The People’s Republic of China (hereafter “China”) is the largest producer of coal and lignite in the world, capturing 51% of the world’s total in 2022. While domestic coal meets most of China’s needs, imports in 2022 still amounted to 293.20 million tonnes, making the country the largest importer of coal. The bulk of imports come from Australia and Indonesia, the world’s top two coal net exporters. China also relies heavily on imported oil and natural gas, a fact that underlies the country’s recent efforts to develop unconventional hydrocarbons (e.g. shale gas and coal-bed methane). In 2022, fossil fuels continue to dominate the power sector with more than half (63%) of electricity being generated from coal, followed by hydro (14%) and solar and wind (9%), nuclear (5%), natural gas (3%) and biofuels and waste (2%).
OECD Inventory of Support Measures for Fossil Fuels: Country Notes
China
Energy resources and market structure
Source: IEA (2022), "World energy statistics", IEA World Energy Statistics and Balances (database).
Energy production and sales of energy products have historically been strictly regulated in China. State-owned companies play a crucial role at various stages of the supply chain, and many of these firms retain monopoly power in key segments relating to the production, distribution, or consumption of fossil fuels.
The State-owned Assets Supervision and Administration Commission (SASAC) of the State Council, nominally supervises China Energy Investment Corporation (CEIC). Meanwhile, the National Development and Reform Commission (NDRC) regulates the energy sector and has anti-trust responsibilities, including the authority to fine oil and gas firms that breach price controls.
China’s thermal-coal production involves a wide range of public and private actors, though problems of overcapacity are increasingly driving consolidation towards larger state-run actors. The largest consumers are public power utilities (e.g. the Huaneng Group) that are subject to price regulation by the NDRC on their electricity and heat output. Despite an increasing focus on renewables as a cleaner power source, coal remains the dominant fuel in power generation. To meet the growing demand for natural gas, China significantly increased its import capacity through capital expenditures on pipelines and LNG terminals. State oil and gas companies (e.g. PetroChina or Sinopec) and partner companies retain an effective monopoly on crude-oil imports, processing, and domestic extraction.
Energy prices and taxes
National, regional, and local authorities regulate prices of fossil fuels in China. The NDRC is ultimately responsible for price setting and competition regulation in most segments of the energy market. Since 2015, natural-gas prices in China have been tied at the city-gate level to prices applying in the Shanghai urban market for fuel oil and LPG. In 2016, stricter regulation policies on gas transmission and distribution tariffs have been introduced, as well as the liberalisation of gas prices for fertiliser. For electricity, the NDRC and its regional counterparts set on-grid wholesale prices received by utilities administratively; retail electricity prices are set for each province and are regularly adjusted. Reforms implemented in 2017 progressively liberalise electricity tariffs at the wholesale level. Since 2018, China began pilot projects to build a national electricity spot market, further liberalising electricity pricing. On-grid power price is negotiated between the utilities and consumers, while NDRC regulates the transmission and distribution price. For crude oil, a price floor of USD 40 per barrel and a price ceiling of USD 130 per barrel were also introduced in 2016. This mechanism prevents the prices for refined oil products from dropping below what they would cost if crude oil remained at USD 40 per barrel. When the international price of crude oil drops below USD 40 per barrel, the difference with the domestic price floor is collected in a special “risk reserve fund” set by the central government, and used to fund programmes on energy saving, oil quality improvement, and other projects. Similarly, if oil price exceeds USD 130 per bbl., the government will subsidise oil companies for higher international oil price from the reserve fund. In March 2019, the Administration lowered the VAT rate for refined oil products from 16% to 13%. Fossil fuels used for heating and other residential purposes is subjected to a lower VAT rate of 9%. Excise duties apply on a range of oil products (e.g. gasoline, naphtha, solvent oil, and lubricating oil at CNY 1.52/litre; diesel, aviation kerosene, and fuel oil at CNY 1.2/litre).
Figure 2. Total tax rebates and support for fossil fuels in China
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Recent developments and trends in support
In 2022, to shield domestic consumers from the effects of the global energy crisis, the Chinese government enacted the legal means to freeze refined oil price for two months should the international price go beyond USD 130 per barrel, through an ad hoc subsidy scheme to oil companies. The Shenzhen municipality also implemented a 10% subsidy on corporate electricity bills from May to June 2022. The Chongqing municipality implemented a targeted energy subsidy scheme for SMEs and individual businesses, in the form of a minimum 5% support rate for gas bills for May and June 2022. The scheme excludes high energy consumption companies, companies using gas as major production resources, gas-fired power plants, gas suppliers, and CNG gas stations, while some sectors (hotels and restauration, culture and tourism, transports, wholesale and retail, and other service industries) are prioritised as beneficiaries.
Also in 2022, the province of Inner Mongolia published the coalbed methane development and utilisation strategy document to support its coal industry development between 2021 and 2025. It has set a target to investment CNY 936 million (USD 140 million, as of 23 June 2022) in coalbed methane, boost production capacity to 155 million m3/year and utilisation to 124 million m3/year. The scheme outlines several upcoming plans for the sector: explore methane reserves in a list of key coal mines; build demonstration zones; advance technological innovation in coalbed methane extraction; strengthen environmental protection regulations and supervision; and support industry development with preferential financial policies and increased funding.
In 2022, total grants to State-owned energy companies increased from the drop seen in 2021, reaching similar levels to 2020 amounts. For example, the national government increased its grant to Sinopec from CNY 6.706 billion to CNY 9.277 billion and the grant PetroChina increased from CNY 837 million to CNY 1 203 million in the same period. The reason for the significant decrease in 2021 is not clear at present.
Starting in 2020, China saw an increasing number of approvals for new coal power plants as part of an economic stimulus response to COVID-19. Electric peak loads strained by increasing use of air conditioning due to high heat waves starting summer of 2022 prompted further investment into coal-fired plants. China approved 106 GW worth of new coal-fired power projects in 2022 with 2023 proposals bringing the amount to 392 GW.
Numerous big-ticket fossil fuel infrastructure projects were also approved during the period of the pandemic mainly focussing on capital spending for the construction of oil and gas storage and receiving facilities. Among these are the construction of oil depot and refined oil pipelines in Hunan province, the construction of a new LNG receiving station in the Beijing-Tianjin area, and a new LNG receiving station in the China's southern Guandong Province.
Support for fossil fuels in China in large part comes in the form of direct payments under the petroleum price-reform support programmes. This measure seeks to compensate professional fuel users that were directly affected by the reform of petroleum pricing after the NDRC switched from price bands to price caps in 2009. Taxi drivers, public transport, and fuel users in farming, forestry, and fisheries have been the largest beneficiaries of the measure. The payments are scheduled to be gradually reduced to 60% in 2020, after which further policies will be decided. The central government, as well as provincial and even municipal governments provide these subsidies. Local government have significant control over the amount.
The Central Government has also at times compensated financially state-owned oil and gas companies (CNOOC, PetroChina, and Sinopec) for losses they had incurred downstream due to differences between domestic regulated prices and import prices. This does not seem to be the case any longer owing to the lower crude-oil prices that have prevailed since late 2014 and the price crashes observed in the COVID-19 era, and to the energy price reforms that China has undertaken over recent years. Per-unit subsidies exist for encouraging the production or utilisation of unconventional gas such as shale gas and coal-bed methane, although such support is being gradually reduced. Conventional hydrocarbon extraction is also supported by way of targeted reductions of China’s resource tax.
The fiscal cost of support measures for fossil fuels in China was estimated at CNY 172.75 billion in 2022 (Table 1). Forty-six per cent (46%) was directed at end user beneficiaries, as opposed to 53% directed to firms. Support was mainly given out in the form of direct transfers (CNY 119.18 billion) accounting for 69% of the total fiscal cost of support measures. Tax expenditures amounted to CNY 53.57 billion.
The fiscal cost of support measures for fossil fuels has decreased by 30% since 2017. Since last year, tax expenditures have increased by 9%, from CNY 49.28 billion to CNY 53.57 billion and direct transfers increased by 4%, from CNY 113.78 billion to CNY 119.18 billion. All growth rate percentages above are expressed in terms of nominal national currency amounts.
Table 1. Fiscal cost of support measures for fossil fuels (in billions of national currency)
|
|
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
|---|---|---|---|---|---|---|
|
Tax expenditures |
43.681 |
47.637 |
48.749 |
47.999 |
49.276 |
53.574 |
|
Direct transfers |
204.361 |
217.146 |
182.585 |
153.886 |
113.781 |
119.179 |
|
Total |
248.042 |
264.784 |
231.333 |
201.885 |
163.057 |
172.753 |
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports). Support measures for which such information is not available are excluded from the aggregate amount reported in this table. In addition, support measures in certain countries may not have been exhaustively identified.
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 2 highlights a selection of support measures associated with a large fiscal cost. A description of these measures is provided in Table 3.
Table 2. Selected support measures for fossil fuels with a large fiscal cost (in billions of national currency)
|
Measures associated with large fiscal cost in 2022 |
2022 |
2017 |
Variation since 2017 |
|
|---|---|---|---|---|
|
Tax expenditures |
|
|||
|
Excise Tax Suspension for Domestic Aviation Fuel |
41.992 |
33.564 |
8.427 |
|
|
VAT Reduction for Natural Gas and Coal for Home Use |
5.295 |
3.601 |
1.693 |
|
|
Resource-Tax Abatements and Refunds for Oil and Gas Extraction |
4.978 |
2.358 |
2.621 |
|
|
Direct transfers |
||||
|
Equipment in coal-fired power plants for atmospheric pollution prevention |
53.474 |
57.960 |
-4.486 |
|
|
Petroleum Fuels Price Reform Support Programmes (Agricultural) |
32.302 |
122.186 |
-89.884 |
|
|
Government Grants to Fossil Fuel Extraction or Refining Companies |
13.549 |
8.502 |
5.047 |
|
1. Fiscal cost of support measures for fossil fuels are based on information reported by countries through official documentation (e.g. budget reports).
2. Tax expenditures are estimates of revenue that is foregone due to a particular feature of the tax system that reduces or postpones tax payments (relative to a jurisdiction’s benchmark tax system) to the benefit of fossil fuels’ producers or users. Hence, (i) tax expenditures estimates can increase either because of greater concessions (relative to the benchmark tax system) or because of an increase in the benchmark itself; (ii) cross-country comparisons of tax expenditures can be misleading due to country-specific benchmark tax systems.
3. Support measures for fossil fuels are included in the Inventory without reference to their economic or environmental effects. No judgment is therefore made as to whether such measures are inefficient or ought to be reformed.
4. Data are expressed in nominal local currency. Data for 2022 are on a preliminary basis.
Source: OECD Inventory of support measures for fossil fuels (2023).
Table 3 Description of selected support measures for fossil fuels
|
Excise Tax Suspension for Domestic Aviation Fuel |
Although in principle domestic aviation fuel in China is subject to a CNY 1.2 per litre excise tax, this levy has been suspended ever since the excise-tax reform of 1 January 2009. This inventory estimates the revenue foregone due to the excise-tax suspension using data from the IEA’s Energy Balances on fuel use in China’s domestic-aviation sector. The benchmark rate of excise duty adopted for estimation purposes is CNY 0.80 per litre up until 2014 included, and CNY 1.2 per litre thereafter. |
|
VAT Reduction for Natural Gas and Coal for Home Use |
Purchases of crude oil, refined petroleum products (except LPG), and coal for use in electricity generation or industry in China are subject to the standard 17% VAT rate. Most other energy products, including all variants of natural gas, LPG, and coal for residential use are taxed at a reduced rate of 13%. Following a VAT policy change issued in 2017, the 13% VAT is replaced by a simplified VAT taxation structure. One of the consequences of the change is that now natural gas, LPG and coal products used in the residential sector are subject to a VAT rate of 11%. This will be reflected in this measure’s estimates for years starting 2017. The OECD can only estimate the value of the support to natural gas under this measure and cannot provide estimates for other fossil fuels. The rate of VAT rebate is multiplied by the estimated value of the natural gas consumed for residential use. Such value is obtained multiplying volume data from the IEA World Energy Balances by average sales prices for natural gas extracted by Sinopec and PetroChina. |
|
Resource-Tax Abatements and Refunds for Oil and Gas Extraction |
The tax treatment of oil and natural-gas extraction in China recently moved from a royalty system to an ad valorem resource tax. This resource tax is levied on the value of a field’s total production, less any applicable exemptions or reductions. The reform was first introduced in June 2010 as a trial in the resource-rich Uygur Autonomous Region of Xinjiang, before it was then extended to the whole country starting in November 2011. Amendments introduced in late 2014 subsequently increased the baseline tax rate from 5% to 6%. There are currently five exemptions or reductions available to oil and gas companies under the resource tax. Those tax concessions concern: - the production of oil and natural gas later used in heating heavy oil [1] for transportation; - the production of heavy oil, high pour-point oil (i.e. high-paraffin oil), and high-sulphur natural gas, which attracts a 40% reduction in the resource tax, for a net resource-tax rate of 3.6%; crude oil produced using tertiary oil-recovery methods (e.g. enhanced oil recovery through the injection of CO2), which attracts a temporary 30% reduction in the resource tax, for a net resource-tax rate of 4.2%; the output from so-called ;low-abundance oil and gas fields; that have recoverable reserves below 250 000 m3 (600 000 m3) per km2 for onshore (offshore) crude oil, and below 250 million m3 (600 million m3) per km2 for onshore (offshore) natural gas, and which attracts a temporary 20% reduction in the resource tax, for a net resource-tax rate of 4.8%; and the output from deep-water oil and gas fields (i.e. deeper than 300 m), which attracts a 30% reduction in the resource tax, for a net resource-tax rate of 4.2%. The concessions listed above are not cumulative and the production from a given oil or gas field can only be subject to one or the other. This results in the same company being subject to different rates of resource tax on its different fields, with effective rates often ranging from 3.6% to 6%. Each field is thus ring-fenced for resource-tax purposes. Chinese authorities provide a table summarising the different effective rates as they apply to different fields. This table shows that only two firms pay the full 6% under China’s resource tax, namely one ;research and development for exploration centre; and the CNPC Southern Petroleum Exploration and Development Company, a subsidiary of CNPC apparently involved in overseas oil exploration. Combining the information in this table with that found in the annual reports of PetroChina and Sinopec to the US Securities and Exchange Commission (SEC) [2] makes it possible to estimate the amounts of revenue foregone under China’s resource tax at the field level. The calculation assumes a 5% benchmark rate of taxation and is done for all fields for which data are available in both the table and annual reports to the US SEC. Footnotes: [1] ;Heavy oil; is defined by Chinese authorities as crude oil having a viscosity greater than or equal to 50 mPa per second, or a density greater than or equal to 0.92 g per m3. [2] Foreign companies listed on the New York Stock Exchange have an obligation of annual reporting pursuant to Section 13 or 15(d) of the US Securities Exchange Act of 1934. It is in this context that PetroChina and Sinopec produce detailed annual reports on their upstream and downstream activities, otherwise known as ;Forms 20-F. |
|
Equipment in coal-fired power plants for atmospheric pollution prevention |
The Chinese government provides many compensation schemes to coal-fired power plants to reduce air pollution (NOx, SOx, and dust emissions). In 2013 for instance, a price compensation was provided to coal-fired power plants with qualifying denitrification equipment (0.01 CNY/kWh) and dust removal facilities (0.002 CNY/kWh). Later in 2016, under its work plan for ultra-low emissions and energy-saving renovation of coal-fired power plants, the Chinese government started providing a tariff premium to ultra-low-emission coal power plants. The premium was set to 0.01 CNY/kWh. Fiscal expenses associated with these measures are assumed to be reported under Pollution prevention - Atmosphere in the National General Public Budget Expenditures. |
|
Petroleum Fuels Price Reform Support Programmes (Agricultural) |
China’s main support measure for fuel consumers was introduced in 2006 and consists of a group of programmes now known as the Petroleum Fuels Price-Reform Support Programmes. These related programmes provide for direct payments to groups deemed most affected by the increases in petroleum fuel prices that followed the NDRC’s switch from target price bands to price caps in 2009, as well as the implementation of hiked excise taxes to raise revenue and reduce road tolls. Although it is governed formally by regulations issued in 2008 and 2009, this measure actually dates back to 2006 at a time when prices initially moved from fixed rates to target price bands. The measure’s main recipients include taxi drivers along with urban and rural passenger transport, and users in the forestry and fisheries sectors. The government used to base the amounts of support it provides on average industry-usage statistics from the prior year and prevailing fuel prices. Though, this measure was reformed in 2016: now the subsidies is no longer linked to the volume of oil consumption -which potentially caused waste as the more consumed, the more subsidised, but is based instead on the 2014 subsidy as a benchmark and the subsidy is gradually reduced every year – 2015 reduces by 15%, 2016 reduces by 30%, 2017 reduces by 40%, 2018 reduces by 50%, 2019 reduces by 60%, and after 2020 further policies will regulate the measure. While specific funds supporting the use of petroleum fuels by farmers are also reported under this measure, those are generally combined with broader subsidies for fertilisers and pesticides (described as comprehensive agricultural input subsidies). This often makes it challenging to distinguish between general support to agricultural inputs and fossil-fuel related spending. The reported figures for agriculture are therefore high estimates since they may comprise more than just fossil-fuel-related expenditures. The data reported here are for central payments made to provincial-level governments. The latter are then responsible for working with local authorities in distributing these payments and any matching funds to affected users. Estimates are not, however, available for those additional matching funds so that this inventory only reports central payments. Figures could not be located for 2009 Central-Government expenditures. Since the governing regulations that were in effect in 2009 had been implemented since 2008, this inventory assumes the 2008 figure of CNY 108.1 billion for the year 2009. [1] This inventory allocates the annual subsidies reported for agricultural users to gasoline and diesel fuel on the basis of the IEA’s Energy Balances for China’s farming sector. In the absence of more information, the amounts of support benefitting taxi drivers, passenger transport, forestry, and fisheries are assumed to encourage the consumption of diesel fuel and light fuel oil. Footnotes: [1] Although the year 2009 saw international oil prices decrease substantially from their 2008 peak, this did not lead to a reduction in domestic fuel prices in China. To the contrary, consumer prices there continued increasing and the Central Government chose to maintain fuel subsidies at the level that then prevailed. Subsidies for the year 2009 were thus calculated by the authorities on the basis of 2008 fuel-usage statistics (MOF 2009 Caijian Circular 1). |
|
Government Grants to Fossil Fuel Extraction or Refining Companies |
This measure covers general grants that were provided by the Central Government of China to Sinopec and PetroChina between the years 2008 and 2012. Those grants are distinct from other government support the two companies received in the form of VAT rebates or operating subsidies (see ;VAT Rebate on Imported Natural Gas Attributable to PetroChina; and ;2008 Operating Subsidies to Sinopec and PetroChina;). Sinopec describes the government grants it received under this measure as accruing to operating capital in its annual reports covering the 2008-12 period. In the 2008 report, for example, the company reported CNY 879 million of ;government grants relating to the purchase of fixed assets; an amount which was then allocated to Sinopec’s capital reserve. Subsidies were split between the parent group and the listed subsidiary, though mostly accruing to the latter. PetroChina classifies the government grants it received as ;non-operating income; for all years. Less the amount (CNY 15.7 billion) specifically attributed to operating subsidies in 2008 (see 2008 Operating Subsidies to Sinopec and PetroChina;), PetroChina and its parent group thus received CNY 1.214 billion in grants for the year 2008. This is consistent with grant levels the company has acknowledged in previous and subsequent years. PetroChina’s 2013 annual report indicates that the company’s grant amounts for recent years ;mostly; reflected the 2011-20 VAT rebates for imported natural gas (see ;VAT Rebate on Imported Natural Gas Attributable to PetroChina;). For the purpose of this report, it is therefore assumed that 2012 and 2011 grants other than the VAT rebates are fixed at the same level as 2010 grants (CNY 1.599 billion), with the rest of the amount allocated to the VAT rebate. The exploration and extraction activities of PetroChina and Sinopec account for a relatively small share of the two companies’ operating revenues (20% and 5% respectively in 2013). By contrast, refining and marketing activities represent well over half of overall costs and generated income. Government grants to PetroChina and Sinopec are therefore classified here as benefitting the refining and retail segments. This inventory allocates the annual grant amounts reported by the two companies to gasoline, diesel fuel, kerosene-type jet fuel, heavy fuel oil, lubricants, and olefins on the basis of the corresponding sales volumes and prices published by each firm. |
Data sources
Note on the Methodology
Aggregate numbers from the Inventory represent the fiscal cost of support measures for fossil fuels. They should not be interpreted as a level of support for fossil fuels, nor as an indicator of the extent to which the considered policies are favourable or unfavourable to climate mitigation.
The Inventory reports tax expenditures as estimates of revenue foregone due to measures that reduce or postpone tax payments relative to a jurisdiction’s benchmark tax systems to the benefit of fossil fuels producers or users. Tax expenditure estimates can thus increase over time due to either an increase in the offered concession (relative to benchmark tax systems) or an increase in the benchmark itself. Cross-country comparisons of tax expenditures can also be misleading due to differences in countries’ benchmark tax systems.