Welfare Analyses of Coal Subsidy Removal in Rural China

Energy subsidy reform is regarded as a potential instrument to reduce GHG emission across the world. However, the welfare implications of such reform remain largely unknown, especially in the developing countries. This paper investigates the welfare impacts of coal subsidy removal on rural households in China using a unique micro dataset. The results suggest that coal subsidy removal would significantly reduce rural households’ welfare, for which the monetary value amounts to 4.4% of their annual expenditure on energy goods. Moreover, the welfare impacts are heterogeneous across households with different energy consumption patterns. Specifically, households relying on coal with limited access to alternative energy sources would bear the greatest welfare loss. Households are found to switch towards to clean energy, i.e. electricity and LPG, in response to the coal subsidy removal. However, the total carbon emission arising from households’ energy consumption increases. Two facts contribute to this striking finding: First, there is a substantial increase in households’ electricity consumption out of households’ energy substitution. Second, electricity is generated primarily by coal-fired power plants of high emission factor and low efficiency in China