In early 2016, China introduced additional capacity cut policies to rebalance supply in the coal market to match demand that had been reduced by slow economic growth and strict environmental regulation. Ensuing disruptions to the coal market caused these policies to be revised and, subsequently, discarded as decision makers tried to find a balance between efficient supply, economic and social stability and environmental sustainability. This paper explores the causes of these unintended consequences using an extended version of the KEM-China model. The results reveal that full and partial compliance with the capacity cut policies results in a significant gap between supply and demand. This suggests that implementation of the policy was technically infeasible, even allowing for a significant increase in coal prices and economic costs. Besides, significant differences in coal prices and output profiles are registered across the country. We argue that the heterogeneous nature of the Chinese coal market and policy compliance was a major factor leading to the unintended consequences rendering a single national price benchmark inappropriate as a policy gauge. We propose that the capacity cut policy should be differentiated across regions and even types of coalmines, market approaches would be preferable to the command-and-control instruments, and policy distortions that cause excess capacity should be removed. © 2017 The Authors
Bertrand is a research fellow focusing on the impact of market regulation and liberalization in energy markets. An experienced energy systems… Bertrand is a research fellow focusing on the impact of market regulation and liberalization in energy markets. An experienced energy systems model developer (linear optimization and mixed complementary problems), he is working on developing the KAPSARC Energy Model (KEM) as a decision support tool for analyzing price regulation in energy economies. Bertrand has contributed to the development of KEM Saudi Arabia and is the lead developer of KEM China, studying the impact of government regulation in the coal, power and natural gas markets. He was previously employed as a research assistant at the Canadian Space Agency.