Impacts of increasing renewable energy subsidies and phasing out fossil fuel subsidies in China

Subsidies to fossil-fuel consumption have made Chinas energy system fragile and unsustainable. It is necessary for China to reform fossil-fuel subsidies and reflect the resource cost and environmental cost in energy prices. Considering the life-cycle external costs, this paper estimates the scale of fossil-fuel subsidy and the true cost of renewable energy in 2010 and evaluates impacts of increasing renewable energy subsidies and phasing out fossil fuel subsidies on macro-economy and energy system in China based on scenario analysis. Simulation results show that the negative impacts on economic growth can be reduced from 4.460% to 0.432%, if only 10% of fossil fuel subsidies were removed. Increasing subsidies for renewable energy has positive impacts on macroeconomic variables. Although the economic benefits per unit of subsidies for renewable energy are lower than those for fossil fuels by 0.06-0.19 CNY, the revenue gap can be narrowed by shifting more subsidies from fossil fuels to renewables. Increasing subsidies for renewable energy helps optimize Chinas energy system in three ways: the first is making energy consumption structure cleaner; the second is improving energy efficiency; and the third is addressing the problem of imbalanced distribution and consumption of energy.