In the draft of China's long-awaited energy law that was recently published to seek public opinion, a market-led pricing system has been proposed to assume a major role in the energy sector.

This is a welcome step toward the introduction of a smart energy pricing system that can respond quickly to supply shortage while rewarding those who are able to make more efficient use of energy.

Currently, a number of key energy prices are still tightly controlled by the government to avoid serious price fluctuations. Given the vital importance of the energy sector to the national economy, it is fairly predictable that a substantial increase in energy prices can pose a severe threat to economic growth, especially when the country has already been hit by accelerated consumer price inflation.

But fears of higher inflation do not justify any further delay to allow the market to play a bigger role in fixing energy prices to balance supply and demand while pricing out those low-efficiency energy consumers.

On one hand, as international energy prices keep soaring, it has become more and more difficult for policymakers to keep domestic energy prices below market prices while ensuring adequate supply.

The recent shortage of oil products, especially diesel, in some parts of China was largely because government price controls have prevented refining companies from passing surging costs for crude oil on to consumers. Some of them simply cut production to avoid losses.

On the other hand, a more compelling reason for the country to introduce a market-oriented energy pricing system is its urgent task to save energy and protect the environment.

A market-led pricing mechanism can properly reflect the scarcity of energy while factoring in related environmental costs.

China is to achieve its goals of cutting energy intensity by 20 percent and pollutant discharges by 10 percent between 2006 and 2010 if it allows energy prices to float according to market demand. Higher energy prices will enable energy-saving enterprises to stand out in competition with those who have long based their low-cost strategy on a below-the-market energy bill.

Legislation to introduce a market-led pricing system for the energy sector is also a crucial part of the efforts to pursue environmental-friendly and sustainable growth.

(China Daily December 5, 2007)