The welfare impacts of removing coal subsidies in rural China

Reforming energy subsidies is one potential means of reducing greenhouse gas emissions worldwide. The welfare implications of such reforms, however, are not well understood, particularly in rural areas of developing countries. In this regard, we examine the welfare effects of removing coal subsidies in rural China. Using a unique micro dataset, we combine an estimation of the residential energy demand system with simulations based on those estimates. The elimination of coal subsidies would significantly reduce the welfare of rural households, which we calculate to be 7.2% of their annual expenditures on energy goods. Depending on the energy portfolios of the households, the impacts vary, with those reliant on coal and with limited access to alternative energy sources experiencing the greatest welfare loss. Based on the simulation, it appears that total emissions from residential energy use will increase despite their switch to clean energy sources as a result of the removal of coal subsidies. Although striking, the finding is due primarily to households' substantial increases in electricity use and the fact that China generates most of its electricity from coal-fired power plants with high emissions and low efficiency.