Government regulation and China's natural gas price distortion: A sectoral perspective

Abstract Clarifying the relationship between government regulation and natural gas price distortion is conducive to providing reference for coordinating the relationship between government and market in the process of natural gas market reform. This study examines the impact of government regulation on natural gas price distortions in China, emphasizing sectoral differences in industrial, residential, and commercial sectors. Utilizing production function and equal calorific value methods, the research uncovers significant variations in price distortions across these sectors, with residential gas exhibiting the highest distortion due to prolonged government control and cross‐subsidization. Theoretical analysis, underpinned by the Peltzman model, reveals that price elasticity of end users and political returns significantly influence the extent of distortion. The empirical analysis, employing the Autoregressive Distributed Lag model, demonstrates that government regulations have a pronounced effect on residential gas prices, while marketization moderates distortions, benefiting the industrial sector but exacerbating distortions in the residential sector. The study suggests a strategic reduction in residential subsidies, alignment of commercial prices with international markets, and phased deregulation, particularly in the commercial sector, to stimulate competition and market efficiency. The findings underscore the necessity for a balanced approach in natural gas market reforms, integrating both government regulation and market forces to achieve sustainable energy transition and economic growth.