China has huge ambitions for EVs but what can it learn from the US about getting subsidies right? Asks Anders Hove
China's government hopes for EV sales to rise up to 40% this year despite deep cuts to consumer subsidies (Image by Remko Tanis)
Depending on who you listen to, China is either on the cusp of revolutionising world energy storage and electric vehicle (EV) markets, or in the throes of upheaval.
Of course, the reality is a bit more nuanced. Some of the issues experienced by the electric vehicle sector in the last few months have resulted from an urgent need to reform the country’s vehicle subsidy programme. But going forward, China can learn a few things from other countries in the design of its programme that will boost the market while limiting the scope for cost overruns.
China is already a global leader in EVs and battery manufacturing. In May 2014, President Xi Jinping declared that new energy vehicles would be a path for China to become a strong automotive manufacturer.
This was more than wishful thinking. From 2013 to 2016 the Chinese market leaped from under 20,000 new energy vehicles per year to more than 350,000 electric cars and over 115,000 electric buses, accounting for 46% of worldwide electric car sales and a whopping 95% of electric bus sales.
Sales have been boosted thanks to subsidies of up to 50,000 yuan (US$7,000) for a passenger car, and promotion of EVs for taxis and buses. Beijing is the latest city to announce that its 67,000 taxis will shift to EVs. The central government also has plans to apply an EV quota on all automakers.
Motives
China’s EV push over the past few years serves several policy goals. The first is an industrial strategy aimed at capturing markets for industries of the future. China has identified EVs as a technology that was “bypassed” by foreign automakers. By moving on this market, it can benefit from its ability to rapidly scale battery and EV manufacturing.
The second goal is to limit oil imports. Car ownership and driving are growing rapidly, and China, which imports 65% of its oil, is now the world’s largest oil importing country.
Pollution is a third driver. Transportation is a major contributor to urban air pollution and rising rapidly, though the majority of transport particulate and NOx (nitrogen oxide) emissions come from diesel trucks. EVs may seem like a counterintuitive solution given China’s coal-based power grid, but various studies have shown that switching to EVs produces a significant air quality benefit. And in the future, EVs could be charged when a surplus of clean energy is available.
Subsidy problems
But China's subsidy programme has encountered problems. Last year the government began fining and punishing companies that had received subsidies illegally, including at least one that had never even made electric vehicles.
As EV sales rocketed upward in late 2016, the cost of subsidies started to look excessive. There has also been criticism about the quality of the subsidised cars and batteries.
The government decided to review the system. In January – always a slow month for EV sales – it announced that manufacturers would have to re-qualify in order for customers to continue to receive subsidies. EV sales plummeted to just over 6,000 per month, which is 60% lower than the same month the year before.
The adjustment is already looking like a short-term blip though. As companies re-qualified in February, sales have returned, and the government hopes for full-year EV sales to rise up to 40%, easily surpassing the impressive 2016 total.
Quality counts
Chinese EV manufacturers are focusing more on quality, too. While many of the leading domestic EVs are tiny “city vehicles”, bigger sedans and crossovers with decent electric range are on the way. This transition is necessary: surveys show that Chinese car buyers have similar range and performance aspirations to those in the developed world.
To satisfy the demand for longer range vehicles, the country needs to upgrade its battery technology know-how. China has opened up subsidies for lithium-ion batteries with the nickel-manganese-cobalt (NMC) chemistry, which offers greater performance than lithium-iron-phosphate (LFP) used in first generation EVs.
As for an EV quota applied to automakers, policymakers have considered revising the scheme after several automakers, and German Chancellor Angela Merkel, raised concerns. A revised regulation is due out later this year.
China is already learning from experience and from subsidy programmes elsewhere that no support scheme is perfect. Also, that small tweaks in how subsidies are designed can produce major shifts in outcomes, and sometimes work against a policy’s original goals.
But as China pursues rapid adoption of electric vehicles what specific lessons can it learn from the US, which has been chasing EVs for much longer?
Find your balance
Perhaps the most important lesson from EV subsidy programmes in the US, as well as various efforts worldwide with feed-in tariffs to promote renewable energy, tax credits, quotas, tradeable credits, non-monetary subsidies like free parking or special lane access, and other schemes, is that policymakers have to strike a balance between many competing goals.
One goal is providing market certainty through policies that will remain in place for long enough to enable carmakers to invest in production and new technologies. But flexibility is also necessary: programmes have to evolve to prevent companies gaming the system or respond to technology/market changes that are slower or faster than expected.
Subsidies must promote choice, not stifle it
Even California’s zero-emission vehicle (ZEV) mandate, which is widely credited with driving the state’s domination of vehicle electrification in the US, has faced heavy criticism. The problem is that almost half the nation’s EV registrations are for California-based Tesla vehicles, leading some to call the state’s zero-emissions vehicle credit-trading programme a “Tesla support scheme”.
In addition, designers of the ZEV mandate gave extra credit for such innovations as longer EV range and hydrogen fuel cells. However, battery technology improved faster than policymakers anticipated, helping Tesla’s longer-range EVs to dominate the domestic market.
Carmakers can pay Tesla to acquire credits and thereby meet the ZEV mandate even though they are producing fewer EVs than the state originally targeted. A Natural Resources Defense Council (NRDC) study showed that by 2025 carmakers can meet the zero-emission mandate by producing ZEVs that total only 6% of annual vehicle sales in the state, less than half the state’s target of 15%. So the policy appears to be falling short, in part due to an oversupply of ZEV credits.
Takeaway 1: While California’s programme encouraged innovation and flexibility, the design resulted in the state missing its targets for emissions reductions and total new energy vehicle sales. In retrospect, by allowing a single company to dominate the market, the original ZEV mandate design gave consumers fewer EV choices.
Avoid penalising early movers
The federal tax credit for hybrid and electric vehicles has faced design issues as well. The federal government offers up to US$7,500 per EV, depending on the size of the battery pack, and the subsidy begins phasing out after a carmaker sells a cumulative 200,000 plug-in vehicles.
This design ensures that the total cost to the government is limited while encouraging carmakers to gradually make EVs more cost-competitive with conventional cars.
But critics complain that the programme gives no credit for early action. In fact, it even penalises early-adopters: Tesla, GM, and Nissan, which pioneered the plug-in revolution in the US, will be competing subsidy-free against latecomers that are still subsidised.
In a way, this is the opposite problem from California, where the early-mover Tesla arguably received an unfair advantage.
Takeaway 2: A flat per-vehicle subsidy capped after an automaker sells a certain number of EVs helps limit costs but doesn’t reward first-movers or innovation.
Beware favouring domestic companies
Another consideration for China is the role of foreign competition. As Tesla shows, there are pros and cons to giving domestic companies a leg-up. Many California customers may feel a different approach to subsidies would result in more choice and faster emissions reductions.
In China’s case, there is strong consumer demand for foreign vehicles, and now that many leading automakers are shifting to EVs, foreign carmakers are likely to have many high-quality, globally-competitive EV models available in China by 2020.
Short-term programmes that favour China’s fleet-footed automakers have produced a huge burst in EV manufacturing, but can this be sustained when the vehicles have to compete worldwide against global leaders that plan vehicle production on five-year cycles?
Furthermore, the introduction of EV quotas for domestic manufacturers before they are ready with quality products could freeze foreign players out of the market in the near term, but in the long term could hold back domestic carmakers from producing higher quality EVs that could compete with those likely to emerge from the likes of GM, Ford, BMW, and Volkswagen.
Takeaway 3: A scheme with staying power that rewards a mix of vehicle and battery characteristics might be more attractive than a flat per-automaker EV quota and per-vehicle or per-kWh government subsidy.
China may also want to consider a subsidy that declines automatically as certain volume goals are reached, instead of one based on fixed dates. When subsidies expire or decline at a set date, such as on December 31, this can create an artificial boom-and-bust cycle and result in unpredictable programme costs that spiral out of control – as happened with renewable feed-in tariffs in many countries.
Takeaway 4: Schemes in which subsidies decline when volume targets are met have proven effective in California for promoting solar and energy storage, and could work for EVs in China as well.
No subsidy scheme is perfect. China’s EV plan is moving rapidly and likely to contribute to scaled-up battery manufacturing and know-how and improvements to air quality and reduced oil consumption. Whether China’s policies will make the country the dominant EV player worldwide remains to be seen, but I wouldn’t bet against it.
Attributes of various EV policy designs, based on US and China policies
Green indicates a positive attribute, red a negative attribute, and amber is neutral. Source: Author
chinadialogue is launching a two-year series of articles exploring challenges to our global fisheries and marine environments and China’s role in tackling them
It is estimated that over the last fifty years almost half of the world’s fish species and population have disappeared. This is due to the vast expansion of global fishing fleets, increasing exploitation of seabed resources and climate change, which humanity has so far failed to prevent. Traces of human activity and interference can now be found from the summit of Mount Everest to the depths of the MarianaTrench.
The state we’re in
One billion people worldwide rely on the oceans for their food but over-exploitation and damage of marine environments is threatening this vital source of nutrition. To ensure that oceans remain alive and plentiful, the United Nations in 2015 made the protection and sustainable use of marine resources one of its 17 sustainable development goals (SDGs), a set of shared ambitions designed to reduce poverty and ensure prosperity for all.
There has long been a scientific consensus on the reasons why fish species are disappearing and stocks shrinking: over-fishing, destruction of marine habitats, and environmental damage caused by climate change are all responsible.
A consequence of over-fishing is that fish populations cannot recover, which has a devastating impact on marine food chains that are highly interdependent. Meanwhile, oil drilling and mining damage the sea floor. Oil leaks often result in widespread death of surrounding marine organisms.
Climate change is also having an impact on marine environments. In 2016 one quarter of the coral in the Great Barrier Reef died due to rising temperatures and acidification. Two thirds of the world’s largest reef already suffers from “bleaching” (the loss of algae). If global emissions are not sharply reduced there may be no coral left anywhere in the world by 2050. And as coral reefs collapse, so too do the marine systems which they support.
This is the paradox of development that humanity faces. Technological advances – from sailing vessels, to diesel-powered ships, to GPS (Global Positioning System) guided navigation – have taken us into deeper, richer waters. But as fishing boats have followed and as offshore drillers have become more experienced, the ocean has become a victim of our progress.
China and the future of the oceans
In contrast with the enthusiasm with which we have taken from the oceans, conservation efforts have always lagged behind. It was only after years of unregulated industrialised ocean fishing that the huge harm caused by illegal, unregulated and unreported fishing (IUU) was recognised. Only in 2006 was a comprehensive ban on the practice of bottom trawling, where nets are dragged along the sea floor causing devastation to marine habitats, put in place.
There are now management bodies in place for some of the world’s major fishing regions. For example, the Convention for the Conservation of Antarctic Marine Living Resources, which manages catches of shrimp and cod in the Antarctic Ocean; and the International Commission for the Conservation of Atlantic Tunas, which manages the catches of species of tuna and skipjack.
These bodies set and adjust fishing quotas to help maintain balanced fish populations. There are also policies designed to prevent over-fishing at all stages of the industrial chain. Meanwhile, captive fish farming is increasingly used to reduce pressure on ocean fisheries.
But illegal fishing continues, with vessels working under flags of convenience (FOC), whereby a merchant ship is registered in a country other than that of its origin, which makes illegal fishing activities difficult to track. The practice of offloading catch on to other vessels is also on the rise. Known as transshipping, the undocumented transfer of caught fish, though not illegal, makes it easier for criminals to operate.
Closer to shore, fish farming brings its own problems. Intensive farming and antibiotics used in feed pollute inshore waters. Much of the feed for farmed fish consists of “fish meal”, which is made of fish caught from the ocean, adding considerably to the burden already placed on global stocks. Fish farming has changed the way in which we exploit our oceans, not prevented it.
Will management of our marine resources continue to be decided by ad hoc, short term thinking? What are the gaps in national fishing policies? What constructive action can we take to reduce pollution from fishing and fish farming? How will new technology help us better maintain fish stocks? And is there a way to reduce the impact of climate change and development of the oceans and coasts?
Solutions must recognise the need to protect resources at the same time as ensuring communities that rely on the sea can continue to develop.
What is China’s role in tackling these questions? China’s fishing fleet is expanding rapidly, and the country accounts for 18% of ocean catches worldwide and over 60% of fish farming, according to the Food and Agriculture Organization of the United Nations (FAO). The country’s distant-water fishing fleet grew by nearly 2,600 vessels (the US has one tenth as many) in 2014-2016 alone. Can China find a sustainable way to provide a population of 1.3 billion people with fish?
Over the next two years chinadialogue will publish a series of articles on fisheries and the marine environment, covering the damage caused by illegal fishing, the protection of the oceans during development, restoration of inshore environments, recharging of fishery resources, loopholes and improvements in fisheries laws and policies, marine pollution, and the impact of climate change on the oceans, as well as new approaches, ideas and solutions to combat these problems. During this process we will focus on China’s role in both the development and the protection of the oceans.
Our oceans are not a mere source of food, they are an essential part of the global ecosystem upon which we all rely for our survival. The health of the oceans is our own health, and concern for the future of the oceans is concern for our own future.
Indigenous peoples push for permanent seat at UN: Indigenous leaders and representatives worldwide are convening at this year's United Nations Permanent Forum on Indigenous Issues, which runs through May 5. One issue they are lobbying for is regular access to the U.N. and a seat at the General Assembly.