China will gradually raise its mandated production quota for new energy vehicles over the next three years, a move that the top industry regulator said would support its ambitious 2025 sales target.

Why it matters: The Corporate Average Fuel Consumption and New Energy Vehicle (CAFC/NEV) credit program is seen as the key policy stimulus from Beijing to drive EV adoption after a years-long subsidy scheme.

  • Also known as the “dual credit policy,” the mandate establishes NEV production quotas for automakers in order to avoid penalties.
  • Beijing late last year raised its annual NEV 2025 sales target to 25% of all new car sales from the original 20% figure.
  • Beijing is also requiring by 2025 an average fuel economy standard of 4 liters per 100 kilometers (58.7 miles per gallon) for passenger vehicles sold in the country.

Details: China on Monday continued to build on its NEV adoption initiative with an updated CAFC/NEV regulatory scheme (in Chinese), including quotas for NEV production over the next three years.

  • Traditional car manufacturers in China are required to achieve NEV credits by meeting production quotas which increase each year: 14% of total car production in 2021, 16% in 2022, and 18% in 2023. The policy will start on Jan. 1, 2021.
  • This means, for example, a carmaker with annual production of 1 million units must earn 140,000 NEV credits for the next year. Each NEV it produces is assigned a specific number of credits depending on driving range and energy economy levels.
  • An earlier version of the rule required automakers to achieve NEV credits of 10% in 2019 and 12% in 2020. Bloomberg analyst Colin McKerracher estimated that 12% NEV credits is equal to about 4% to 5% of a company’s total car sales annually.
  • The new policy also lowers the NEV credit per vehicle by adjusting coefficients to guard against a potential NEV credit glut, brought about by rapid acceleration in driving range over the years, the Ministry of Industry and Information Technology (MIIT) said on Monday.  

Context: Automakers in China produced 9.93 million NEV credits vs 2.91 million CAFC deficits in 2018, according to a report (in Chinese) by think tank Innovation Center for Energy and Transportation (ICET) earlier this year.

  • To avoid government penalties, automakers unable to hit their targets were forced to purchase credits from those with surplus NEV credits to offset their CAFC credit deficits.
  • However, an excess of credits meant that its value fell to only “several hundred RMB” each, according to a Caixin report (in Chinese) citing persons with knowledge of the matter.
  • China in 2019 reported its first-ever annual decrease in clean energy vehicle sales. A total of 1.2 million NEVs, namely all-electrics, plug-in hybrids, and fuel cell vehicles, were sold in 2019, a 4% decline compared with a year earlier.
  • Meanwhile, the world’s biggest auto market fell 8.2% year on year with a total of 25.8 million vehicles sold in 2019, according to figures from the China Association of Automobile Manufacturers.

Jill Shen

Jill Shen is Shanghai-based technology reporter. She covers Chinese mobility, autonomous vehicles, and electric cars. Connect with her via e-mail: jill.shen@technode.com or Twitter: @yushan_shen