will subsidise oil companies for higher international oil price from the reserve fund. In March 2019, the Administration lowered the VAT rate for refined oil products from 16% to 13%. Fossil fuels used for heating and other residential purposes is subjected to a lower VAT rate of 9%. Excise duties apply on a range of oil products (e.g. gasoline, naphtha, solvent oil, and lubricating oil at CNY 1.52/litre; diesel, aviation kerosene, and fuel oil at CNY 1.2/litre).
In 2022, to shield domestic consumers from the effects of the global energy crisis, the Chinese government enacted the legal means to freeze refined oil price for two months should the international price go beyond USD 130 per barrel, through an ad hoc subsidy scheme to oil companies. The Shenzhen municipality also implemented a 10% subsidy on corporate electricity bills from May to June 2022. The Chongqing municipality implemented a targeted energy subsidy scheme for SMEs and individual businesses, in the form of a minimum 5% support rate for gas bills for May and June 2022. The scheme excludes high energy consumption companies, companies using gas as major production resources, gas-fired power plants, gas suppliers, and CNG gas stations, while some sectors (hotels and restauration, culture and tourism, transports, wholesale and retail, and other service industries) are prioritised as beneficiaries.
Also in 2022, the province of Inner Mongolia published the coalbed methane development and utilisation strategy document to support its coal industry development between 2021 and 2025. It has set a target to investment CNY 936 million (USD 140 million, as of 23 June 2022) in coalbed methane, boost production capacity to 155 million m3/year and utilisation to 124 million m3/year. The scheme outlines several upcoming plans for the sector: explore methane reserves in a list of key coal mines; build demonstration zones; advance technological innovation in coalbed methane extraction; strengthen environmental protection regulations and supervision; and support industry development with preferential financial policies and increased funding.
In 2022, total grants to State-owned energy companies increased from the drop seen in 2021, reaching similar levels to 2020 amounts. For example, the national government increased its grant to Sinopec from CNY 6.706 billion to CNY 9.277 billion and the grant PetroChina increased from CNY 837 million to CNY 1 203 million in the same period. The reason for the significant decrease in 2021 is not clear at present.
Starting in 2020, China saw an increasing number of approvals for new coal power plants as part of an economic stimulus response to COVID-19. Electric peak loads strained by increasing use of air conditioning due to high heat waves starting summer of 2022 prompted further investment into coal-fired plants. China approved 106 GW worth of new coal-fired power projects in 2022 with 2023 proposals bringing the amount to 392 GW.
Numerous big-ticket fossil fuel infrastructure projects were also approved during the period of the pandemic mainly focussing on capital spending for the construction of oil and gas storage and receiving facilities. Among these are the construction of oil depot and refined oil pipelines in Hunan province, the construction of a new LNG receiving station in the Beijing-Tianjin area, and a new LNG receiving station in the China's southern Guandong Province.
Support for fossil fuels in China in large part comes in the form of direct payments under the petroleum price-reform support programmes. This measure seeks to compensate professional fuel users that were directly affected by the reform of petroleum pricing after the NDRC switched from price bands to price caps in 2009. Taxi drivers, public transport, and fuel users in farming, forestry, and fisheries have been the largest beneficiaries of the measure. The payments are scheduled to be gradually reduced to 60% in 2020, after which further policies will be decided. The central government, as well as provincial and even municipal governments provide these subsidies. Local government have significant control over the amount.
The Central Government has also at times compensated financially state-owned oil and gas companies (CNOOC, PetroChina, and Sinopec) for losses they had incurred downstream due to differences between domestic regulated prices and import prices. This does not seem to be the case any longer owing to the lower crude-oil prices that have prevailed since late 2014 and the price crashes observed in the COVID-19 era, and to the energy price reforms that China has undertaken over recent years. Per-unit subsidies exist for encouraging the production or utilisation of unconventional gas such as shale gas and coal-bed methane, although such support is being gradually reduced. Conventional hydrocarbon extraction is also supported by way of targeted reductions of China’s resource tax.
The fiscal cost of support measures for fossil fuels in China was estimated at CNY 172.75 billion in 2022 (Table 1). Forty-six per cent (46%) was directed at end user beneficiaries, as opposed to 53% directed to firms. Support was mainly given out in the form of direct transfers (CNY 119.18 billion) accounting for 69% of the total fiscal cost of support measures. Tax expenditures amounted to CNY 53.57 billion.
The fiscal cost of support measures for fossil fuels has decreased by 30% since 2017. Since last year, tax expenditures have increased by 9%, from CNY 49.28 billion to CNY 53.57 billion and direct transfers increased by 4%, from CNY 113.78 billion to CNY 119.18 billion. All growth rate percentages above are expressed in terms of nominal national currency amounts.
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.