Small cars were banned from Beijing's main roads less than a decade ago, as China's rulers worried that cheap, spluttering vehicles would clog lanes they hoped to fill with sleek modern autos.

Today, pollution, traffic jams and a growing dependence on imported oil have forced a radical rethink that has made China an unlikely pioneer of some of the world's tightest fuel efficiency standards and stricter emissions limits.

Forward-thinking policy-makers are steering the world's second-biggest oil user onto a very different road than top guzzler America, where low taxes and static standards coddle a motoring populace addicted to long trips and inefficient SUVs.

Beijing's measures may not help it cope with oil demand expected to expand at 5 percent or more over the next five years, twice the U.S. rate, but could prevent a big-car culture from fuelling even faster growth in the decades to follow.

China burns about as much gasoline as Japan but has 10 times more people, and transportation is expected to account for over 60 percent of oil use by 2020 versus around 30 percent now.

The government recognizes that energy resources going forward are a problem... This is part of a far broader and more pervasive policy of addressing fuel and energy efficiency, said Clive Saunderson, automotive partner at Ernst & Young in Beijing.

Beijing is keen to improve fuel efficiency, but it's also trying to work out how it actually does this without causing harm to what is a very important nascent industry in China, he added, referring to its rapid rise as a car manufacturer.

Communist planners were once happy to plunder China's natural resources in the service of economic growth, brushing environmental concerns aside as bourgeois frivolity. They promoted the auto industry as a cornerstone of the economy.

But China's growing middle class now demands cleaner air and roads that work in addition to job prospects, while Beijing's bureaucrats are working furiously to balance growth with pollution and a growing appetite for imported crude, much of it from politically unstable areas and at near record costs.

With that in mind, Beijing is encouraging the manufacture of small-engine cars, has imposed taxes on gas-guzzling autos and is experimenting with biofuels, hydrogen-powered and hybrid cars.

But with car sales up over 50 percent this year -- aiding manufacturers such as Hong Kong-listed Dongfeng Motor Group Co. Ltd. and Shanghai Auto, a major partner of both Volkswagen AG and General Motors Corp. -- smaller engines are more likely to trim growth in fuel consumption than halt it.

Already the world's third-largest vehicle market, China had some 24 million cars on the road by the end of 2005, but if car use approaches U.S. levels, by 2031 this could rise to over 1 billion vehicles nationwide, said environmentalist Lester Brown.

India, where only eight in 1,000 people own a car, have undertaken similar measures, cutting excise taxes on small cars by 8 percentage points in its budget for this year.

WHAT PRICE EFFICIENCY?

Officials worried at public discontent seem to have balked at taking the final step in curtailing a culture of ostentatious consumption -- raising state-set price caps that keep fuel costs below most Western levels and drivers behind their wheels.

As people get better off they are worrying more about quality of life. They do get used to cheap energy though, as you see in Russia and the United States, said Rob Watson of the U.S.-based Natural Resource Defense Council.

Diesel and gasoline prices are currently set by Beijing, which has held them below global rates, even as its refiners bleed cash, because of worries about inflation and social unrest.

Those concerns remain despite more aggressive but successful moves by others in Asia such as Indonesia, which cut consumption by 20 percent after nearly doubling fuel prices last October, but only faced muted popular protest.

Gasoline in the Chinese capital costs about $2.40 a gallon, around 50 cents less than the average retail price in the United States last week but half the price in much of Europe.

The handful of increases from the start of 2005 -- totaling around 33 percent, while crude oil climbed around 60 percent over the same period -- have yet to make a dent.

China's implied demand for gasoline rose 10.2 percent in the first four months of this year to 1.2 million bpd, while diesel consumption climbed 7.0 percent to 2.3 million bpd, data showed.

And officials have shied away from a long-touted fuel consumption tax, which has encouraged economy in much of Europe.

TIGHTER STANDARDS

But a new round of taxes on the most polluting cars, which rise to 20 percent for engines above 4.0 liters and cover sports utility vehicles (SUVs), is shaping consumers' choices.

Low-emission cars accounted for half of the 10 best-selling models in the first five months of the year, the official Xinhua news agency reported earlier this month.

And as part of an ambitious drive to bring car and housing efficiency standards to leading international levels by 2010, another round of fuel economy standards will come into force in two years, after a first phase was introduced last year.

Almost all vehicles being made and built in China could meet the phase 1 standards... but almost no vehicles being made could meet the phase 2 standards. These are pretty severe, among the toughest in the world, said Tim Dunne, managing director at Beijing-based Automotive Resources Asia Ltd.

In comparison, the U.S. has not raised car efficiency standards for 16 years, although in March it announced plans for a modest rise in SUV fuel economy, to come into force by 2011.

China is stricter than the United States and Japan on economy standards for heavier vehicles and SUVs, but softer on lighter end vehicles, research by Wu Wei and Jin Yuefu of the China Automobile Technology and Research Center shows.

(Additional reporting by Fang Yan in Shanghai)

Japan Russia China India