Energy pricing reform and energy efficiency in China: Evidence from the automobile market

Abstract

Promoting energy efficiency by undertaking a market-oriented reform of the energy-pricing mechanism is one of the top priorities of China's ongoing reform effort. In this study, we examine the impacts of China's gasoline-pricing reform implemented in January 2009 on the fuel economy of the country's new automotive fleet. In particular, we distinguish the effects of two common elements of China's energy-pricing reform packages: the effects of the energy tax increase (i.e., the gasoline tax increase) and the effects of the energy-pricing mechanism reform (i.e., the adoption of a market-oriented pricing scheme for gasoline). By exploiting a rich dataset of monthly new passenger vehicle sales at the vehicle-model level in China between 2008 and 2013, we are able to control for potential correlations between unobserved product and consumer characteristics and products’ fuel efficiency. Our empirical results infer that fuel costs have a significant influence on new vehicle sales in China, while the presented policy simulations suggest that the gasoline-pricing reform in China has led to an approximately 6.25 percent increase in new vehicle fuel economy. Moreover, the two major elements of the reform, the gasoline tax increase and expedited adjustment cycles for gasoline prices, make similar contributions to the increase in the new vehicle fleet's fuel economy, with the former contributing 3.43 percent and the latter, 2.82 percent.