China has recently implemented broad strategies aimed at achieving a circular economy by providing subsidies for the remanufacture industry and setting a target of 15% increase in energy efficiency in industrial production across sectors, among other strategies. Here, we examine the environmental implications of these policies in the context of engine remanufacture, using an environmental computable general equilibrium (CGE) model. Results indicate that both the subsidy policy and energy efficiency improvement target can contribute to economic growth and emission reductions, but the subsidy policy is estimated to have far greater impacts. The implementation of both can reinforce each other, generating higher economic and environmental benefits than the sum of each occurrence alone. Another major finding from our model is that an additional remanufactured engine only displaces 0.42 (90% confidence interval from 0.32 to 0.47) of a new engine (comprised of new parts), mainly because the lower prices of remanufactured engines lead to greater consumption. This ratio is much lower than the 1:1 perfect displacement commonly assumed in life cycle assessment (LCA) studies. Overall, our study suggests that the subsidizing of engine remanufacture in China can help promote the industry, improve overall economic welfare, and contribute to environmental targets. Our study also contributes to the estimation of more realistic product displacement ratios in LCA.