After previously proposing to stop offering subsidies for electrification, China’s government has taken a different direction towards retaining the local subsidies for electric vehicles. The new amended policy is in the final discussion stages, amid the rising demand for new energy vehicles (NEV) in China.
Policy makers changed their stance regarding the discontinuation of local incentives, due to fears of impairing the development of the NEV sector.
China had traditionally, aggressively promoted plug-in electric vehicles, with billion dollar subsidies, aimed to limit air pollution and improve the competitiveness of the domestic automotive industry.
Phasing out incentives
In December last year, China’s government announced plans to stop offering subsidies for electric cars and other NEVs. The Ministry of Finance was also working on a plan that would mandate authorities to phase out the incentives, in order to discourage protectionism and help rein in state expenditure. If implemented, the plan was threatening to destabilise demand for cars made by companies like BYD Co. and BAIC Motor Corp.
The subsidies and grants were remnants of a decade-old policy to help promote zero-emission vehicles. They made electric vehicles much more affordable, leading China to surpass the U.S. as the world’s biggest market in 2015, accounting for 50% of the global EV use.
The government in Beijing was reviewing the payouts in order to clear out potential distortions and implement fiscal prudence. Until last month, it was expected that China would further cut subsidies for NEVs in 2018 and completely phase them out by 2020.
Retaining 50% grants
As China has decided to retain the subsidy scheme, it will continue running the existing program, which sets the upper limit funding based on the vehicles performance. Thus, cars that can run at least 250 kilometres (155 miles) on a single charge can obtain 44,000 yuan ($6,653) from the central government, while local authorities can provide at most 50% of the central grant.
China’s EVs funding scheme started in 2010, when the country identified plug-in hybrids and fuel-cell vehicles as a strategic industry. In addition to providing the government grants, China is also considering to end production and sales of combustion engine vehicles in several years.
China’s central government already spent 59 billion yuan through 2015 on subsidising NEVs, while it planned to spend additional 83 billion yuan in 2016 and 2017, based on estimates by the China Passenger Car Association. The subsidies program are expected to bear fruit in 2018, with NEV sales projected to increase up to 1 million units, from 700,000 last year, according to the China Association of Automobile Manufacturers.