The environmental and economic impacts of phasing out cross-subsidy in electricity prices: Evidence from China

Abstract

Electricity cross-subsidy policies have long been criticized for they involve subsidizing households by charging above-cost prices in industrial sectors. This paper examines the environmental and economic impacts of phasing out cross-subsidy in electricity prices in the context of China's Carbon Peaking and Neutrality goals by exploiting a large panel data from 2012 to 2020. We first adopt a price-gap approach to calculate the scale of negative cross-subsidy in China and different sectors. Next, we estimate the electricity demand price elasticity of high-, medium-, and low-emission industries to evaluate how the cross-subsidy affects electricity consumption, carbon emissions, and the output value. Finally, with the 2020 scenario as our baseline, we simulate three distinct policy change Schemes and evaluate the environmental and economic effects of phasing out electricity cross-subsidy in China. We find that if policy makers do not consider the emission levels of different industries when implementing cross-subsidy removal, great environmental harm will be caused. We also find that the potential burden on households of electricity cross-subsidy removal is likely to be relatively small at all implementation stages. This study provides timely policy implications for the ongoing electricity system reform in China.