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Towards a low carbon economy by removing fossil fuel subsidies?

Jianglong Li and Chuanwang Sun

China Economic Review, 2018, vol. 50, issue C, 17-33

Abstract: An important environmental consequence of subsidies for fossil fuels is that it encourages the substitution from renewable energy, capital and labor to fossil fuels, and thus impedes the low carbon transition. To reduce energy consumption and energy-related greenhouse gas emissions, there is a renewed interest in phasing out fossil fuel subsidies. In policy debates, it is commonly believed that fossil fuel subsidies encourage wasteful energy consuming, and thus removing them would depress energy-related carbon dioxide (CO2) emissions. But whether it is the real case and the magnitude of mitigation by removing fossil fuel subsidies are still unanswered. Here we provide an opposite insight in this paper. We find that fossil fuel subsidies in China might have been removed in total in 2015, but further attention should be paid to whether the removal is caused by the market condition of low energy prices, or by the on-going market-oriented reforms. Furthermore, during the periods with positive subsidies, removing fossil fuel subsidies alone cannot achieve CO2 mitigation because it would lead to the substitution from low-emitted fuels to high-emitted coal and from capital and labor to energy. Our results demonstrate that additional policies and efforts will be required to fulfill the aspirations for low carbon economy. The findings in this paper may be extended to emerging and developing countries due to their similar conditions of fossil fuel subsidies.

Keywords: Low carbon transition; Fossil fuel subsidies; Inter-factor/inter-fuel substitution; Lock-in mechanism; Asymmetric price response (search for similar items in EconPapers)
Date: 2018
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China Economic Review is currently edited by B.M. Fleisher, K. X. D. Huang, M.E. Lovely, Y. Wen, X. Zhang and X. Zhu

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