It is noteworthy that income elasticity of energy consumption in China shifted from positive to negative after 1996, accompanied by an unprecedented decline in energy-related CO2 emissions. This paper therefore investigate the evolution of energy-related CO2 emissions in China from 1985 to 1999 and the underlying driving forces, using the newly proposed three-level "perfect decomposition" method and provincially aggregated data. The province-based estimates and analyses reveal a "sudden stagnancy" of energy consumption, supply and energy-related CO2 emissions in China from 1996 to 1999. The speed of a decrease in energy intensity and a slowdown in the growth of average labor productivity of industrial enterprises may have been the dominant contributors to this "stagnancy." The findings of this paper point to the highest rate of deterioration of state-owned enterprises in early 1996, the industrial restructuring caused by changes in ownership, the shutdown of small-scale power plants, and the introduction of policies to improve energy efficiency as probable factors. Taking into account the characteristics of those key driving forces, we characterize China's decline of energy-related CO2 emissions as a short-term fluctuation and incline to the likelihood that China will resume an increasing trend from a lower starting point in the near future. (C) 2003 Elsevier Ltd. All rights reserved.