Investigating CO2 mitigation potentials and the impact of oil price distortion in China's transport sector

The transport sector is a major source of oil consumption and CO2 emissions in China, however, due to the regulated pricing mechanism in China, the end-user oil price cannot reflect real market price and thus oil price distortion exists. Therefore, the main aim of this paper is to study the affecting mechanism of oil price distortion on CO2 emission mitigation. Firstly, the level of oil price distortion is evaluated and a dynamic trans-log cost function model is built to analyze the substitution relationship among energy products. Secondly, the own price elasticity and cross price elasticity for fuel demand are calculated based on provincial panel data of China's transport sector over 2004-2016. Finally, CO2 mitigation potentials are estimated by removing the impact of oil price distortion. Results show that: 1) there is positive oil price distortion over 2004-2016; 2) substitute relationship is observed between oil and coal, oil and electricity, and the substitution relationship is affected by factor substitution; 3) removing oil price distortion will reduce CO2 emissions of China's transport sector by 599 million tons in the studying period. Policies should focus removing the impact of oil price distortion, promoting electricity/oil substitution and promoting capital/energy substitution to mitigate CO2 emissions.