The Carbon Rebound Challenge: Evaluating the Mitigation Effect of Fossil Fuel Subsidy Removal in Chinese Households

• Authors: Qian Chen, Jaume Freire González, Pansong Jiang and Donglan Zha
• BSE Working Paper: 1561 | February 2026
• Keywords: CO2 emissions, Rebound effect, fossil fuel subsidies, household consumption, input-output price model
• JEL codes: H23, Q41, Q54, R15, R21

The carbon rebound effect, a phenomenon that usually accompanies improvements in energy efficiency, is frequently observed in households. To mitigate the household carbon rebound effect, the removal of fossil fuel subsidies has emerged as a potential strategy. This paper aims to systematically simulate the consequences of removing such a subsidy to inform evidence-based policy-making. We develop an analytical framework that facilitates a detailed investigation of changes in the prices of various goods and services consumed by residents after the removal of fossil fuel subsidies, as well as the main sources of household carbon rebound effect (CRE). Moreover, we examine the extent to which the removal of fossil fuel subsidies can counteract the rebound effect. Our findings indicate that rebound-driven fossil fuel consumption is the primary contributor to the total CRE. Meanwhile, consumption in the ‘residence’ category is the dominant source of the indirect CRE. We further show that removing all fossil fuel subsidies could totally offset the CRE in Chinese households. A notable urban-rural heterogeneity is observed. The subsidy removal for oil and natural gas yields the strongest mitigation effect on CRE in urban regions, whereas removing the oil subsidy proves most effective in rural areas. These results affirm the effectiveness of policies to remove fossil fuel subsidies. We conclude that reforming fossil fuel subsidies is a powerful tool to counteract the CRE, offering valuable insights not only for China but also for other developing countries with similar household consumption patterns.