The central government has urged domestic refiners to accelerate the upgrade of the quality of domestically produced fuel to tackle worsening air pollution.
The move will increase the cost on refiners but Beijing has indicated that fuel prices should be priced "reasonably" to reflect its impact on environmental protection.
In a statement released after a meeting of the State Council, chaired by Premier Wen Jiabao, Beijing said authorities responsible for setting fuel quality should announce as soon as possible the National IV diesel emission standards. It would be launched nationwide by the end of next year.
The standards were announced in 2010, but implementation has fallen behind target, as the supply of fuel at such standard has been insufficient to meet nationwide demand.
The more stringent National V emission standards for diesel and petrol are to be unveiled this year and implemented by the end of 2017, the State Council said.
"Domestic oil refiners should speed up the upgrading of their facilities to ensure fuel supply can meet demand according to the implementation schedule," it said, adding the nation's three state-backed oil refiners must complete their upgrade on time.
The nation's capital witnessed the worst air pollution in recent memory last month when the city was shrouded in dense fog, with many blaming sub-standard fuel made by refiners for the problem.
Although refiners said their National IV emission standards are equivalent to Euro IV European standards, many believe the domestically produced fuel does not meet claimed standards.
Oil refiners, led by China Petroleum & Chemical (Sinopec), have blamed state control on fuel prices which forces them to be set below international levels, and a lack of state subsidies and tax breaks to upgrade facilities fast enough to meet demand.
The State Council said fuel prices should be priced so that refiners are "reasonably" compensated for the costs, and follow the principle that prices should be commensurate with quality and polluters should pay the costs of pollution.
Fuel prices - closely linked to international crude oil prices - are set by the state. But when crude prices rise, fuel prices are often suppressed to protect the poor, resulting in billions of yuan in losses for refiners.
"It is hard to tell whether Beijing is serious this time around about reforming the fuel pricing system, or whether it is paying lip service again," said an analyst at a European brokerage who did not want to be identified.