Rapid economic growth has led to an increasing demand for
energy. And as energy prices keep increasing more pressure is being
put on supply and demand. The reform of the energy industry,
especially its pricing mechanism, has drawn much attention.
The National Development and Reform Commission said recently it
was necessary to reform the pricing mechanism of resource products
to further improve efficiency. But the reform should be implemented
at the right time with due consideration for all concerned.
Energy prices in China are mainly decided and controlled by the
government and do not reflect the scarcity of resources and the
impact of energy use on the environment. The prices are relatively
low and the pricing mechanism is not in line with that of the
international market. This has caused serious problems in energy
utilization, economic development and environmental protection.
The pricing mechanism is not in line with production and
consumption. This has led to the over-exploitation of resources.
China's rapid economic growth is mainly built on an economic
structure of high-energy consumption and low-efficiency. The waste
in exploitation contrasts hugely with the shortage of
At the same time, low energy prices have increased the
competitiveness of China's high-energy-consuming, high-polluting
and resource-based products, enlarged trade surpluses and
exaggerated the pressure on the yuan's appreciation.
The government is now paying great attention to energy
conservation and emission reduction. Without reform of the pricing
mechanism, the efforts will only achieve half the results. Reform
is a matter of urgency.
Reform will mean further price hikes, and as it takes hold, it
will affect the producer price and consumer price indices. The
pressure of increasing costs on producers will gradually be
transferred to consumers. The process, however, will take time.
Though the rise of energy prices will increase pressure on
middle and downstream products, its impact on inflation in the
short term will depend on the supply and demand of consumer goods.
Over-capacity will lessen pressure for price increases, judging by
China's current industrial and energy consumption structure.
In the long run, a price lever is still the most effective way
to conserve energy and reduce emissions. As long as energy prices
are low, enterprises will lack the drive to improve efficiency and
cut emissions. The only way to stop high-energy consuming
enterprises from expanding is to increase energy costs. It is
therefore necessary to reform the pricing mechanism, marketize
energy products and let prices guide investment and economic
The reform faces a series of tough issues.
First, the supporting measures of the reform are not completed.
There is a lack of overall planning and design in the pricing
structure of different energy products. For example, coal prices
are market-led now but not electricity. China's crude oil prices
are in line with the international market but reform of refined oil
prices has not caught up.
Today discussions on reform of the energy pricing mechanism are
mainly about bringing China's energy prices in line with the
international market. But merely stressing this while ignoring the
characteristics of the country's energy resources is not a good
If the scarcity of resources and environmental costs are
properly considered, China's energy prices may be even higher than
the international level, which could attract more imports of energy
Social fairness is also an issue that should be considered. The
price hikes that will come with reform will produce different
impacts on consumers of different income levels and social groups.
Even prices that are in line with the international market will
harm the interests of some consumers. Transparent subsidies for
certain consumers will help solve the problem. This is also an
important part of the reform.
The current way subsidies are granted to producers have led to
unfair distribution and consumption, which does not improve
efficiency or promote social fairness.
Compared with other reforms, reform of the energy pricing
mechanism will take time because of its importance, complexity and
sensitivity. Marketization offers a way.
Any further delay in reform will make us lose important
opportunities and increase the cost of sustainable development.
Without feasible alternatives, the inefficient use of energy
resources driven by the low prices today will mean higher energy
prices and a bigger cost to the environment tomorrow.
It is reported that mounting inflationary pressure could slow
down our reform of the energy pricing mechanism, if we do not do it
now, we will have to bear the costs later.
The author is director of China Center for Energy Economics
Research at Xiamen University
(China Daily December 25, 2007)