Energy Policy 65 (2014) 541–551

Contents lists available at ScienceDirect

Energy Policy
journal homepage: www.elsevier.com/locate/enpol

China's natural gas consumption and subsidies—From

a sector perspective
Ting Wang a, Boqiang Lin b,c,n
a
Institute of Public Policy, South China University of Technology, Guangzhou 510641, China
b
Newhuadu Business School, Minjiang University, Fuzhou 350108, China
c
Collaborative Innovation Center for Energy Economics and Energy Policy, China Institute for Studies in Energy Policy, Xiamen University, Xiamen, Fujian
361005, China

H I G H L I G H T S

We figured out the price elasticity of different sectors.

We figured out the income elasticity of different sectors.

We introduced temperature factor into the study of natural gas consumption.

We study the natural gas subsidy of different sectors.

art ic l e i nf o a b s t r a c t

Article history: China's natural gas consumption is growing rapidly and it has being driven by economic growth,
Received 5 August 2012 industrialization and urbanization. In addition, the country's low-carbon development strategy,
Received in revised form government-controlled gas price, and some other factors also contribute to the surging gas consumption.
18 October 2013
This paper studies China's natural gas consumption in residential, industrial and commercial sectors. We
Accepted 19 October 2013
Available online 18 November 2013
adopt the cointegration test and error correction model to study the relationships of explanatory factors
and gas consumption of different sectors and climate factor is included into the analysis. In order to find
Keywords: the direction of natural gas pricing reform and establish the benchmark gas price, this paper also
Sector consumption estimates the size of gas price subsidy by using price-gap approach. Our findings are as follows: In the
Elasticity
long term, China's residential sector is more sensitive to price than the other two. Urbanization is an
Subsidy
important factor promoting industrial and commercial gas consumption. Prices of other energies have an
influence on natural gas consumption significantly due to the substitutability between energies. The
slow-moving and unsatisfying pricing reforms on refined oil and natural gas lead to positive price
elasticity of natural gas in the commercial sector, which implies that a further energy price reform is still
stringent for China.
& 2013 Elsevier Ltd. All rights reserved.

1. Introduction However, China's coal-dominated energy structure cannot be

easily changed in the short term. In 2011, the share of coal in China's
China's energy structure is now dominated by coal. While primary energy consumption structure was approximately 68.4%,
under the country's Clean Development Strategy, natural gas will while that of natural gas was only 5%. As the “cleanest” fossil fuel,
probably be the major energy type that will substitute coal natural gas has gained increasing attention. With West-East Gas
consumption in the coming years. With Sino-Russian and China– Pipeline and foreign-connected gas pipelines being put into opera-
Myanmar gas pipelines being put into operation, China's foreign tion, China's natural gas consumption in recent years has grown
gas dependency would be about 35% and gas consumption would rapidly. Its average annual growth rate reached 7.46% from 1980 to
account for 7–8% of its primary energy consumption by 2015 (Lin 2011, while the figure from 2002 to 2011 was as high as 16.08%. The
et al., 2011). foreign dependency is also climbing. Since 2007, China has become a
net gas importer, and in 2011 its foreign dependency reached 21.56%.
As a non-renewable resource, there will be depletion issues,
n and based on Lin and Wang (2012a,b), China's natural gas
Corresponding author at: Newhuadu Business School, Minjiang University,
Fuzhou 350108, China. Tel.: þ 86 5922186076; fax: þ86 5922186075. production peak will come around the 2020s and then gas
E-mail address: bqlin@xmu.edu.cn (B. Lin). production will decline rapidly. By summarizing previous studies,

0301-4215/$ - see front matter & 2013 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.enpol.2013.10.065
542 T. Wang, B. Lin / Energy Policy 65 (2014) 541–551

Lin and Wang (2012a,b) also observed that China's unconventional 100%
natural gas reserves were abundant, which was about four times 90%
that of conventional natural gas. If large-scale mining of uncon- 80%
ventional gas begins from now on, the arrival of natural gas 70%
production peak can generally be delayed by ten years and the 60%
Industrial
annual production will be greatly raised. However, considering 50%
Residential
technology, water resources and China's geographical environ- 40%
Commercial
ment, whether the large-scale mining of unconventional gas can 30%
be realized as expected is full of uncertainty. With the approaching 20%
of conventional gas production peak and the rapid increase of 10%
foreign gas dependency, China's gas supply security is facing risks. 0%
China's natural gas prices are still guided by government. The Year 1985 1990 1995 2000 2005 2010

low and inflexible gas price cannot be used as leverage to optimize Fig. 1. Proportion variation of each sector's natural gas consumption in China.
allocation of resources. Therefore, it is urgent to reform China's Source: CEIC.
current natural gas pricing mechanism. At present, natural gas
shares a small proportion of energy consumption in China and the
overall negative influences and the obstacles of the pricing reform Statistical Yearbook are both from National Bureau of Statistics of
may be weak. At the end of 2011, the National Development and China. From these two statistical yearbooks we can get natural gas
Reform Commission issued a statement, and selected Guangdong consumption data of different sectors, and they are not continuous
Province and Guangxi Autonomous Region as pilot provinces to time series. According to China Statistical Yearbook, in 2010, gas
carry out natural gas pricing mechanism reform. According to the users can be divided into seven sectors mainly (in most of the
statement, net back value method will be used to decide the gas years, there were only six sectors counted as the agriculture
price. Under this pricing mechanism, the imported fuel oil and consumption was not included). These gas user sectors include:
liquefied petroleum gas (LPG) are taken as alternative energy (1) “Agriculture”, “Forestry”, “Animal Husbandry” and “Fishery and
types. This is the marketization and internationalization process of Water Conservancy”; (2) “Industry” (including “Mining”, “Manu-
natural gas price. facturing”, and “Electric Power, Gas and Water Production and
However, as a commodity relating to people's livelihood, public Supply”); (3) “Construction”; (4) “Transport, Storage and Post”; (5)
service and national strategy, subsidy system is also very impor- “Wholesale and Retail Trades” and “Hotels and Catering Services”;
tant for natural gas consumption. How can the government (6) “Others”; (7) “Household Consumption”. There are more
achieve the balance between equity and efficiency? detailed classifications for the seven sectors in these statistical
Studying China's gas consumption in different sectors and their yearbooks, and we are not going to elaborate them here.
corresponding subsidy scales is practically significant in designing The main purpose of this paper is to study the characteristics of
natural gas subsidy and gas price reforms. We adopt the cointe- natural gas consumption in main sectors and further to study
gration test and error correction model to study the relationships Chinese natural gas consumption subsidies. To simplify the
of explanatory factors and gas consumptions of different sectors, research and to cater for the availability of natural gas price data
and climate factor is also included. In order to find the direction of (there are only three categories of natural gas price available:
natural gas price reform and study the benchmark of gas price, the residential gas price, industrial gas price, and gas price of public
size of gas consumption subsidy is also estimated by using price- services). In this article, we combine the six sectors of National
gap approach. We believe all these attempts are greatly significant Bureau of Statistics of China into three sectors: “Construction”
for policy making on natural gas supply, peak shaving, efficiency would be combined to industrial sector; “Transport, Storage and
improvement, and price reforms. Post”, “Wholesale and Retail Trades”, “Hotels and Catering Ser-
The remaining parts of this article are organized as follows. The vices” are combined as commercial sector; “Household Consump-
second part briefly discusses natural gas consumption and price tion” is residential sector. As the agriculture consumption of
characteristics of each sector. The third part is the empirical study natural gas was small and even to 0 in many years (and that's
analyzes the main factors affecting natural gas consumption and why there are just six sectors’ data in CEIC), we will not analyze
price elasticity. The fourth part adopts the price-gap method to this sector's gas consumption in this paper.
estimate the subsidy size of gas consumption. The last part For example, according to China Statistical Yearbook, the total
provides some policy recommendations. natural gas consumption in 2010 was 107.58 billion cubic meters,
and the proportion of natural gas consumption of each sector is
shown in Table 1. Residential and commercial natural gas con-
2. Gas consumption and gas prices of each sector sumption accounted for only 36% of total gas consumption, and
power generation and heating shared 17.88%. These two men-
2.1. Natural gas consumption of each sector tioned above together shared a proportion of 53.88%, which is
below the corresponding levels in developed countries.
Power generation, residential and commercial sectors generally Natural gas consumption in China is different from that in
share most of the gas consumption in developed countries, but gas developed countries, which is mainly induced by the differences in
usage as chemical raw materials accounts for a very small propor- economic development, urbanization, and people's living stan-
tion in these countries. China is a developing country and the dards. According to Li (1997), in a country with higher level of
industrial sector in China consumes a greater proportion of total modernization, people pay more attention to the environment and
natural gas consumption. However, the consumption proportions life quality. In such countries, natural gas is undoubtedly a good
of commercial and residential sectors present a steady upward choice for power generation, and preferred by residential and
trend as shown in Fig. 1. commercial sectors. While developing countries tend to have
There should be some explanations for Fig. 1. In this paper, the larger populations, and they have to produce more fertilizer and
original gas consumption data of various sectors come from CEIC. other chemical products to meet the huge food as well as other
And these data are in line with the statistic data of National Bureau commodities that are needed by residents. This has resulted in
of Statistics of China. China Statistical Yearbook and China Energy the higher proportion of natural gas being used as raw materials.
 T. Wang, B. Lin / Energy Policy 65 (2014) 541–551 543

Table 1
Proportion of each sector's natural gas consumption in China in 2010 (%).
Source: China Statistical Yearbook.

Industry (including construction) Commercial Residential

63.88 14.85

Mining Manufacturing Electric power, gas and water Construction Transport, storage and post Wholesale and retail trades, Others
production and supply hotels and catering services

12.75 33.25 17.88 0.02 9.92 2.53 2.4 21.1

In addition, natural gas usage in residential and commercial of natural gas to crude oil is usually between 0.65 and 0.80, while the
sectors depends largely on gas pipeline networks. Urbanization price ratio of China's industrial ex-factory natural gas to crude oil is
level in China is lower than that of developed countries, and the only 0.3. In China, CIF duty-paid price of natural gas imported
gas popularizing rate still needs to be improved. With the through Central Asia pipeline is over 2 Yuan/cubic meter, and gas
completion of West-East Gas Pipeline and improvement of city price in long-term LNG trade agreement with Australia is 4 Yuan/
gas pipeline network, proportions of gas consumption in residen- cubic meter. The prices of imported gas are generally much higher
tial and commercial sector will continue to rise. In addition, the than domestic gas prices. Due to the price difference, China's gas
increasing demand for distributed power systems to shave elec- companies tend to have little enthusiasm in gas imports. In 2010,
tricity peaks will also raise the proportion of natural gas used for China imported 4.3 billion cubic meters of natural gas from Central
power generation. Asia through pipeline, and the price inversion amounted to about
0.88 Yuan/cubic meter, which caused a loss of nearly 3.7 billion Yuan
2.2. Natural gas price of each sector in gas imports for Petro China.
In late 2011, National Development and Reform Commission of
Natural gas prices generally include wellhead price, city gate China issued a notice on gas price reform decisions and selected
price and end-user price. Gas prices are influenced by interna- Guangdong Province and Guangxi Autonomous Region to carry out
tional oil prices, regional resource abundance, level of economic pilot price reform on natural gas pricing mechanism. It aims to
development, and some demand factors. The amount of natural explore and establish the dynamic adjustment mechanism of natural
gas resources in neighboring countries and the transmission gas price which can reflect market supply and demand situations as
distances are also factors affecting a country's gas prices. Natural well as resource scarcity. Another goal of the pilot price reform is to
gas market is different from markets of crude oil or other straighten out the price relations between natural gas and alternative
commodities in general and it tends to be more regional. Accord- energies, and to provide the reform experiences to other regions for
ing to Lin (2009a), it is also affected by international political reference. The general idea of the pilot reform is to shift the pricing
situation and other related factors. In China, value chain of gas mechanism from the existing cost-plus method to net back value
industry consists of three links: production, transportation and method. According to the method of Development and Reform
city gas distribution. Correspondingly, the natural gas price system Commission in 2010, the highest city-gate prices of Guangdong
includes ex-factory price, city-gate price and the end-user price. and Guangxi provinces (autonomous regions) were estimated to be
City-gate price is the sum of ex-factory price and pipeline price. 2740 Yuan and 2570 Yuan per thousand cubic meters, respectively.
End-user price is the sum of city-gate price, transmission and According to Lin (2009a), in many other countries, gas price gap
distribution charges. Production, transmission and distribution between power generation sector and industrial sector is small.
prices are government-guided. The first two are set by the However, gas prices for residential sector are generally over two times
National Development and Reform Commission, and the distribu- that of industrial sector and power generation sector. In 2008, gas
tion price is decided by the local government. prices for industrial sector were slightly higher than those for power
Ex-factory price (The ex-factory price of natural gas before 2002 generation in US, while those for residential sector were generally
was known as the wellhead price. In 2001, China began to set higher about 1.6 times those for power generation and industrial sectors. In
prices for better quality natural gas, and natural gas purification fee China, however, residential gas prices as a whole are the lowest,
incorporated into the wellhead price, so ex-factory price is unified) of followed by gas prices for commercial sector, and industrial gas prices
natural gas has gone through the stage of low gas prices (1950– are the highest. In Fig. 2, the nominal prices and the real prices
1981), stage of two-track prices (1982–1992), stage of structure (deflated and 2007 is set as the base year) of the three sectors are
prices (1993–2005) as well as stage of government-guided prices given. Real gas prices for different sectors generally show a slight
(December 2005). Generally, gas prices have climbed up with the upward trend.
development of four price stages. However, compared with other
countries, China's natural gas prices remain at a relatively low level.
According to Lin (2009b), until the end of the 20th century, the gap 3. Gas consumption determinants and estimation of elasticity
between natural gas prices in China and that of international market
is still reasonable and acceptable, but it has expanded rapidly since 3.1. Analysis of determinants
then. In 2004, average sales price announced by Petro China was only
40.7% of the U.S. wellhead gas prices, 48.1% of the imported gas price Studies on China's energy consumption and its influential
through EU pipelines, and 42.4% of LNG CIF in Japan. In 2005, factors are abundant. By using input–output structural decom-
international oil prices continued to rise, compelling many countries position method and the weighted average method, Lin et al.
to raise their gas prices. In 2008, Henry Price of the U.S, EU CIF for per (2011) decomposed China's industrial electricity consumption
million British thermal units was averagely $8.85 and $12.61, increment into the weighted average of ten influential factors,
respectively. In that year, China's ex-factory price was only 42.4% of and calculated the average contribution rate of these factors. Liang
the Henry Price and 29.7% of EU CIF. According to Oil and Gas and Chen (2005) adopted panel data model to study the energy
Industry Development Research Center of China University of consumption of each sector and analyzed the energy consumption
Petroleum, 2010, now in mature market economies, the price ratio tendency and average consumption level of industry, agriculture,
544 T. Wang, B. Lin / Energy Policy 65 (2014) 541–551

Nominal price Also, it predicted the long-term coal demand, and analyzed the
3.5
impacts of coal demand on environment, coal price and supply.
3
As to natural gas consumption, studies in China generally focus
Yuan/cubic meter

2.5 on qualitative analysis. Qu (2011) discussed the main character-

2 istics and development direction of China's natural gas consump-
Residential
1.5 tion in the “12th Five-Year”. Li (1997) analyzed the influential
Commercial
1 factors of China's gas-fired power, and explored the feasibility of
Industrial
0.5 gas-fired power generation from environmental and economic
point of view. Zhou and Li (2008) analyzed the explanatory factors
0
Year 2007 2008 2009 2010 2011 of natural gas consumption, pointing out that economic develop-
ment, development stage of natural gas market, and natural gas
Real price prices are the main factors affecting natural gas consumption.
3
By summarizing the existing studies mentioned above, we can
2.5
see that theoretical and empirical researches on China's energy
Yuan/cubic meter

2 consumption are limited on total primary energy consumption

1.5 Residential
and total electricity consumption. Researches on influential factors
of natural gas consumption, especially in sectors are scarce.
1 Commercial
As Dagher (2011) said, although there is no standard identify-
Industrial
0.5 ing what factors affect natural gas consumption, the factors
0
generally accepted as influential factors include natural gas price,
Year 2007 2008 2009 2010 2011 prices of alternative energies, prices of related products, income,
demographic factors, weather, season as well as technical changes.
Fig. 2. Development of gas prices for three sectors in China over 2007–2011.
Source: CEIC. As an empirical research, there should be an emphasis putting
on it. In this paper, we hope to explore how China's natural gas
consumption responds to price and climate change. According to
building, transportation and wholesale trade. Wu et al. (2005) the related literature research, income is an important factor
compared the energy consumption influential factors of China and affecting energy consumption. On the other hand, as China is on
America and analyzed the cointegration relationship between the stage of urbanization and industrialization, urbanization and
energy consumption and economic growth. They found out that industrialization process is important factor influencing energy
industrialization in the long run can improve energy efficiency. consumption. This article only adopted the urbanization as vari-
Besides, in China, per capita energy consumption might increase able in order to avoid collinearity.
with the rise of per capita income, but energy intensity would go Related products and technology progress are also very impor-
down with the development of industrialization. Wang and Yang tant, but for different sectors, there will be many different kinds of
(2006) established comprehensive cointegration model to study related products. Technical indicators will be very difficult to
China's industrial energy consumption and found out that a long- define, and the data could not be obtained completely. So in this
run equilibrium is significant and short-term adjustment effects paper we focus on income, price, urbanization and climate change.
existed among China's industrial energy consumption, industry
growth and energy efficiency. (1) Income and price. Most studies on natural gas demand
Standard Granger causality test, cointegration and error correc- estimate the long-term and short-term income and price
tion model (ECM) have been widely used in explaining long-run elasticity, especially for the household sector. The methods
equilibrium and short-term relationships between economic used include ordinary least squares, generalized least squares
development and energy consumption. Lin (2001) used cointegra- method, autoregressive distributed lag model, cointegration
tion and error correction model to study influential factors of and error correction model. Data used include time series data,
China's energy demand. The empirical results proved the existence panel data and cross-sectional data. Related studies on income
of a long-run equilibrium between total energy consumption, GDP, and price elasticity are summarized in Table 2.
energy prices and energy structure. Compared with other coun- In addition, studies on other sectors are also available.
tries, China's income elasticity of energy demand was relatively Andersen (2011) used panel data model to estimate the price
lower and the price elasticity was higher. Lin (2003a) also used elasticity and output elasticity of natural gas demand in
cointegration analysis and error correction model to study the manufacturing sector of OECD countries. Wadud et al. (2011)
relationship between electricity consumption and economic assumed that natural gas demand in Bangladesh was in line
growth. The results showed that there was a long-run equilibrium with Cobb Douglas function and estimated the country's long-
relationship between electricity consumption, GDP, capital, and term income elasticity, which was 1.47. Erdogdu (2010) used
human capital. Taking urbanization factor into consideration, He ARIMA model and estimated Turkey's natural gas demand
et al (2009) adopted nonlinear model and cointegration model to with price and income are influential factors. We can see that
study the electricity demand in China and found out that the studies on self-price elasticity of natural gas demand are
results of the two models were generally similar. This shows a abundant while those on alternative cross-price elasticity are
strong relevance between electricity demand and urbanization. scarce. Also, studies on the characteristics of natural gas
Qu and Yuan (2008) built panel cointegration model to study demand in different sectors are even less.
energy consumption of the industrial sector. These results indicate (2) Urbanization and industrialization. Lin (2005) manifested the
the long-run equilibrium between energy consumption, energy rigid energy demand in urbanization and industrialization
efficiency and industrial output of China's industries, and there are process. Then Lin (2008) carried out a more systematic
significant short-term adjustment effects, but these effects are discussion on how urbanization and industrialization pro-
significantly different in different industries. Lin (2007) studied cesses affected energy demand. Lin (2003b) pointed out that
China's coal demand in the long term using co-integration population growth is an important factor promoting electricity
method. The study estimated long-term income elasticity, price consumption, but the promotion impacts of urbanization rate
elasticity, structural elasticity, and elasticity of transportation costs, are more significant. Urbanization requires large-scale urban
 T. Wang, B. Lin / Energy Policy 65 (2014) 541–551 545

infrastructure, housing, and transportation system, which will

 0.43–0.49
0.018–0.02
promote the rapid development of high-energy consuming

0.01–0.02
0.1–0.17
industries such as building materials and metallurgy. Also, it

0.176
Long

0.77
0.17
will increase the industrial, agricultural and residential elec-

Na
Na
Na
Income elasticity tricity consumption. Unlike developed countries, China's urba-
nization and industrialization has not finished yet.
In China, urban areas share the most part of China's gas

0.02–0.05

0.05–0.31
consumption, and city pipeline network construction is an
Short

0.11
important factor affecting the gas consumption of a certain
area. Urbanization plays an especially important role in pro-
moting natural gas consumption growth.
(3) Climate (mainly referring to the change of temperature). There

 2.79–  3.44
 0.59–  0.94

 0.24–  1.36
 0.44–  2.13

 0.22–  0.6
 0.01– 0.2
 0.2–  4.6 are seasonal fluctuations in natural gas consumption, and peak
shaving is necessary. Winter is the peak period of natural gas

 0.22

 0.36
 0.33

 0.24
Long

consumption, which is demonstrated by the “winter gas

Na

shortage” in recent years. Studies on energy (including natural

gas) demand rarely take into account climate factors. In fact, in
empirical researches, especially empirical studies on natural
Price elasticity

 0.23–  0.35
 0.12–  0.25

 0.09–  0.18
 0.05–  0.9

gas demand, climate factor should be an important variable. In

most studies (like Dagher (2011)), heating days (HDD: heating
 0.05

 0.09
 0.12
Short

degree days) are adopted as climate variable.

3.2. Cointegration and error correction model

1994–2006
1957–1962

1970–1982
1970–1990
1977–1999
1967–1977
1961–1970
1959–1974

1971–1976
Period

3.2.1. Variables and data

1987
Na

Na

Based on the discussion on explanatory factors of gas con-

sumption, we study the characteristics of China's natural gas
consumption in main sectors. We estimate the income and price
Cross section

elasticity, and analyze the effects of urbanization and climate

Time series
Time series
Panel data

Panel data
Panel data

Panel data
Panel data
Panel data
Panel data
Panel data

changes on consumption.
Jamil and Ahmad (2011) used cointegration tests and error
Data

Na.

correction model to study the electricity demand of residential,

commercial, manufacturing and agricultural sectors in Pakistan by
using different influential factors for different sectors. For natural
Residential and Commercial

Residential and Commercial

gas, influential factors for different sectors are also not the same.
For example, income of the household sector is a disposable
income, while in industrial and commercial sectors income is
represented by output value, or sales income. Alternative energies
for households include liquefied petroleum gas and electricity,
Residential

Residential

Residential
Residential
Residential
Residential
Residential
Residential
Residential
Residential

which are similar to that for commercial sector. While alternative

energies for transportation sector include gasoline, diesel etc, and
Sector

those for industrial sector are mainly coal and fuel oil. Also
urbanization as a factor for residential sector is reflected mainly
in pipeline network construction and gas user population rate
Al-Sahlawi (1989), Bohi (1981)

(proportion of population using natural gas in total population),

Bernstein and Griffin (2006)
Balestra and Nerlove (1996)
Berndt and Watkins (1997)

while commercial and industrial sectors are affected less by

Blattenberger et al. (1983)
Researches on price and income elasticity of natural gas demand.

population rate as they can use more LNG and select their
Beierlein et al. (1981)

Maddala et al. (1997)

Lee and Singh (1994)

locations. As gas consumption of different sectors has different

Tinic et al. (1973)

characteristics, the influence of climate change is also different.

Herbert (1986)

Dagher (2011)

Therefore, we use annual data of the period of 1985–2010 to study

Bloch (1980)

the gas consumption of different sectors. Gas consumption of the

Source

three sectors are QR (residential), QI (industrial) and QC (commer-

cial). Data were taken from CEIC. Other variables and data are
listed as follows.

(1) Income. In Jamil and Ahmad (2011)'s research, private con-

(Ontario and British Columbia)

sumption expenditure was used as the income variable for

household sector, and in other sectors real GDP is used as the
(Northeastern states)

income variable. As natural gas consumptions of residential

sector in China are mainly located in cities and towns, urban
residents’ disposable income is used as income variable, and
United States

(New Jersey)
(California)
(36 states)

(Colorado)

they are deflated to real income (YR) using urban consumer

(National)
(49 state)
(6 states)
(Alberta)
Country

Canada

price index deflator. GDP of secondary industry and GDP of

Table 2

tertiary industry are used as the income variable for industrial

and commercial sectors respectively. These variables are
546 T. Wang, B. Lin / Energy Policy 65 (2014) 541–551

deflated to real income (YI, YC) by the producer price index and equations:
retail price index deflator, respectively. Data mentioned above ln Q Rt ¼ βR1 þ βR2 ln Y Rt þβR3 ln PRt þ βR4 ln NP Rt
are from China Statistical Yearbook.
þ βR5 ln LP t þ βR6 ln AT t þ ui ð2Þ
(2) Urbanization. For household sector, gas population rate has
direct effects on natural gas consumption. Thus, we select the ln Q It ¼ βI1 þ βI2 ln Y It þ βI3 ln UBt þ βI4 ln NP It
gas population rate (PR) as the urbanization variable. Data was
þ βI5 ln CP t þ βI6 ln AT t þ ui ð3Þ
taken from CEIC. For industrial and commercial sectors, gas
population rates are not the most direct impact factor, as they ln Q Ct ¼ βC1 þ βC2 ln Y Ct þ βC3 ln UBt þ βC4 ln NP Ct
may use liquefied natural gas and their site selection is þ βC5 ln OP t þ βC6 ln AT t þ ui ð4Þ
influenced by many other factors. Thus, we select the ratio of
urban population to total population as the urbanization
variable (UB), and data were taken from China Statistical 3.2.2. Cointegration test
Yearbook. We first carry out the unit root test for each variable and then
(3) Natural gas price. Natural gas price for each sector is adopted. conduct the cointegration test. Table 3 shows the results of
To maintain consistency, we use urban consumer price index, Augmented Dickey–Fuller (ADF) and Philips–Perron tests. The
producer price index and retail price index deflator to deflate urbanization variable (lnUB) is I (2) at 1% significant level; Climate
the gas prices for the three sectors and get the real prices (NPR, variable (lnAT) is I (0), which are consistent with the previous
NPI, NPC). Data were taken from CEIC and China Statistical studies (Jamil and Ahmad, (2011)) and other variables are I (1) at
Yearbook. Natural gas prices of several years are not available the 5% significant level.
and we try to estimate these figures by referring to relevant The estimated coefficients of cointegration equations are
studies and international natural gas prices. shown in Tables 4 and 5:
(4) Alternative energies prices. As mentioned above, alternative The corresponding cointegration Eqs. (5)–(7) are:
energy types of natural gas for different sectors are different.
ln Q Rt ¼ 7:72 þ0:99 ln Y Rt þ0:26 ln PRt  2:88 ln NP Rt
For household sector, we use the price of liquefied petroleum
þ 1:46 ln LP t  3:06 ln AT t þ ui ð5Þ
gas as alternative energy price (LP), and the data were taken
from CEIC. For industrial sector, coal price (Datong mixed coal)
ln Q It ¼ 31:67  2:31 ln Y It þ 6:2 ln UBt 0:4 ln NP It
will be used as alternative energy price (CP), and data were
þ 2:52 ln CP t  1:47 ln AT t þ ui ð6Þ
taken from Sockstar and other websites. Table 1 shows that a
large part of natural gas consumption in China's commercial
ln Q Ct ¼  6:17 þ 1:78 ln Y Ct þ 1:02 ln UBt þ 0:45 ln NP Ct
sector is used by transportation, so that the Brent crude oil
0:09 ln OP t  0:28 ln AT t þ ui ð7Þ
price is used as alternative energy price (OP), and the data
were taken from IEA. The data of exchange rate are from The cointegration equations show a long-run elasticity of each
China Statistical Yearbook. Nominal price are all deflated factor. First, according to the significance of long-term income
accordingly. elasticity, we can see that income is indeed an important factor
(5) Climate. According to the monthly temperature data of Pakis- influencing natural gas consumption of the sectors. The long-term
tan's main weather stations, Jamil and Ahmad (2011) built a income elasticities of residential and commercial sectors are
temperature variable (Tt), defined as a sum of degrees showing positive, which indicates that, an increase in the income of
extreme temperatures in a year. Unlike electricity heating and residents (income of urban residents) and commercial sector will
cooling, gas heating in China generally begins in mid- result in the increase in their natural gas consumption. Natural gas
November and ends in mid-March. And compared to warming, consumption increases by 0.99% when residents’ income goes up
cooling by gas in China is less common. More and more cities by 1%. In commercial sector, the effects of income increase will be
have now adopted the central-heating system. Thus, heating
time length and temperature are only related fixedly to the 30
January
temperature of several months. We calculate the average 25
temperatures of 29 major cities in January, February, March,
November and December and get the temperature variable by 20 February

adding them up (AT). Data were taken from China Statistical

Centigrade

15
Yearbook and China Meteorological Yearbook. The tempera- March

ture variable of t year is shown in Eq. (1): 10

November
5

∑ AT tci 0
c December
AT t ¼ ∑ i ¼ 1; 2; 3; 11; 12:…c ¼ 1⋯29: ð1Þ Year 1985 1990 1995 2000 2005 2010
i 29 -5

Fig. 3. Cumulative temperature trend of heating month over 1985–2010.

We depict the trend of temperature variable (AT) in Fig. 3.

25000 30
It reflects the warming trend to some extent. We describe the
million cubic meters

20000 25
trend of AT and natural gas consumption of household sector in
20
centigrade

Fig. 4. We can see that the two variables are negatively correlated: 15000
15
when exact cumulative temperature of heating months stays 10000
10
above the AT trend line, natural gas consumption stays below its 5000 5
trend line and vice versa. The real relation between the two
0 0
variables needs to be studied further.
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

Year
To eliminate heteroscedasticity, we took the logarithm of these
Residential consumption Cumulative temprature of heating monthes
variables. Assuming that long-term stable relationship exists, the
relationship among variables can be expressed by the following Fig. 4. Trends of AT and gas consumption of China's residential sector.
 T. Wang, B. Lin / Energy Policy 65 (2014) 541–551 547

Table 3 gas consumption (27.94% of industrial consumption in 2010) and

Results of unit root testsa. followed by the “Manufacture of Raw Chemical Materials and
Chemical Products” (27.2% of industrial consumption in 2010).
Variable ADF Philips–Perron
“Extraction of Petroleum and Natural Gas” ranked third, sharing
Level First Second Level First Second 19.26% of industrial consumption in 2010, while “Manufacture of
difference difference difference difference Non-metallic Mineral Products” accounted for the fourth share
(6.21%). The next is the “Processing of Petroleum, Coking and
lnQR  3.03  4.60nnn  1.95  4.60nnn
lnYR  3.49  4.37nn  1.14  4.35nn
Processing of Nuclear Fuel” with 5.82% and other consumption
lnPR  7.71nnn  6.58nnn categories accounting for not more than 1%.
lnNPR  2.10  5.30nnn  2.74  6.67nnn First of all, China's power generation is dominated by thermal
lnLP  2.75  5.80nnn  2.74  10.36nnn power stations which account for around 80% of China's electricity,
lnQI 0.42  5.82nnn 1.01n  5.92nnn
and natural gas accounting for a very small proportion currently.
lnYI  0.31  3.69nn  2.04  2.73  4.52nnn
lnUB  2.97  2.17  4.77nnn  1.59  2.22  4.77nnn Natural gas power generation at present are mainly distributed
lnNPI  2.48  4.85nnn  2.57  4.92nnn power stations and mainly used for peak shaving. Industrial gas
lnCP  3.31  6.11nnn  3.24  11.13nnn consumption includes “Electric Power Generation, Gas and Water
lnQC  3.99  8.63nnn  3.94  15.78nnn Production for Heating” and “Manufacture” consumption. These
lnYC  3.05  5.81nnn  1.27  2.42  3.91nn
lnNPC  1.78  5.05nnn  2.79  4.85nnn
two parts of consumption can induce negative income elasticity.
lnOP  0.88  6.24nnn  0.77n  6.65nnn Gas heating and power are mainly used to cope with heating
lnAT  4.59nnn  4.68n demand in the extreme climate. For example, in recent years,
extreme cold winter caused some economic losses, while the
Note:
a n nn nnn
demand for natural gas increased under such weather. Second,
Significant at 10% level; Significant at 5% level; Significant at 1% level.
agricultural production and the food industry are cycle-resistant in
nature especially with the existence of a large number of migrant
Table 4 farmers in China. The agricultural production is often the least
Johansen's tests for cointegration (intercept and trend in CE)a. affected by the economic downturn or even got greater develop-
ment. Also the associated chemical fertilizer and pesticide manu-
Sector Rank Trace Critical Max–Eigen Critical
facturing industries are also likely to move in a counter-cyclical
r statistics value statistics value
direction. The two main reasons above can explain the negative
Residential elasticity.
0 173.46nn 103.85 57.19nn 40.96 The elasticities of urbanization of three sectors are positive.
rr 1 116.27nn 76.97 41.36nn 34.81 This indicates that the ongoing urbanization promotes natural gas
rr 2 74.91nn 54.08 30.96nn 28.59
consumption of the sectors. For the residential sector, gas popula-
rr 3 43.95nn 35.19 22.31nn 22.30
rr 4 21.64nn 20.26 13.06 15.89 tion rate is used instead of the urbanization rate. 1% increase in gas
rr 5 8.59 9.16 8.59 9.16 population rate will increase natural gas consumption of house-
Industry hold sector by 0.26%. For the industrial sector, the development of
0 176.44nn 103.84 50.23nn 40.96
urbanization will increase natural gas consumption. This is mainly
rr 1 126.21nn 76.97 37.13nn 34.81
rr 2 89.09nn 54.08 31.08nn 28.59
because urbanization induces more natural gas consumption by
rr 3 58.01nn 35.19 28.70nn 22.30 power generation and central heating. For the commercial sector,
rr 4 29.31nn 20.26 19.17nn 15.89 1% increase in urbanization rate will raise natural gas consumption
rr 5 10.14nn 9.16 10.14nn 9.16 by 1.02%.
Business
The third is the price factor. Price elasticity of household gas
0 151.89nn 103.85 50.95nn 40.96
rr 1 100.94nn 76.97 35.71nn 34.81 demand is  2.88, and alternative energy price elasticity is also
rr 2 65.23nn 54.08 26.90 28.59 significant (1.46). On the one hand, China's per capita income level
rr 3 38.32nn 35.19 18.30 22.30 is still low and long term natural gas consumption is price-sensitive
rr 4 20.02 20.26 14.02 15.89 but on the other hand, natural gas consumption in the household
rr 5 6.00 9.16 6.00 9.16
sector is more easily substituted. Natural gas price elasticity of
Note: industrial sector is  0.4, smaller than that of household sector,
a nn
Significant at 5% level. mainly because that natural gas consumption of the industrial
sector cannot be easily replaced by other energy types. The coal
Table 5 price elasticity is significant and this is because China's coal price is
Coefficients of cointegration equationsa. more market-oriented. When the coal price fluctuates, industrial
enterprises have greater incentive to use alternative energy.
lnQR lnYR lnPR lnNPR lnLP lnAT C The price elasticity of commercial sector is counterintuitive.
1  0.99nnn  0.26n 2.88nnn  1.46nnn 3.06nnn  7.72nnn
Chinese commercial sector natural gas consumption is concen-
lnQI lnYI lnUB lnNPI lnCP lnAT C trated in the transport sector, which accounts for about 66% of
1 2.31nnn  6.20nnn 0.40nnn  2.52nnn 1.47nnn  31.67nnn total commercial natural gas consumption, and gas used in
transport is primarily for urban buses and taxis. As Fig. 2 shows,
lnQC lnYC lnUB lnNPC lnOP lnAT C
though at a low level, China's natural gas price for commercial
1  1.78nnn  1.02  0.45nn 0.09 0.28 6.17nn
usage is in a rising trend. However, when it comes to the transport
Note: sector, there are always financial supports in the public transit.
a n
Significant at 10% level; nn
Significant at 5% level; nnn
Significant at 1% level. And in the low-carbon development context in recent years, the
governments have promoted natural gas buses in the city's public
larger. A 1% increase in income raises natural gas consumption transit system, such as Xiamen and Guangzhou. Though the
by 1.78%. commercial natural gas price rises, regional governments always
In the industrial sector, “Electric Power, Gas and Water Produc- release fuel subsidies for buses and taxis, and such subsidies can
tion and Supply” accounted for the largest proportion of natural even completely cover natural gas price adjustment. Thus in the
548 T. Wang, B. Lin / Energy Policy 65 (2014) 541–551

Table 6
Short-term elasticity—results of ECMa.

ECT(t  1) D(lnQR(  1)) D(lnYR(  1)) D(lnPR(  1)) D(lnNPR(  1)) D(lnLP(  1)) D(lnAT(  1)) C
D(lnQR) 0.10  0.13  0.56 0.63n  0.39 0.48nn  0.12 0.12

ECT(t  1) D(lnQI(  1)) D(lnYI(  1)) D(lnUB(  1)) D(lnNPI(  1)) D(lnCP(  1)) D(lnAT(  1)) C
D(lnQI)  0.07 0.46nn 0.17  0.25 0.04  0.14 0.07 0.04

ECT(t  1) D(lnQC(  1)) D(lnYC(  1)) D(lnUB(  1)) D(lnNPC(  1)) D(lnOP(  1)) D(lnAT(  1)) C
D(lnQC)  1.93nnn 0.49nnn  1.13  8.76n  0.78nn 0.34n 0.34 0.47n

Note:
a n nn nnn
Significant at 10% level; Significant at 5% level; Significant at 1% level.

commercial sector and especially in the city traffic department, Government pricing means energy subsidies. According to Yao
natural gas consumption and natural gas price may change in the et al., (2011), subsidy is one of government's policy tools for
same direction, resulting in the positive price elasticity. Alternative realizing economic, social and environmental objectives. Energy
energy price elasticity of commercial sector is also counterintuitive subsidies can offset the negative effects of market failures caused
and not significant, which reflects the defects of China's energy by energy externality to protect domestic firms and to avoid
price system that we will talk about later. potential unemployment with the aim of providing specific social
The fourth factor is climate (temperature) change. We can see groups with more access to modern energy services. This is also
from the test results that all sectors are affected by temperature the reason that China's energy prices are low and price reform is
changes. Rising temperature will cause a decline in natural gas arrested. To some extent, the low-energy-price policy has ensured
consumption. The influence on household sector is most obvious energy consumption of specific groups. However, subsidy with no
and the elasticity of industrial sector becomes significant, while specific target but was carried out only by lower energy prices may
that of commercial sector is relatively small. One possible reason is go against the principles of equality and efficiency. Further, it may
that, in commercial sector natural gas is mainly consumed by also lead to excessive consumption of fossil energy which leads to
transportation. The comparison shows that household sector has excessive emissions. Therefore, it is important to find a reasonable
the greatest pressure in gas peak shaving. gas price level, to estimate the subsidy size for gas consumption,
and to design more equal and efficient subsidy policies for China.

3.2.3. Error correction model 4.1. Price-gap approach and choice of reference price
We built the error correction model (ECM) based on the
cointegration tests. The short-term adjustment effects of the Lin and Jiang (2011) used price-gap approach to estimate the
influential factors can then be obtained, as shown in Table 6. scale of fossil energy subsidies. Theoretical framework of price-gap
According to the results of ECM, impact of error adjustment is approach was established by Corden (1957). Before using price-
only significant in commercial sector. In the household sector, only gap method, we should firstly determine the reference price. Then
the gas population rate and LPG price change are significant in the the price gap (PG) between real price and reference price can be
short term. As gas expenditure accounts for a smaller proportion determined. The second step is to estimate the subsidies based on
of household consumption expenditure, the impacts of price and demand function. Thus, the reference price is the prerequisite for
income on gas consumption are limited while the opening of a estimating subsidy scale and designing price reform.
new gas pipeline clearly has a greater impact. In the industrial As a relative index, according to different reference prices, we
sector, the impacts of previous gas consumption are significant, believe that the “subsidy” will be different. In order to fully
while the impacts of price and income are not significant in the investigate the scale of China's natural gas consumption subsidy,
short term. For commercial sector, the impacts of previous gas we refer to two sets of price. We choose international gas price as
consumption, urbanization rate, gas price and international crude one set of reference price as China's gas foreign dependency is
oil prices are significant. It is noteworthy that, the short-term is rising quickly, and the subsidies estimation based on this set of
different from the long-term situation in commercial sector: price mainly illustrate the pressure of price reform in China. On
Natural gas price elasticity is negative and cross-price elasticity the other hand, we choose alternative energy price as reference
is positive which indicates that the consumer adjusts consumption price, which can illustrate the real market value of natural gas for
according to the relative price changes which is in line with the different sectors.
economic principles. In the long-term, the sectors can adjust The goal of natural gas price reform in China is to replace the
spending habits according to the real energy prices. government-guided cost-plus method with netback value method
which is more market-oriented. According to Lin (2011b), one
prerequisite of netback value method is the determination of
4. Gas subsidies in China reference price. Different gas markets and consumer groups
should be treated separately in terms of choosing alternative
Based on the analysis above, in the long-run, only household energy types. Natural gas end-users in China are grouped into
sector is price sensitive. Price elasticity of industrial sector is industrial, residential and commercial sectors. Main alternative
negative but, the absolute value is relatively smaller and thus we energies of natural gas in industrial sector include coal gas,
can conclude that it is not sensitive to gas prices. More generally, liquefied petroleum gas, fuel oil and coal. But generally, fuel oil
the natural gas price elasticity of commercial sector is counter- prices are used for determining reference prices of natural gas.
intuitive, reflecting the problems of China's energy pricing Main alternative energies for natural gas consumption of residen-
mechanism. The government-guided natural gas prices have tial sector are liquefied petroleum gas (LPG) and coal gas. In China,
resulted in relatively excessive gas consumption in the industrial LPG can be used as the reference energy. Though natural gas, coal
sector, making gas consumption being unable to adjust to natural gas, and liquefied petroleum gas are close in terms of utilization,
gas price efficiently. coal gas prices are also subsidized by government and it is adopted
 T. Wang, B. Lin / Energy Policy 65 (2014) 541–551 549

as a reference that the market value of natural gas will be gas consumption in Germany mainly depends on imported gas. In
underestimated. LPG prices can reflect the real market value of 2011, foreign dependency was as high as 86% and its imports mainly
natural gas. Commercial sector consumes coal gas, LPG and natural come from Russia, Norway and the Netherlands, in which Russia is the
gas. LPG is a more appropriate alternative fuel for natural gas and biggest supplier. China's gas imports are mainly from Turkmenistan,
their environmental costs are also relatively similar. The reason is Qatar, Australia, Indonesia and Malaysia. Russia is also an important
that LPG prices are relatively more market-oriented, and can supplier. Though there are different suppliers for China and Germany,
better reflect the market value of natural gas. Therefore, we will both are based on the proximity principle. Based on those considera-
determine the reference price of natural gas price in accordance tions above, we believe that Germany's data are more suitable.
with the analysis above. For better comparison, we will also By comparing the terminal price and ex-factory price of natural
choose international price of natural gas as another reference. gas and summarizing the pipeline prices of natural gas transported
In Table 7, price of alternative energy is converted into natural by China's West-East natural gas pipeline to relevant provinces
gas reference price according to caloric values, which can be seen (West-East Gas Price Research Group (2004)), we estimate the gap
as scenario 1. LPG is chosen as the alternative energy for residen- between China's ex-factory price and terminal average natural gas
tial sector and commercial sector. Imported fuel oil is chosen for price to be about 1 Yuan. Then, reference price in scenario 2 can be
industrial sector. The price data of LPG come from CEIC and those obtained. Being different from scenario 1, the reference prices for
of imported fuel oil come from PETROHI while standard calorific different sectors in scenario 2 are identical.
values of natural gas, LPG and fuel oil come from National We can see that in either scenario, gas subsidy rates of sectors in
Development and Reform Commission (2011) of China. China are in a downward trend. But comparing with prices of
In scenario 2, we want to find import gas price series in China, alternative energies, we can see that the subsidy rate is still high
however, the data are scarce and CIF of natural gas in Germany is especially in industrial sector. Compared to scenario 2, the method for
chosen as reference price for natural gas in China, and data are determining reference prices in scenario 1 may be more reasonable.
from BP (2011). According to the situations in scenario 1, although terminal natural
There are series of natural gas price of several countries in BP gas price of residential sector is the lowest, the subsidy rate is not the
statistical review: LNG Japan CIF, Average German Import Price, UK highest. As gas in commercial sector is mainly consumed by trans-
(Heren NBP Index), US Henry Hub, and Canada (Albert). From regional portation, and China's refined oil price is government-guided, we do
perspective, Japan is near to China, and Japan's natural gas consump- not use refined oil price as reference price (the price of one unit
tion depends on LNG imports totally. But due to higher cost, LNG price calorific value of LPG is about twice that of 93 # gasoline in China).
is higher than that of gas transported by pipeline. While the pipeline-
imported gas of China share more proportion, especially with the
opening of Central-Asia, China-Kazakhstan, and China-Russia gas 4.2. Estimation of China's natural gas consumption subsidy size
pipelines, pipeline gas imports will further expand, so we think
Japan-imported LNG price is not very appropriate here. Foreign gas Based on the estimated long-term price elasticity, the natural
dependency in U.K. is up to 44% in 2011 and its Heren index is a gas consumption of different sectors in the third section, and the
weighted average of the contract price trading in a particular month. reference prices determined in Section 4.1, we estimate China's
Also, more than half of its natural gas consumption comes from their natural gas subsidies of each sector and that of the whole country
own and the price index is greatly affected by the national resources by using the method of Lin and Jiang (2011). Results are shown in
endowment. In view of such considerations, we decided not to choose Table 8. Fig. 5 shows the proportion of subsidy for each sector in
this price. Similarly, self-sufficiency rate of natural gas in the United total subsidies in two scenarios.
States is more than 90%, and Canada is even a net exporter of natural We can see that China's natural gas consumption subsidy as a
gas in recent years. Due to the development of shale gas, the gas whole is indeed declining. In scenario 1, alternative energy prices are
prices of these two countries are weak, so it is not appropriate to chosen as reference prices. As the proportion of residential natural gas
choose US Henry Hub and Canada (Albert) as reference prices. Natural consumption is rising, subsidy for residential sector shows an upward

Table 7
Natural gas price and reference price of different sectors.

Sector/Year Terminal price (Yuan/cubic meter) Reference price (Yuan/cubic meter) Price gap (Yuan/cubic meter) Subsidy rate (%)

Scenario 1 Scenario 2 Scenario 1 Scenario 2 Scenario 1 Scenario 2

Residential
2006 1.95 3.89 3.23 1.94 1.28 99.26 65.89
2007 2.15 3.92 3.18 1.77 1.03 81.97 47.65
2008 2.28 4.50 3.87 2.21 1.59 97.03 69.5
2009 2.42 3.71 3.08 1.29 0.66 53.41 27.17
2010 2.47 4.40 2.94 1.93 0.47 78.36 19.13
Industrial
2006 2.25 4.19 3.23 1.94 0.98 86.05 43.56
2007 2.47 4.58 3.18 2.12 0.71 85.84 28.95
2008 2.61 5.75 3.87 3.14 1.26 120.21 48.13
2009 2.74 6 3.08 3.26 0.34 119.31 12.53
2010 2.88 6.12 2.94 3.24 0.06 112.50 1.99
Commercial
2006 2.10 3.89 3.23 1.78 1.13 84.88 53.92
2007 2.09 3.92 3.18 1.83 1.09 87.34 52.01
2008 2.39 4.50 3.87 2.11 1.48 88.10 61.81
2009 2.56 3.71 3.08 1.16 0.52 45.31 20.45
2010 2.68 4.40 2.94 1.72 0.26 64.16 9.64
550 T. Wang, B. Lin / Energy Policy 65 (2014) 541–551

Table 8
China's natural gas subsidy size.

Sector Residential (billion yuan) Industrial (billion yuan) Commercial (billion yuan) Total subsidy/GDP (%)

Year Scenario 1 Scenario 2 Scenario 1 Scenario 2 Scenario 1 Scenario 2 Scenario 1 Scenario 2

2006 19.85 13.18 74.77 37.85 134.46 8.29 1.06 0.27

2007 25.31 14.72 102.01 34.40 134.41 8.72 0.98 0.22
2008 37.65 26.97 167.15 66.91 147.02 16.28 1.12 0.35
2009 22.97 11.68 188.95 19.84 107.78 7.25 0.94 0.11
2010 43.82 10.70 222.99 3.95 126.71 4.13 0.98 0.04

100%
Scenario 1 As a kind of non-renewable resource, gas should be consumed
by sectors with higher efficiency. Li et al. (2012) established a
80% formula of economic value of natural gas use. They concluded that
in 2009 China's use of natural gas in producing chemical fertilizers
60% Commercial
is of the lowest economic value while it is the highest in
Industrial
40% residential sector, and the lowest economic value was only 25%
Residential
of the highest. From an economic point of view, if there are higher
20%
marginal benefits in residential and commercial sector, transfer of
0% gas consumption from chemical department to residential and
2006 2007 2008 2009 2010
commercial sectors can improve welfare and bring more benefit.
Scenario 2 So in terms of the relative amounts, we said gas consumption of
100%
industrial sector is “excessive”.
80% In scenario 2, reference prices of three sectors are equivalent.
As the terminal price of residential sector is the lowest, its subsidy
60% Commercial size is relatively higher. By comparing the estimated subsidy sizes
40%
Industrial in two scenarios, we can see that the choice of different reference
Residential prices result in different subsidy estimations. In this regard, the
20% direction of natural gas price reform is to adopt the weighted
0% average prices of a variety of alternative energy types as city-gate
2006 2007 2008 2009 2010 price. Thus, we can say that real subsidy size should be roughly
Fig. 5. Proportion of each sector's subsidy in different scenarios.
between the estimated sizes of scenario 1 and scenario 2.

trend, but subsidy scale for industrial sector is still the largest. Natural
gas consumption of commercial sector in recent years was slightly 5. Conclusions and suggestions
less than that of residential sector. However, with the same reference
price, the size of subsidies for commercial sector is larger than that for We analyze the influential factors of natural gas consumption
household sector. Due to the positive price elasticity, gas consumption in three sectors in China and carry out cointegration tests and
does not go down as price rising. Industrial sector gets the largest part error correction model to estimate long-run elasticities and short-
of subsidies, which means there is relatively excessive consumption in term variations. The results show that income elasticities of
industrial sector. China's natural gas consumption are significant, which means that
From China's energy consumption structure perspective, the income is an important factor affecting natural gas consumption.
cleanest fossil energy is gas, and gas consumption needs to be Urbanization is also an important factor. Energy prices (either
encouraged. Taking alternative energy prices as reference, industry price of natural gas or price of alternative energies) also affect
gas consumption subsidies is the highest. The relatively lower consumption, though the effects can be very different for the three
price compared with alternative energies usually results in low different sectors, and the winter temperature changes should not
efficiency and mismatch of resources. From various sectors’ per- be ignored.
spective and taking alternative energy prices as reference, industry We estimate the price elasticity and cross-price elasticity of
gas consumption subsidy is the highest. There may appear some natural gas consumption. Price elasticity for the residential sector
problems in the resources allocation and increase gas consump- is the greatest, indicating that, the residential sector is more price-
tion under the relative lower price. For example, natural gas, coal sensitive. Therefore, when carrying out the price reform, the
and oil are the three alternative raw materials in fertilizer government should pay sufficient attention to the residents in
manufacturing. In recent years, the price rises of oil and coal have order to avoid their large consumption fluctuations. The smaller
been much higher than natural gas, and fertilizer produced from price elasticity of the industrial sector means its tolerance of price
natural gas gained a larger cost advantage, resulting in over- change is relatively stronger. Natural gas price elasticity and cross-
capacity and even a large number of fertilizers exported. price elasticity in the commercial sector are counter-intuitive,
In the case of urea, in recent years a large number of Chinese reflecting the lag of price reform of entire energy market. It also
urea was exported and net export accounted for about 20% of the shows that the price reform of each type of fossil energy is not
total output. As a kind of high energy consumption and intensive isolated and should be carried out coordinately in order to realize
pollution product, especially with the existence of subsidies for the market prices based resource allocation.
resource, the appearance of a large number of exports of urea It is an innovation to introduce climate factor into the model.
fertilizer is irrational. From this perspective, we can say that, gas According to the empirical results, the influences of climate factor
consumption of industrial sector especially the chemical depart- in the three sectors are significant. Temperature fluctuation sig-
ment's gas consumption is “excessive”. nificantly affects natural gas consumption, indicating that peak
 T. Wang, B. Lin / Energy Policy 65 (2014) 541–551 551

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