Reforming Inefficient Energy Pricing: Evidence from China

Koichiro Ito, Shuang Zhang

NBER Working Paper No. 26853
Issued in March 2020
NBER Program(s):Development Economics, Environment and Energy Economics, Industrial Organization

Inefficient energy pricing hinders economic development in many countries. We examine long-run effects of a recent heating reform in China that replaced a commonly-used fixed-payment system with individually-metered pricing. Using staggered policy rollouts and administrative data on household-level daily heating consumption, we find that the reform induced long-run reductions in heating usage and generated substantial welfare gains. Consumers gradually learned how to conserve heating effectively, making short-run evaluations underestimate the policy impacts. Our results suggest that energy price reform is an effective way to improve allocative efficiency and air quality in developing countries, where unmetered-inefficient pricing is still ubiquitous.

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Document Object Identifier (DOI): 10.3386/w26853