Is China able to reduce air pollution?

Serious air pollution in China is expected to be eased during the Lunar New Year holiday week, however the smog is likely to appear frequently again after the holidays.

Chinese government is reported to introduce more strict environmental regulations ahead of the schedule due to the recent escalation of air pollution. But is it able to  reduce pollution successfully?

Current Chinese major emission regulation is called China 3 that is said to be equivalent to the Euro-3 standard. The Chinese regulation, for example, limits sulphur contents at 150 parts per million or below in gasoline and 350 ppm or below in diesel.

The China 3 regulation was introduced in 2005 in Beijing and was expanded to nationwide in 2007. Meanwhile, Euro-4 equivalent China 4 was introduced in Beijing in 2008 prior to the Olympic games. The new regulation limits sulphur content at 50 ppm or below in both gasoline and diesel.

Although the China 4 regulation was expanded to Shanghai in 2009 and to Guangzhou in 2010, other most area is still covered by the China 3.
This time, Chinese government aims to adapt all domestic petroleum fuel to the China 4 standard by the end of 2014. Also it plans to introduce China 5 standard, that limits sulphur content at 10ppm or below, in Beijing within this year and to expand to nationwide by the end of 2017.

These policies would force Chinese refineries to spend huge investment on desulphurization facilities.
Chinese domestic produced crude oil is low sulphur, but recent rapid growth of petroleum demand is lifting the nation's high sulphur crude oil imports from the Middle East.

Chinese crude oil imports have exceeded domestic production regularly since mid-2009. Surging crude oil import is in step with the country's automobile production.

The above 2 charts suggest that the increasing petroleum fuel production by using high sulphur crude oil triggered by the higher automobile output in the past couple of years is one of the main reasons of recent severe air pollution.

Chinese refineries mainly processed low sulphur domestic crude oil up till very recently. Therefore, they are unable to make clean fuels from increasing high sulphur crude oil since they have poor desulphurization facilities.

Most refineries have to invest huge amount of money. But many Chinese refineries do not have enough funds.
In China, refineries have to buy crude oil at global market prices, while domestic sales prices for petroleum products are controled by the government. So they often suffer losses.

PetroChina, the largest oil company in the country posted 23.3 billion RMB losses in its refining business in the first half of 2012. In case of rural small and medium sized refineries, the huge investment is likely to damage their balance sheet significantly.

Investments and increased costs due to the upgrading desulphurization are estimated to hike Chinese petroleum production costs by 0.12-0.15 RMB per liter between China 3 and China 4. Production costs for China 5 is higher further, of course.
Chinese government seems to consider the higher production cost, but how to and who pay the costs are still unclear.

If prices are different between grades, consumers will go to the rural area to buy cheaper fuel. Meanwhile, keeping same prices for all grades is likely to make refineries hesitant to supply high-cost fuels soon.

Anti air pollution is an urgent matter in China since the it is expanding to neighboring nations. However, Chinese people usually do not obey government order easily when it hurts their interests.

Some people in the government or major oil companies also say that Chinese emission regulation is progressing compared to other emerging. Others claim that China's current effort is enough since Europe spent more than ten years until reaching to the Euro-5 standard after introducing Euro-1.