China’s Policy Responses to High Oil Prices: Balancing Macroeconomic Stability and Low-Carbon Transition

Abstract

International oil price volatility poses severe risks to macroeconomic stability and energy security, presenting complex policy challenges for China as it simultaneously pursues economic growth and a low-carbon transition. To bridge the gap between general equilibrium reallocation and transition quality, this study couples an 18-sector recursive dynamic computable general equilibrium (CGE) model with a super-efficiency slacks-based measure (SBM) model to evaluate China’s macroeconomic path and green total factor productivity (GTFP) from 2023 to 2045. We simulate a permanent 200% international oil price shock starting from 2026—conceived as a tail-risk stress test—together with alternative shock scenarios of varying magnitude and persistence (P50, P100, and a five-year temporary variant of P200_5Y), and evaluate four counterfactual policies under the P200 stress-test condition: household transfers (Tran_HG), price regulation (P_REG), structural tax reduction (T_RED), and energy-transition acceleration (Delta_ENE). The shock triggers imported cost-push inflation and a regressive shift toward coal, with the long-run damage governed jointly by shock magnitude and persistence; since GTFP deteriorates monotonically with shock size, the apparent emission reductions under extreme shocks suggest a contraction-driven “efficiency illusion” rather than genuine green improvements. Individually, P_REG and T_RED are effective only as temporary shields, Tran_HG provides the strongest welfare protection but amplifies the high-carbon rebound, and Delta_ENE uniquely improves resilience and green efficiency simultaneously. Building on these results, a combined policy package (COM) is further designed and simulated, which exhibits positive complementarities; it cuts the 2026 GDP loss by about 70%, turns GDP and welfare losses into net gains by 2043 and 2040, respectively, and delivers favorable green-transition outcomes. These findings call for coordinated, phased policy packages in which fiscal space rotates from emergency shields to demand-side repair and, ultimately, to electrification-led structural transformation.