The Rise of Electric Vehicle Incentives in China
When one thinks of the word “electric vehicle”, one often imagines US or western companies’ electric vehicle products, such as the iconic Tesla Model S. However, with millions of electric vehicles in its streets, it is actually China that is the largest electric vehicle market in the world. This is in part thanks to the aggressive electric vehicle incentives the Chinese government has launched in the past decade.
In this article, we will talk about the history of China’s electric vehicle incentives, the effects of them, the drawbacks of them, and possible ways China could improve them.
The History of Electric Vehicle Incentives in China
Beginning in 2010, China has launched a pilot program to decrease $8,785 off of the price of battery cars in 5 cities (Shanghai, Shenzhen, Hangzhou, Heifei, and Changchun).
Then, in 2013, China renewed its subsidy program by giving a national subsidy of $9,800 for electric passenger vehicles and up to $71,000 for an all-electric bus. Originally planned to expire by 2015, these subsidies were extended beyond this end date up to 2018.
To further the diffusion of electric vehicles, local governments have further bolstered these national subsidies by offering further, local subsidies to those who purchase electric vehicles.
One reason why China launched these subsidies is to combat its air pollution problem. Capable of causing lung cancer and increasing the risk of bladder cancer, air pollution is a serious health crisis in China. Combined with China’s efforts to phase out coal-based energy (which, if not phased out, would cause electric vehicles’ electricity to come from a high-emission source), China’s electric vehicle program is an effective way for China to deal with its air pollution.
Furthermore, in 2019, the Chinese government has mandated that electric vehicles must make up 3 to 4% of all cars produced, with this proportion expected to increase in future years.
In addition to consumer subsidies, many cities provide favorable policies such as the assured issuance of a vehicle license and increased access to carpool lanes to electric vehicle purchasers. Vehicle licenses being guaranteed to owners of electric vehicles is especially effective because vehicle licenses are notoriously difficult to obtain. One example of this is in Beijing, where there are as many as 3 million vehicle license applications for 3,000 vehicle licenses at any given time.
The Effects of these Incentives
The result of these subsidies is the vast increase in electric car sales in China. In 2017 alone, 770,000 electric vehicles were sold in China- up from 507,000 in 2016 and 331,000 in 2015 (ie. a doubling of electric car sales in a span of just two years). This is about 2.7% of all passenger vehicles sold in China that year. Although that number does not seem like much, it is relatively high in comparison to the percentage of electric vehicles sold in other nations. For instance, in the United States, electric vehicles represented only 1.2% of all vehicles sold in the year 2017.
Beyond the subsidies themselves, China has also launched an ambitious plan to build 120,000 public electric vehicles charging stations by the year 2020. This is because one of the fears of Chinese consumers in adopting electric cars is that there may be a lack of charging stations.
Likewise, Chinese firms, such as Nio Inc., that specialize in manufacturing electric vehicles have risen during the decade of China’s subsidizing electric vehicle production. In fact, there are 30 firms manufacturing electric buses as of 2018.
Drawbacks of the Incentives
However, despite the considerable impact the subsidies had in boosting China’s electric vehicles sales, they were quite costly for the government. From 2010 to 2018, China spent $58 billion in direct and indirect subsidies. For this reason, the government drastically reduced the subsidies this year and then will discontinue them altogether in 2020- thus making the goal of selling 2 million electric vehicles in the year of 2020 harder for the government. For instance, in Shanghai, the electric vehicle subsidy was dropped to $3,560 this year (from $9,800 before) and will become nullified next year. In short, the sheer cost of these subsidies are making them unsustainable.
Ways the Incentives Could Improve
Because it is unrealistic for the Chinese government to continue providing such expensive subsidies while maintaining its present economic development at the same time, it would be difficult for it to continue giving such large subsidies to electric vehicle buyers indefinitely. Instead, I believe that it would be best for the Chinese economy and the electric vehicle market for China to focus on reducing the number of non-EV vehicle licenses being given out. This way, China can continue to incentivize customers to buy EVs to get guaranteed vehicle licenses while not spending excessive amounts of money on subsidies.
Likewise, instead of paying subsidies to electric vehicle manufacturers, China could also collect a small lump-sum tax from conventional car buyers. Although this tax would be small (to prevent public outrage), the sheer annual volume of China’s automobile market, which was 28 million cars in 2018, will cause this tax to allow China to quickly recoup the money it spent on electric vehicle subsidies. This way, China can gain tax revenue that it could use to grow its economy while still incentivizing consumers to shy away from conventional vehicles and purchase electric vehicles. For instance, a tax as small as $100 will allow China to recoup $2.8 billion, which it could use to spend elsewhere or subsidize 285,000 more cars.
Conclusion
Due to its incentives for electric vehicles, China has rapidly grown its electric vehicle market over the past decade. However, this rapid growth has been very costly to the Chinese government, so methods such as reducing the number of non-EV vehicle licenses being given out or a non-electric vehicle tax can help offset the cost of China’s electric vehicle incentivization program and perhaps allow China to continue to provide generous subsidies so that its electric vehicle market can continue to grow.
