Household heterogeneity impact of removing energy subsidies in China: Direct and indirect effect

Reforming subsidies for fossil fuels is a challenging prospect for many governments. The impact of such a reform on households is a major concern for the government. This paper investigates the heterogeneous impacts of eliminating energy subsidies on households in China from direct and indirect perspectives. The results of the direct effects show that the removal of energy subsidies, particularly for removing electricity and gas subsidies, has a greater negative impact on the poor than on the rich. From an indirect perspective, this article shows that the lower the per capita disposable income, the higher the proportion of consumption to disposable income, and the greater the indirect impact of eliminating subsidies. Meanwhile, the impact is not only related to household income but consumer goods. Moreover, the indirect effects of eliminating subsidies on households differ across energy types. Specifically, eliminating electricity subsidies has the greatest effect on households, followed by transportation fuel and gas. We suggest that targeted supportive measures need to be taken towards the implementation of subsidy reform, particularly in countries with greater inequality, to minimize the negative effects on the poor.