BEIJING, July 8 -- On June 30, the Chinese government announced hefty subsidies for green vehicles, which will play a crucial role in the development of a domestic green auto industry. It is a smart investment for China as the country is relying on its massive and ever-expanding auto market to be the catalyst for future GDP growth, while at the same time it aims to reduce carbon intensity, defined as CO2 emissions per unit of GDP.

Currently, China is the largest and fastest-growing auto market in the world, which presents opportunities and challenges. China is engaged in a balancing act. It seeks to switch from export-led growth by encouraging domestic consumption, and in this process, supporting the domestic car market plays a vital role. However, automobiles account for 25 percent of carbon emissions worldwide. Hence, the growth of the auto market is counterproductive to China's efforts to reduce carbon intensity by 45 percent of 2005 levels by 2020.

Right now, China's per capita carbon emissions are actually lower than those of developed countries like the United States, and the main reason for this is because of the gap in the level of car ownership— one that is growing narrower on a daily basis. If Chinese consumption is not channeled toward green autos, then many of the country's other efforts, such as developing clean energy and updating the inefficient grid, will be in vain as the rise in auto emissions will nullify any gains.

This is why subsidies to China's green auto industry are timelier than ever. China is home to a number of companies that are leading the world in the development of all-electric and hybrid vehicles. Chinese automakers pin their hopes on the burgeoning green auto market because it is one where no one company has established dominance. Green cars were the stars of an auto show held in Beijing earlier this year. Leading automaker SAIC unveiled its innovative, if somewhat unusual, "Leaf" concept car and BYD auto showed off its E6 model, which is scheduled to go on sale in the United States by the year's end.