(This piece is also published by the California-China Climate Institute, here.)
When China’s national subsidy program for new energy vehicles (NEVs) started in 2013, only 1% of new light-duty vehicles sold were NEVs. (In China, battery electric, hydrogen fuel cell electric, and plug-in hybrid electric vehicles are classified as NEVs.) With the help of subsidies at both the national and local levels, that percentage reached 15.5% in 2021. The year prior, in 2020, China announced a goal of 20% NEV sales in 2025. But as the country will phase out its national purchase subsidy program this year, how will China keep supporting its NEV targets? The main national regulatory approach is the NEV mandate or “dual-credit” policy, and here we’ll analyze its role in shaping NEV growth trends to 2025.
The dual-credit policy is a way of referring to the Parallel Management Regulation for Corporate Average Fuel Consumption and New Energy Vehicle Credits for light-duty vehicles, a regulation adopted in 2018. It’s partially modeled after California’s pioneering Zero Emission Vehicle (ZEV) program and adds a parallel management component that connects manufacturers’ fuel economy performance with their NEV credit performance.
Manufacturers are required by corporate average fuel consumption (CAFC) credit requirements to make fuel-efficient vehicles, and to meet NEV credit requirements, they must produce NEVs. If manufacturers exceed the set targets, they have extra credits; non-compliance, meanwhile, results in deficits. Importantly, and as detailed in Table 1, there is a one-way street via which NEV credits can be used to offset a CAFC deficit, but manufacturers with extra CAFC credits cannot use those to offset an NEV deficit.
Table 1. Compliance pathways in China’s dual-credit policy in the case of a deficit (from Chen & He, 2021).
|Deficit type||Compliance strategies|
(Actual NEV credits < NEV targets)
|Purchase NEV credits from other companies.
Use banked NEV credits from own company.
(Actual CAFC credits < CAFC targets)
|Use banked CAFC credits from own company.
Transfer CAFC credits from affiliated companies.
Use banked or current year NEV credits from own company.
Purchase NEV credits from other companies.
NEVs have lower fuel consumption or count as zero fuel consumption and thus automatically lower a manufacturer’s fleet average fuel consumption and help them meet the CAFC targets. Indeed, nearly 80% of NEVs in China are pure electric. Moreover, these vehicles generate NEV credits that not only contribute to NEV compliance but can also form a potential reservoir of credits to be used to achieve CAFC compliance.
To see how this works in practice, let’s look at some empirical evidence. China tightens its fuel economy standards for light-duty vehicles every year, and…