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

China's energy structure is now dominated by coal. While
under the country's Clean Development Strategy, natural gas will
probably be the major energy type that will substitute coal
consumption in the coming years. With Sino-Russian and China–
Myanmar gas pipelines being put into operation, China's foreign
gas dependency would be about 35% and gas consumption would
account for 7–8% of its primary energy consumption by 2015 (Lin
et al., 2011).
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.
E-mail address: bqlin@xmu.edu.cn (B. Lin).
easily changed in the short term. In 2011, the share of coal in China's
primary energy consumption structure was approximately 68.4%,
while that of natural gas was only 5%. As the “cleanest” fossil fuel,
natural gas has gained increasing attention. With West-East Gas
Pipeline and foreign-connected gas pipelines being put into opera-
tion, China's natural gas consumption in recent years has grown
rapidly. Its average annual growth rate reached 7.46% from 1980 to
2011, while the figure from 2002 to 2011 was as high as 16.08%. The
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,
production peak will come around the 2020s and then gas
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
natural gas reserves were abundant, which was about four times
that of conventional natural gas. If large-scale mining of uncon-
ventional gas begins from now on, the arrival of natural gas
production peak can generally be delayed by ten years and the
annual production will be greatly raised. However, considering
technology, water resources and China's geographical environ-
ment, whether the large-scale mining of unconventional gas can
be realized as expected is full of uncertainty. With the approaching
of conventional gas production peak and the rapid increase of
foreign gas dependency, China's gas supply security is facing risks.
China's natural gas prices are still guided by government. The
low and inflexible gas price cannot be used as leverage to optimize
allocation of resources. Therefore, it is urgent to reform China's
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
may be weak. At the end of 2011, the National Development and
Reform Commission issued a statement, and selected Guangdong
Province and Guangxi Autonomous Region as pilot provinces to
carry out natural gas pricing mechanism reform. According to the
statement, net back value method will be used to decide the gas
price. Under this pricing mechanism, the imported fuel oil and
liquefied petroleum gas (LPG) are taken as alternative energy
types. This is the marketization and internationalization process of
natural gas price.
However, as a commodity relating to people's livelihood, public
service and national strategy, subsidy system is also very impor-
tant for natural gas consumption. How can the government
achieve the balance between equity and efficiency?
Studying China's gas consumption in different sectors and their
corresponding subsidy scales is practically significant in designing
natural gas subsidy and gas price reforms. We adopt the cointe-
gration test and error correction model to study the relationships
of explanatory factors and gas consumptions of different sectors,
and climate factor is also included. In order to find the direction of
natural gas price reform and study the benchmark of gas price, the
size of gas consumption subsidy is also estimated by using price-
gap approach. We believe all these attempts are greatly significant
for policy making on natural gas supply, peak shaving, efficiency
improvement, and price reforms.
The remaining parts of this article are organized as follows. The
second part briefly discusses natural gas consumption and price
characteristics of each sector. The third part is the empirical study
analyzes the main factors affecting natural gas consumption and
price elasticity. The fourth part adopts the price-gap method to
estimate the subsidy size of gas consumption. The last part
provides some policy recommendations.
2. Gas consumption and gas prices of each sector
2.1. Natural gas consumption of each sector
Power generation, residential and commercial sectors generally
share most of the gas consumption in developed countries, but gas
usage as chemical raw materials accounts for a very small propor-
tion in these countries. China is a developing country and the
industrial sector in China consumes a greater proportion of total
natural gas consumption. However, the consumption proportions
of commercial and residential sectors present a steady upward
trend as shown in Fig. 1.
There should be some explanations for Fig. 1. In this paper, the
original gas consumption data of various sectors come from CEIC.
And these data are in line with the statistic data of National Bureau
of Statistics of China. China Statistical Yearbook and China Energy
100%
90%
80%
70%
60%
Industrial
50%
Residential
40%
Commercial
30%
20%
10%
0%
Year 1985 1990 1995 2000 2005 2010
Fig. 1. Proportion variation of each sector's natural gas consumption in China.
Source: CEIC.
Statistical Yearbook are both from National Bureau of Statistics of
China. From these two statistical yearbooks we can get natural gas
consumption data of different sectors, and they are not continuous
time series. According to China Statistical Yearbook, in 2010, gas
users can be divided into seven sectors mainly (in most of the
years, there were only six sectors counted as the agriculture
consumption was not included). These gas user sectors include:
(1) “Agriculture”, “Forestry”, “Animal Husbandry” and “Fishery and
Water Conservancy”; (2) “Industry” (including “Mining”, “Manu-
facturing”, and “Electric Power, Gas and Water Production and
Supply”); (3) “Construction”; (4) “Transport, Storage and Post”; (5)
“Wholesale and Retail Trades” and “Hotels and Catering Services”;
(6) “Others”; (7) “Household Consumption”. There are more
detailed classifications for the seven sectors in these statistical
yearbooks, and we are not going to elaborate them here.
The main purpose of this paper is to study the characteristics of
natural gas consumption in main sectors and further to study
Chinese natural gas consumption subsidies. To simplify the
research and to cater for the availability of natural gas price data
(there are only three categories of natural gas price available:
residential gas price, industrial gas price, and gas price of public
services). In this article, we combine the six sectors of National
Bureau of Statistics of China into three sectors: “Construction”
would be combined to industrial sector; “Transport, Storage and
Post”, “Wholesale and Retail Trades”, “Hotels and Catering Ser-
vices” are combined as commercial sector; “Household Consump-
tion” is residential sector. As the agriculture consumption of
natural gas was small and even to 0 in many years (and that's
why there are just six sectors’ data in CEIC), we will not analyze
this sector's gas consumption in this paper.
For example, according to China Statistical Yearbook, the total
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-
sumption accounted for only 36% of total gas consumption, and
power generation and heating shared 17.88%. These two men-
tioned above together shared a proportion of 53.88%, which is
below the corresponding levels in developed countries.
Natural gas consumption in China is different from that in
developed countries, which is mainly induced by the differences in
economic development, urbanization, and people's living stan-
dards. According to Li (1997), in a country with higher level of
modernization, people pay more attention to the environment and
life quality. In such countries, natural gas is undoubtedly a good
choice for power generation, and preferred by residential and
commercial sectors. While developing countries tend to have
larger populations, and they have to produce more fertilizer and
other chemical products to meet the huge food as well as other
commodities that are needed by residents. This has resulted in
the higher proportion of natural gas being used as raw materials.
 T. Wang, B. Lin / Energy Policy 65 (2014) 541–551
Table 1
Proportion of each sector's natural gas consumption in China in 2010 (%).
Source: China Statistical Yearbook.
Industry (including construction)
63.88
Mining Manufacturing Electric power, gas and water Construction
production and supply
12.75 33.25 17.88 0.02
In addition, natural gas usage in residential and commercial
sectors depends largely on gas pipeline networks. Urbanization
level in China is lower than that of developed countries, and the
gas popularizing rate still needs to be improved. With the
completion of West-East Gas Pipeline and improvement of city
gas pipeline network, proportions of gas consumption in residen-
tial and commercial sector will continue to rise. In addition, the
increasing demand for distributed power systems to shave elec-
tricity peaks will also raise the proportion of natural gas used for
power generation.
2.2. Natural gas price of each sector
Natural gas prices generally include wellhead price, city gate
price and end-user price. Gas prices are influenced by interna-
tional oil prices, regional resource abundance, level of economic
development, and some demand factors. The amount of natural
gas resources in neighboring countries and the transmission
distances are also factors affecting a country's gas prices. Natural
gas market is different from markets of crude oil or other
commodities in general and it tends to be more regional. Accord-
ing to Lin (2009a), it is also affected by international political
situation and other related factors. In China, value chain of gas
industry consists of three links: production, transportation and
city gas distribution. Correspondingly, the natural gas price system
includes ex-factory price, city-gate price and the end-user price.
City-gate price is the sum of ex-factory price and pipeline price.
End-user price is the sum of city-gate price, transmission and
distribution charges. Production, transmission and distribution
prices are government-guided. The first two are set by the
National Development and Reform Commission, and the distribu-
tion price is decided by the local government.
Ex-factory price (The ex-factory price of natural gas before 2002
was known as the wellhead price. In 2001, China began to set higher
prices for better quality natural gas, and natural gas purification fee
incorporated into the wellhead price, so ex-factory price is unified) of
natural gas has gone through the stage of low gas prices (1950–
1981), stage of two-track prices (1982–1992), stage of structure
prices (1993–2005) as well as stage of government-guided prices
(December 2005). Generally, gas prices have climbed up with the
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
between natural gas prices in China and that of international market
is still reasonable and acceptable, but it has expanded rapidly since
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
through EU pipelines, and 42.4% of LNG CIF in Japan. In 2005,
international oil prices continued to rise, compelling many countries
to raise their gas prices. In 2008, Henry Price of the U.S, EU CIF for per
million British thermal units was averagely $8.85 and $12.61,
respectively. In that year, China's ex-factory price was only 42.4% of
the Henry Price and 29.7% of EU CIF. According to Oil and Gas
Industry Development Research Center of China University of
Petroleum, 2010, now in mature market economies, the price ratio
543
Commercial Residential
14.85
Transport, storage and post Wholesale and retail trades, Others
hotels and catering services
9.92 2.53 2.4 21.1
of natural gas to crude oil is usually between 0.65 and 0.80, while the
price ratio of China's industrial ex-factory natural gas to crude oil is
only 0.3. In China, CIF duty-paid price of natural gas imported
through Central Asia pipeline is over 2 Yuan/cubic meter, and gas
price in long-term LNG trade agreement with Australia is 4 Yuan/
cubic meter. The prices of imported gas are generally much higher
than domestic gas prices. Due to the price difference, China's gas
companies tend to have little enthusiasm in gas imports. In 2010,
China imported 4.3 billion cubic meters of natural gas from Central
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
in gas imports for Petro China.
In late 2011, National Development and Reform Commission of
China issued a notice on gas price reform decisions and selected
Guangdong Province and Guangxi Autonomous Region to carry out
pilot price reform on natural gas pricing mechanism. It aims to
explore and establish the dynamic adjustment mechanism of natural
gas price which can reflect market supply and demand situations as
well as resource scarcity. Another goal of the pilot price reform is to
straighten out the price relations between natural gas and alternative
energies, and to provide the reform experiences to other regions for
reference. The general idea of the pilot reform is to shift the pricing
mechanism from the existing cost-plus method to net back value
method. According to the method of Development and Reform
Commission in 2010, the highest city-gate prices of Guangdong
and Guangxi provinces (autonomous regions) were estimated to be
2740 Yuan and 2570 Yuan per thousand cubic meters, respectively.
According to Lin (2009a), in many other countries, gas price gap
between power generation sector and industrial sector is small.
However, gas prices for residential sector are generally over two times
that of industrial sector and power generation sector. In 2008, gas
prices for industrial sector were slightly higher than those for power
generation in US, while those for residential sector were generally
about 1.6 times those for power generation and industrial sectors. In
China, however, residential gas prices as a whole are the lowest,
followed by gas prices for commercial sector, and industrial gas prices
are the highest. In Fig. 2, the nominal prices and the real prices
(deflated and 2007 is set as the base year) of the three sectors are
given. Real gas prices for different sectors generally show a slight
upward trend.
3. Gas consumption determinants and estimation of elasticity
3.1. Analysis of determinants
Studies on China's energy consumption and its influential
factors are abundant. By using input–output structural decom-
position method and the weighted average method, Lin et al.
(2011) decomposed China's industrial electricity consumption
increment into the weighted average of ten influential factors,
and calculated the average contribution rate of these factors. Liang
and Chen (2005) adopted panel data model to study the energy
consumption of each sector and analyzed the energy consumption
tendency and average consumption level of industry, agriculture,
544
Nominal price
3.5
3
Yuan/cubic meter
2.5
2 istics and development direction of China's natural gas consump-
1.5
1 factors of China's gas-fired power, and explored the feasibility of
0.5
0
Year 2007 2008 2009 2010 2011
Real price
3
2.5
Yuan/cubic meter
2 consumption are limited on total primary energy consumption
1.5
1 Commercial
0.5
0
Year 2007 2008 2009 2010 2011
Fig. 2. Development of gas prices for three sectors in China over 2007–2011.
Source: CEIC.
building, transportation and wholesale trade. Wu et al. (2005)
compared the energy consumption influential factors of China and
America and analyzed the cointegration relationship between
energy consumption and economic growth. They found out that
industrialization in the long run can improve energy efficiency.
Besides, in China, per capita energy consumption might increase
with the rise of per capita income, but energy intensity would go
down with the development of industrialization. Wang and Yang
(2006) established comprehensive cointegration model to study
China's industrial energy consumption and found out that a long-
run equilibrium is significant and short-term adjustment effects
existed among China's industrial energy consumption, industry
growth and energy efficiency.
Standard Granger causality test, cointegration and error correc-
tion model (ECM) have been widely used in explaining long-run
equilibrium and short-term relationships between economic
development and energy consumption. Lin (2001) used cointegra-
tion and error correction model to study influential factors of
China's energy demand. The empirical results proved the existence
of a long-run equilibrium between total energy consumption, GDP,
energy prices and energy structure. Compared with other coun-
tries, China's income elasticity of energy demand was relatively
lower and the price elasticity was higher. Lin (2003a) also used
cointegration analysis and error correction model to study the
relationship between electricity consumption and economic
growth. The results showed that there was a long-run equilibrium
relationship between electricity consumption, GDP, capital, and
human capital. Taking urbanization factor into consideration, He
et al (2009) adopted nonlinear model and cointegration model to
study the electricity demand in China and found out that the
results of the two models were generally similar. This shows a
strong relevance between electricity demand and urbanization.
Qu and Yuan (2008) built panel cointegration model to study
energy consumption of the industrial sector. These results indicate
the long-run equilibrium between energy consumption, energy
efficiency and industrial output of China's industries, and there are
significant short-term adjustment effects, but these effects are
significantly different in different industries. Lin (2007) studied
China's coal demand in the long term using co-integration
method. The study estimated long-term income elasticity, price
elasticity, structural elasticity, and elasticity of transportation costs,
T. Wang, B. Lin / Energy Policy 65 (2014) 541–551
Also, it predicted the long-term coal demand, and analyzed the
impacts of coal demand on environment, coal price and supply.
As to natural gas consumption, studies in China generally focus
on qualitative analysis. Qu (2011) discussed the main character-
Residential
tion in the “12th Five-Year”. Li (1997) analyzed the influential
Commercial
Industrial
gas-fired power generation from environmental and economic
point of view. Zhou and Li (2008) analyzed the explanatory factors
of natural gas consumption, pointing out that economic develop-
ment, development stage of natural gas market, and natural gas
prices are the main factors affecting natural gas consumption.
By summarizing the existing studies mentioned above, we can
see that theoretical and empirical researches on China's energy
Residential
and total electricity consumption. Researches on influential factors
of natural gas consumption, especially in sectors are scarce.
As Dagher (2011) said, although there is no standard identify-
Industrial
ing what factors affect natural gas consumption, the factors
generally accepted as influential factors include natural gas price,
prices of alternative energies, prices of related products, income,
demographic factors, weather, season as well as technical changes.
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
the related literature research, income is an important factor
affecting energy consumption. On the other hand, as China is on
the stage of urbanization and industrialization, urbanization and
industrialization process is important factor influencing energy
consumption. This article only adopted the urbanization as vari-
able in order to avoid collinearity.
Related products and technology progress are also very impor-
tant, but for different sectors, there will be many different kinds of
related products. Technical indicators will be very difficult to
define, and the data could not be obtained completely. So in this
paper we focus on income, price, urbanization and climate change.
(1) Income and price. Most studies on natural gas demand
estimate the long-term and short-term income and price
elasticity, especially for the household sector. The methods
used include ordinary least squares, generalized least squares
method, autoregressive distributed lag model, cointegration
and error correction model. Data used include time series data,
panel data and cross-sectional data. Related studies on income
and price elasticity are summarized in Table 2.
In addition, studies on other sectors are also available.
Andersen (2011) used panel data model to estimate the price
elasticity and output elasticity of natural gas demand in
manufacturing sector of OECD countries. Wadud et al. (2011)
assumed that natural gas demand in Bangladesh was in line
with Cobb Douglas function and estimated the country's long-
term income elasticity, which was 1.47. Erdogdu (2010) used
ARIMA model and estimated Turkey's natural gas demand
with price and income are influential factors. We can see that
studies on self-price elasticity of natural gas demand are
abundant while those on alternative cross-price elasticity are
scarce. Also, studies on the characteristics of natural gas
demand in different sectors are even less.
(2) Urbanization and industrialization. Lin (2005) manifested the
rigid energy demand in urbanization and industrialization
process. Then Lin (2008) carried out a more systematic
discussion on how urbanization and industrialization pro-
cesses affected energy demand. Lin (2003b) pointed out that
population growth is an important factor promoting electricity
consumption, but the promotion impacts of urbanization rate
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
retail price index deflator, respectively. Data mentioned above
are from China Statistical Yearbook.
(2) Urbanization. For household sector, gas population rate has
direct effects on natural gas consumption. Thus, we select the
gas population rate (PR) as the urbanization variable. Data was
taken from CEIC. For industrial and commercial sectors, gas
population rates are not the most direct impact factor, as they
may use liquefied natural gas and their site selection is
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
Yearbook.
(3) Natural gas price. Natural gas price for each sector is adopted.
To maintain consistency, we use urban consumer price index,
producer price index and retail price index deflator to deflate
the gas prices for the three sectors and get the real prices (NPR,
NPI, NPC). Data were taken from CEIC and China Statistical
Yearbook. Natural gas prices of several years are not available
and we try to estimate these figures by referring to relevant
studies and international natural gas prices.
(4) Alternative energies prices. As mentioned above, alternative
energy types of natural gas for different sectors are different.
For household sector, we use the price of liquefied petroleum
gas as alternative energy price (LP), and the data were taken
from CEIC. For industrial sector, coal price (Datong mixed coal)
will be used as alternative energy price (CP), and data were
taken from Sockstar and other websites. Table 1 shows that a
large part of natural gas consumption in China's commercial
sector is used by transportation, so that the Brent crude oil
price is used as alternative energy price (OP), and the data
were taken from IEA. The data of exchange rate are from
China Statistical Yearbook. Nominal price are all deflated
accordingly.
(5) Climate. According to the monthly temperature data of Pakis-
tan's main weather stations, Jamil and Ahmad (2011) built a
temperature variable (Tt), defined as a sum of degrees showing
extreme temperatures in a year. Unlike electricity heating and
cooling, gas heating in China generally begins in mid-
November and ends in mid-March. And compared to warming,
cooling by gas in China is less common. More and more cities
have now adopted the central-heating system. Thus, heating
time length and temperature are only related fixedly to the
temperature of several months. We calculate the average
temperatures of 29 major cities in January, February, March,
November and December and get the temperature variable by
equations:
ln Q Rt ¼ βR1 þ βR2 ln Y Rt þβR3 ln PRt þ βR4 ln NP Rt
þ βR5 ln LP t þ βR6 ln AT t þ ui ð2Þ
ln Q It ¼ βI1 þ βI2 ln Y It þ βI3 ln UBt þ βI4 ln NP It
þ βI5 ln CP t þ βI6 ln AT t þ ui ð3Þ
ln Q Ct ¼ βC1 þ βC2 ln Y Ct þ βC3 ln UBt þ βC4 ln NP Ct
þ βC5 ln OP t þ βC6 ln AT t þ ui ð4Þ
3.2.2. Cointegration test
We first carry out the unit root test for each variable and then
conduct the cointegration test. Table 3 shows the results of
Augmented Dickey–Fuller (ADF) and Philips–Perron tests. The
urbanization variable (lnUB) is I (2) at 1% significant level; Climate
variable (lnAT) is I (0), which are consistent with the previous
studies (Jamil and Ahmad, (2011)) and other variables are I (1) at
the 5% significant level.
The estimated coefficients of cointegration equations are
shown in Tables 4 and 5:
The corresponding cointegration Eqs. (5)–(7) are:
ln Q Rt ¼ 7:72 þ0:99 ln Y Rt þ0:26 ln PRt  2:88 ln NP Rt
þ 1:46 ln LP t  3:06 ln AT t þ ui ð5Þ
ln Q It ¼ 31:67  2:31 ln Y It þ 6:2 ln UBt 0:4 ln NP It
þ 2:52 ln CP t  1:47 ln AT t þ ui ð6Þ
ln Q Ct ¼  6:17 þ 1:78 ln Y Ct þ 1:02 ln UBt þ 0:45 ln NP Ct
0:09 ln OP t  0:28 ln AT t þ ui ð7Þ
The cointegration equations show a long-run elasticity of each
factor. First, according to the significance of long-term income
elasticity, we can see that income is indeed an important factor
influencing natural gas consumption of the sectors. The long-term
income elasticities of residential and commercial sectors are
positive, which indicates that, an increase in the income of
residents (income of urban residents) and commercial sector will
result in the increase in their natural gas consumption. Natural gas
consumption increases by 0.99% when residents’ income goes up
by 1%. In commercial sector, the effects of income increase will be
30
January
25
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(lnQR) 0.10  0.13  0.56
ECT(t  1) D(lnQI(  1)) D(lnYI(  1))
D(lnQI)  0.07 0.46nn 0.17
ECT(t  1) D(lnQC(  1)) D(lnYC(  1))
D(lnQC)  1.93nnn 0.49nnn  1.13
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,
natural gas consumption and natural gas price may change in the
same direction, resulting in the positive price elasticity. Alternative
energy price elasticity of commercial sector is also counterintuitive
and not significant, which reflects the defects of China's energy
price system that we will talk about later.
The fourth factor is climate (temperature) change. We can see
from the test results that all sectors are affected by temperature
changes. Rising temperature will cause a decline in natural gas
consumption. The influence on household sector is most obvious
and the elasticity of industrial sector becomes significant, while
that of commercial sector is relatively small. One possible reason is
that, in commercial sector natural gas is mainly consumed by
transportation. The comparison shows that household sector has
the greatest pressure in gas peak shaving.
3.2.3. Error correction model
We built the error correction model (ECM) based on the
cointegration tests. The short-term adjustment effects of the
influential factors can then be obtained, as shown in Table 6.
According to the results of ECM, impact of error adjustment is
only significant in commercial sector. In the household sector, only
the gas population rate and LPG price change are significant in the
short term. As gas expenditure accounts for a smaller proportion
of household consumption expenditure, the impacts of price and
income on gas consumption are limited while the opening of a
new gas pipeline clearly has a greater impact. In the industrial
sector, the impacts of previous gas consumption are significant,
while the impacts of price and income are not significant in the
short term. For commercial sector, the impacts of previous gas
consumption, urbanization rate, gas price and international crude
oil prices are significant. It is noteworthy that, the short-term is
different from the long-term situation in commercial sector:
Natural gas price elasticity is negative and cross-price elasticity
is positive which indicates that the consumer adjusts consumption
according to the relative price changes which is in line with the
economic principles. In the long-term, the sectors can adjust
spending habits according to the real energy prices.
4. Gas subsidies in China
Based on the analysis above, in the long-run, only household
sector is price sensitive. Price elasticity of industrial sector is
negative but, the absolute value is relatively smaller and thus we
can conclude that it is not sensitive to gas prices. More generally,
the natural gas price elasticity of commercial sector is counter-
intuitive, reflecting the problems of China's energy pricing
mechanism. The government-guided natural gas prices have
resulted in relatively excessive gas consumption in the industrial
sector, making gas consumption being unable to adjust to natural
gas price efficiently.
D(lnPR(  1)) D(lnNPR(  1)) D(lnLP(  1)) D(lnAT(  1)) C
0.63n  0.39 0.48nn  0.12 0.12
D(lnUB(  1)) D(lnNPI(  1)) D(lnCP(  1)) D(lnAT(  1)) C
 0.25 0.04  0.14 0.07 0.04
D(lnUB(  1)) D(lnNPC(  1)) D(lnOP(  1)) D(lnAT(  1)) C
 8.76n  0.78nn 0.34n 0.34 0.47n
Government pricing means energy subsidies. According to Yao
et al., (2011), subsidy is one of government's policy tools for
realizing economic, social and environmental objectives. Energy
subsidies can offset the negative effects of market failures caused
by energy externality to protect domestic firms and to avoid
potential unemployment with the aim of providing specific social
groups with more access to modern energy services. This is also
the reason that China's energy prices are low and price reform is
arrested. To some extent, the low-energy-price policy has ensured
energy consumption of specific groups. However, subsidy with no
specific target but was carried out only by lower energy prices may
go against the principles of equality and efficiency. Further, it may
also lead to excessive consumption of fossil energy which leads to
excessive emissions. Therefore, it is important to find a reasonable
gas price level, to estimate the subsidy size for gas consumption,
and to design more equal and efficient subsidy policies for China.
4.1. Price-gap approach and choice of reference price
Lin and Jiang (2011) used price-gap approach to estimate the
scale of fossil energy subsidies. Theoretical framework of price-gap
approach was established by Corden (1957). Before using price-
gap method, we should firstly determine the reference price. Then
the price gap (PG) between real price and reference price can be
determined. The second step is to estimate the subsidies based on
demand function. Thus, the reference price is the prerequisite for
estimating subsidy scale and designing price reform.
As a relative index, according to different reference prices, we
believe that the “subsidy” will be different. In order to fully
investigate the scale of China's natural gas consumption subsidy,
we refer to two sets of price. We choose international gas price as
one set of reference price as China's gas foreign dependency is
rising quickly, and the subsidies estimation based on this set of
price mainly illustrate the pressure of price reform in China. On
the other hand, we choose alternative energy price as reference
price, which can illustrate the real market value of natural gas for
different sectors.
The goal of natural gas price reform in China is to replace the
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
reference price. Different gas markets and consumer groups
should be treated separately in terms of choosing alternative
energy types. Natural gas end-users in China are grouped into
industrial, residential and commercial sectors. Main alternative
energies of natural gas in industrial sector include coal gas,
liquefied petroleum gas, fuel oil and coal. But generally, fuel oil
prices are used for determining reference prices of natural gas.
Main alternative energies for natural gas consumption of residen-
tial sector are liquefied petroleum gas (LPG) and coal gas. In China,
LPG can be used as the reference energy. Though natural gas, coal
gas, and liquefied petroleum gas are close in terms of utilization,
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
underestimated. LPG prices can reflect the real market value of
natural gas. Commercial sector consumes coal gas, LPG and natural
gas. LPG is a more appropriate alternative fuel for natural gas and
their environmental costs are also relatively similar. The reason is
that LPG prices are relatively more market-oriented, and can
better reflect the market value of natural gas. Therefore, we will
determine the reference price of natural gas price in accordance
with the analysis above. For better comparison, we will also
choose international price of natural gas as another reference.
In Table 7, price of alternative energy is converted into natural
gas reference price according to caloric values, which can be seen
as scenario 1. LPG is chosen as the alternative energy for residen-
tial sector and commercial sector. Imported fuel oil is chosen for
industrial sector. The price data of LPG come from CEIC and those
of imported fuel oil come from PETROHI while standard calorific
values of natural gas, LPG and fuel oil come from National
Development and Reform Commission (2011) of China.
In scenario 2, we want to find import gas price series in China,
however, the data are scarce and CIF of natural gas in Germany is
chosen as reference price for natural gas in China, and data are
from BP (2011).
There are series of natural gas price of several countries in BP
statistical review: LNG Japan CIF, Average German Import Price, UK
(Heren NBP Index), US Henry Hub, and Canada (Albert). From regional
perspective, Japan is near to China, and Japan's natural gas consump-
tion depends on LNG imports totally. But due to higher cost, LNG price
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
pipelines, pipeline gas imports will further expand, so we think
Japan-imported LNG price is not very appropriate here. Foreign gas
dependency in U.K. is up to 44% in 2011 and its Heren index is a
weighted average of the contract price trading in a particular month.
Also, more than half of its natural gas consumption comes from their
own and the price index is greatly affected by the national resources
endowment. In view of such considerations, we decided not to choose
this price. Similarly, self-sufficiency rate of natural gas in the United
States is more than 90%, and Canada is even a net exporter of natural
gas in recent years. Due to the development of shale gas, the gas
prices of these two countries are weak, so it is not appropriate to
choose US Henry Hub and Canada (Albert) as reference prices. Natural
gas consumption in Germany mainly depends on imported gas. In
2011, foreign dependency was as high as 86% and its imports mainly
come from Russia, Norway and the Netherlands, in which Russia is the
biggest supplier. China's gas imports are mainly from Turkmenistan,
Qatar, Australia, Indonesia and Malaysia. Russia is also an important
supplier. Though there are different suppliers for China and Germany,
both are based on the proximity principle. Based on those considera-
tions above, we believe that Germany's data are more suitable.
By comparing the terminal price and ex-factory price of natural
gas and summarizing the pipeline prices of natural gas transported
by China's West-East natural gas pipeline to relevant provinces
(West-East Gas Price Research Group (2004)), we estimate the gap
between China's ex-factory price and terminal average natural gas
price to be about 1 Yuan. Then, reference price in scenario 2 can be
obtained. Being different from scenario 1, the reference prices for
different sectors in scenario 2 are identical.
We can see that in either scenario, gas subsidy rates of sectors in
China are in a downward trend. But comparing with prices of
alternative energies, we can see that the subsidy rate is still high
especially in industrial sector. Compared to scenario 2, the method for
determining reference prices in scenario 1 may be more reasonable.
According to the situations in scenario 1, although terminal natural
gas price of residential sector is the lowest, the subsidy rate is not the
highest. As gas in commercial sector is mainly consumed by trans-
portation, and China's refined oil price is government-guided, we do
not use refined oil price as reference price (the price of one unit
calorific value of LPG is about twice that of 93 # gasoline in China).
4.2. Estimation of China's natural gas consumption subsidy size
Based on the estimated long-term price elasticity, the natural
gas consumption of different sectors in the third section, and the
reference prices determined in Section 4.1, we estimate China's
natural gas subsidies of each sector and that of the whole country
by using the method of Lin and Jiang (2011). Results are shown in
Table 8. Fig. 5 shows the proportion of subsidy for each sector in
total subsidies in two scenarios.
We can see that China's natural gas consumption subsidy as a
whole is indeed declining. In scenario 1, alternative energy prices are
chosen as reference prices. As the proportion of residential natural gas
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
less than that of residential sector. However, with the same reference
price, the size of subsidies for commercial sector is larger than that for
household sector. Due to the positive price elasticity, gas consumption
does not go down as price rising. Industrial sector gets the largest part
of subsidies, which means there is relatively excessive consumption in
industrial sector.
From China's energy consumption structure perspective, the
cleanest fossil energy is gas, and gas consumption needs to be
encouraged. Taking alternative energy prices as reference, industry
gas consumption subsidies is the highest. The relatively lower
price compared with alternative energies usually results in low
efficiency and mismatch of resources. From various sectors’ per-
spective and taking alternative energy prices as reference, industry
gas consumption subsidy is the highest. There may appear some
problems in the resources allocation and increase gas consump-
tion under the relative lower price. For example, natural gas, coal
and oil are the three alternative raw materials in fertilizer
manufacturing. In recent years, the price rises of oil and coal have
been much higher than natural gas, and fertilizer produced from
natural gas gained a larger cost advantage, resulting in over-
capacity and even a large number of fertilizers exported.
In the case of urea, in recent years a large number of Chinese
urea was exported and net export accounted for about 20% of the
total output. As a kind of high energy consumption and intensive
pollution product, especially with the existence of subsidies for
resource, the appearance of a large number of exports of urea
fertilizer is irrational. From this perspective, we can say that, gas
consumption of industrial sector especially the chemical depart-
ment's gas consumption is “excessive”.
5. Conclusions and suggestions
We analyze the influential factors of natural gas consumption
in three sectors in China and carry out cointegration tests and
error correction model to estimate long-run elasticities and short-
term variations. The results show that income elasticities of
China's natural gas consumption are significant, which means that
income is an important factor affecting natural gas consumption.
Urbanization is also an important factor. Energy prices (either
price of natural gas or price of alternative energies) also affect
consumption, though the effects can be very different for the three
different sectors, and the winter temperature changes should not
be ignored.
We estimate the price elasticity and cross-price elasticity of
natural gas consumption. Price elasticity for the residential sector
is the greatest, indicating that, the residential sector is more price-
sensitive. Therefore, when carrying out the price reform, the
government should pay sufficient attention to the residents in
order to avoid their large consumption fluctuations. The smaller
price elasticity of the industrial sector means its tolerance of price
change is relatively stronger. Natural gas price elasticity and cross-
price elasticity in the commercial sector are counter-intuitive,
reflecting the lag of price reform of entire energy market. It also
shows that the price reform of each type of fossil energy is not
isolated and should be carried out coordinately in order to realize
the market prices based resource allocation.
It is an innovation to introduce climate factor into the model.
According to the empirical results, the influences of climate factor
in the three sectors are significant. Temperature fluctuation sig-
nificantly affects natural gas consumption, indicating that peak
 T. Wang, B. Lin / Energy Policy 65 (2014) 541–551
shaving is still an important issue in natural gas supply. Peak
shaving is especially important for the residential sector.
Based on the long-term price elasticity, we estimate the natural
gas consumption subsidies by adopting the price-gap method.
Although the terminal price for the residential sector is the lowest,
the size of subsidies for the industrial sector is the largest when
the prices of alternative energies were referred to. In reforming
terminal prices of natural gas and designing subsidy mechanism
for each sector, price levels of alternative energies and the sector's
affordability should be fully considered.
When natural gas pricing is not adequately reformed, subsidy is
still unavoidable. In this regard, it is important to consider fairness
and efficiency when designing subsidies, which is an important
aspect of China's energy price reform. For natural gas pricing
reform, when considering the affordability of different regions and
different users, the new pricing mechanism must have targeted
subsidies. For example, the government should give price dis-
counts to relatively underdeveloped provinces and subsidize
residential natural gas consumption so as to minimize the impact
of gas price increases on residents.
Acknowledgments
The authors appreciate the two anonymous reviewers for their
valuable comments and constructive suggestions. The paper is
supported by Newhuadu Business School Research Fund, the China
Sustainable Energy Program (G-1305-18257), National Social
Science Foundation of China (Grant No. 12&ZD059), and Ministry
of Education (Grant No. 10GBJ013).
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