Impacts of removing fossil fuel subsidies on China: How large and how to mitigate?

Abstract

G20 committed to removing inefficient fossil fuel subsidies at the Pittsburgh Summit. China is a large energy consumer with large subsidies. Then, how large are impacts of subsidy removal, and how to mitigate negative impacts? This paper simulates the potential impacts of subsidy removal, and compares different policy options to mitigate the adverse effects. The main findings are as follows. Firstly, subsidy removal would affect the competitiveness, output, welfare and emissions of different world regions disproportionally. Secondly, subsidy removal in China would result in competitiveness issue through trade channel, which would generate negative externalities to China, but positive externalities to other world regions without subsidy removal. Thirdly, subsidy removal in China would result in rebound effects, which would generate positive externalities to regions without subsidy removal, but be harmful to world's emission reductions. Looking ahead, the government should develop a well-designed planning to overcome resistances to subsidy removal.