Government incentive strategies and private capital participation in China’s Shale gas development

ABSTRACT

Shale gas development investments are uncertain and irreversible in the initial stage in China. Flexible incentive strategy is needed for governments to guide private capital participation at different development stages. This study aims to provide analysis governments can use to encourage private investment in shale gas projects according to its plans in an extended real options framework. A social benefits variable is introduced to determine the threshold of social benefits that determine whether the government will choose a deferred or instant incentives strategy. By considering the efficiency factor, we show the optimal arrangements of two kinds of incentives: tax cuts and production subsidies, to implement incentive targets. The results indicate that current market demand and social benefits are the key factors that affect the government’s choice of incentive strategy. We also find that the optimal level of incentives, either tax cuts or production subsidies, are independent of current market demand and future market uncertainty under the delayed incentive strategy, but which affect the optimal level of incentives under the instant motivation strategy, and ignoring the negative influence of unpredictable random events on future market demand might lead to insufficient government incentives in this case.

KEYWORDS:

• Real options
• opportunity cost
• social benefits
• government incentives
• private investment

JEL CLASSIFICATION:

• D81
• G31
• Q48

Acknowledgements

The authors gratefully acknowledge the financial support from the National Natural Science Foundation of China (grant numbers71473193 and 71403207). We also would like to thank the anonymous referees as well as the Journal Manager for their helpful suggestions and corrections on this article.

Disclosure statement

No potential conflict of interest was reported by the authors.

Supplemental data

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Notes

¹ In November 2012, Ministry of Land and Resources of the People′s Republic of China issued ‘Work Done Notice on Strengthening the Shale Gas Resources Prospecting and Exploitation, Supervision and Administration’. In October 2013, National Energy Administration of the People’s Republic of China issued ‘Shale Gas Industry Policy’.

² In November 2012 and April 2015, Ministry of Finance and National Energy Administration of the People′s Republic of China have jointly issued ‘Notice about Fiscal Subsidy Policy of Shale Gas Exploitation’.

³ In June 2013 and January 2014, Ministry of Land and Resources, National Development and Reform Commission, Bureau of Energy and Guizhou Province sponsored several reports of development progress, the results show that only a handful of companies have made substantial progress on the exploration work.

⁴ In March 2012, Ministry of Finance, Bureau of Land and Resources, and other institutions jointly issued a report, ‘Shale gas development plan (2011–2015)’, which calculated a shale gas production capacity of 6.5 billion m³. Compared with coal, shale gas could reduce carbon dioxide emissions if used to generate electricity by about 14 million tons, sulphur dioxide emissions by about 115,000 tons, nitrogen oxides emissions by about 43,000 tons and soot emissions by about 58,000 tons.

Additional information

Funding

The authors gratefully acknowledge the financial support from the National Natural Science Foundation of China (grant numbers 71473193 and 71403207).