This paper presents an energy—economic—environment model based on the dynamic CGE (Computable General Equilibrium) model approach. A policy simulation was conducted to determine the potential and policy choices for China in order to reduce CO₂ emissions towards 2020. The results show that carbon tax and investment adjustments are effective measures to alleviate CO₂ emission increases, but can lead to negative impacts on GDP. Technological improvements can have positive impacts on GDP in regard to CO₂ abatement. Under high technological improvement with a mid-level carbon tax scenario, and low technological improvement with mid-level carbon tax and mid-level investment adjustment scenario, China' s CO₂ emissions in 2020 will reach 9.27–9.55 billion tons and CO₂ emissions intensity will decline by 0.138–0.143 ton (10³ Yuan RMB)^-1. According to the mitigation target proclaimed by Chinese government, China should reduce CO₂ emissions intensity from 0.241 to 0.145 t (10³ Yuan RMB)^-1 from 2005 to 2020 (in constant 2007 RMB). However, it is not easy to realize a 40% mitigation target because increasing energy efficiency at a faster rate than the normal rate of technological improvement means greater costs for investment in equipment renewal and depreciation before 2020. Moreover, in future, energy supply constraints may have positive effects on the mitigation of CO₂ emissions. China needs to devote major efforts to developing low carbon technologies, in addition, international community should provide and increase support to China in this area.