The impact of removing cross subsidies in electric power industry in China: Welfare, economy, and CO2 emission

Abstract

There are cross subsidies in China's power industry and there is a gap between supply cost and the sales price of electricity to residents and enterprises. Enterprises pay for part of residents' electricity bills. As cross subsidies always have been criticized, this paper simulates counterfactual scenarios of removing cross subsidy by applying a dynamic recursive computable general equilibrium model. Based on the scenario analysis, the elimination of cross subsidy will have positive impact on economic performance, but negative on CO2 mitigation, industrial structure, and social welfare. Eliminating cross subsidies can reduce commodity prices, improve the competitiveness of enterprises, especially power-intensive enterprises. However, China is somehow an export-oriented country. Only a part of the benefits of the decrease in the product price is obtained by domestic households. Maybe removing cross subsidies is not a good policy in this kind of countries. However, under the background of power system reform, cross subsidy may not last long, and the price will not be regulated. With the marketization of electricity trading, appropriate imposed environmental tax or carbon tax will be more conducive to China's low-carbon development.