How did the price and income elasticities of natural gas demand in China evolve from 1999 to 2015? The role of natural gas price reform

Abstract

As a cleaner, high-efficiency, and low-carbon fuel, natural gas has been an important fuel resource for China. To achieve a substantial increase in natural gas demand, China has sought to reform its natural gas pricing mechanism. Employing a set of unbalanced panel data for China’s 30 provinces covering 1999–2015, this study aims to estimate the evolving price and income elasticities of natural gas demand and explore the effect of natural gas price reform in China. For this purpose, a series of econometric techniques allowing for cross-sectional dependence and slope homogeneity is utilized. The results suggest that although natural gas demand in China still lacks negative price elasticity, the phenomenon is improving. Moreover, the estimates suggest that natural gas demand in China is indeed becoming increasingly sensitive to income changes. Our estimates also provide strong evidence in favor of the effect of natural gas price reform on the change in price elasticity as the price elasticity decreases in five of the seven regions. In addition, the results indicate large variations in the change in price and income elasticities of natural gas demand across China’s regions. Natural gas demand is becoming more price inelastic in Southwest China and Northwest China, while such demand in North China and East China responds less sensitively to income changes. These findings offer several policy suggestions for the reform of China’s natural gas market at the national and regional levels.