June 25, 2007

Subsidizing Inefficiency

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In my last post, I marveled at the plethora of clean energy technologies that were available at an environmental protection conference here in Beijing – presumably without subsidy. In fact, the PRC has indeed taken a no-subsidies stance, at least according to a speech by central bank Governor Zhou Xiaochuan last year where he called for removing price-distorting subsidies on energy and raw materials.

In reality, however, a series of subsidies, both good and bad towards the promotion of renewable energy, are already in place or in the works. On the ethanol front, for example, is the $173 per ton that China’s four major ethanol producers will receive once their plants reach the designed production capacities. Ironically, China exports between 500,000 to 900,000 tons of ethanol yearly – mostly to the U.S., where its purchase is then subsidized by the U.S. government!

Although subsidies are rationalized as essential towards achieving China’s “Green GDP” goal to cut energy cost per gross domestic product by 4 percent a year during 2006-2010, they have also reduced competition and innovation in the market. The result is often energy inefficiency: in 2005, for example, China and India each consumed up to five times the energy Japan did to produce each dollar of economic output, according to the Asian Development Bank.

The majority of China’s energy subsidies are allocated per volume of energy produced, without adequate consideration of the energy inputs or negative externalities associated with the energy medium. Instead of following this route, China should develop an objective and consistent policy based on mandatory caps on greenhouse gases for carbon trading, similar to the one in place in the U.S. or in Europe (but avoiding the high cost of certification which exists in the latter market).