The authors use CHINAGEM, a computable general equilibrium model to investigate the economic effect and pollution reduction impacts of improved auto fuel economy standard in China. The policy change is modelled as shocks to production tax rate of two industries - petrol refine and motor vehicle parts. The results show that the shocks lead to higher labor cost, slightly decreased GDP and improved terms of trade. The majority
of industries, such as motor vehicle manufacturing, will undergo downsizing because of new standards and
substitution of imported motor vehicles for domestic ones. However, with improved emission standard and
slowdown of vehicle production growth, air pollution problem will be alleviated. Based on the model prediction, the annual emission reductions of carbon monoxide, hydrocarbons, nitrogen oxides and total particulate matter amount to 39.52, 37.51, 11.63 and 1.66 million tons respectively, which are 32, 36, 63, and 87 percentage reduction from the respective business-as-usual levels.
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