As the Chinese economy expands, the country desperately needs to strike a balance between ensuring that it continues to receive the steady supply of energy that it needs to grow and curbing its heavy reliance on greenhouse gas-emitting fossil fuels. Shale gas, a form of natural gas that is much cleaner than coal, which has long been used to satisfy the country's appetite for energy, may offer China a way out of this dilemma.

Unfortunately though, China's shale gas industry is still in its infancy and has yet to iron out a sound strategy or receive support from the government.

At present, perhaps the largest challenge holding back China's shale gas industry is a lack of exploitation technology. In order to correct this, Beijing can follow the example set by the US, where the government rolled out preferential tax polices and subsidies to kick start the development of the industry. In 2001, shale gas accounted for 1 percent of the US's energy use. After generous financial assistance from the government, this amount shot up to 20 percent by 2010, according to Chatham House, a research group.

At the same time, the government should work to loosen its tight grip on natural gas prices if it wants to promote the shale gas industry and limit itself to just overseeing the market rather than steering it.

Currently, the government-capped prices that domestic natural gas suppliers can charge in China are below those in the international market. Yet, with local shale gas providers unable to meet the domestic demand for the gas with locally-extracted supplies, many have to purchase gas in the international market and then sell it at a loss in the Chinese market.

Admittedly though, balancing the interests of the government, enterprises and end-users is no easy task, especially given the vagaries of the market. For example, domestic gas prices could increase significantly, which would be a blow to consumers but a boon to producers and suppliers. Conversely, a price slump could dampen suppliers' incentives to expand their output and lead to a shortage of gas supplies in the market.

Finally, the government should also design regulations to make sure that the shale gas industry is free of irregularities and complies with laws meant to protect the environment. In the US, there are actually concerns that shale gas exploration can pollute nearby water supplies and ground surfaces. For the sake of the industry and the environment, Beijing must make sure that shale gas developers are adhering to all relevant laws and policies rather than trying to restrict the market.

The author is the director of the China Center for Energy Economic Research at Xiamen University. bqlin@xmu.edu.cn