For Beijing residents, or for anyone who has visited the city in the past few years, you already know that air pollution and energy policy is one of the biggest challenges facing us here. When it comes to policy choices, there are hundreds of things to choose from.  However, there are only a few that can rival the potential of auto emission standards and energy taxes.

In many developing countries, one fundamental policy trade-off makes energy an extremely difficult area to deal with.  Here’s the problem: developing countries have lots of poor people and start-up companies, folks that are trying to start businesses and move up the economic ladder, but these people are often hampered by fundamental costs of things like energy.  In these countries, governments will often help out these people, and development, by putting price controls on energy.  There are good and bad results, but essentially if you have strong growth that leads to inefficient energy usage, you are going to be faced with environmental problems.

China has been doing this for some time, and the government has been trying to come to grips with energy pricing in recent years.  Another debate is going on now.  This time supporters of higher energy prices, which include energy companies, have argued that in addition to energy conservation issues, there are very real problems associated with raw material costs.  If the price of oil goes up, shouldn’t the price of gasoline also trend upwards?

This all sounds fairly reasonable, and I for one have long been a proponent of raising gasoline prices in China.  All I have to do is look out the window and see the roads and the sky, and I’m convinced that this is a good idea.  Unfortunately, the timing is not so good.  Prices in this country have gone up tremendously in a fairly short period of time, and while everyone seemed to be quite happy when this mostly involved real estate, nobody seems to be very pleased at the price of things like pork and fast noodles this year.  When food prices go up, economists get nervous.  Core prices, including food and energy, are a big deal because they affect everyone, and the poor disproportionately.

So if you are the government, and you want to help out the energy companies and you want to encourage energy efficiency, you have a real problem.  Pushing up energy prices during a time of inflation, particularly one that has hit food products, is pretty risky.  In addition to that generalization, one has to keep in mind the history of inflation in this country.  It is not an exaggeration to say that the current government in Beijing and the CCP may not have gained power in 1949 if it were not for the devastating effects of inflation in large Chinese cities at that time, which was seen as one of the fundamental failures to govern of the Nationalist government.  Suffice it to say that Beijing has been extremely wary of the effects of inflation and will not lightly adopt an inflationary policy, particularly at this time.  I would therefore bet on a much slower upward trend of energy prices.

For some background: Beijing Pressed to Raise Power Prices