Low eligibility bar
Beijing this week unveiled new technical requirements for EVs eligible for tax breaks and the bar has been set low enough that over 90% of electrified passenger vehicles sold in the country will qualify according to the ministry responsible.
From 2024, Chinese buyers would not have to pay tax on a full electric vehicle (BEV) that has a driving range of at least 200km (~124 mi) per charge. Plug-in hybrid cars (PHEV) should have a battery-only range of at least 43km (~27mi) to qualify.
Vehicles that cannot drive at speeds of more than 100km per hour are not eligible under the rules, while EV batteries with energy density below 125Wh/kg also do not qualify. The new regulations also specify that in cold weather, EVs that lose 35% or more range or have less than 120km (~75 mi) of driving distance in these conditions are excluded.
The EV incentive package, worth a total of $72 billion, was first introduced in June and will run until 2028. EVs bought in 2024 and 2025 will be exempted from sales tax up to a maximum of 30,000 yuan ($4,180). The maximum tax exemption falls to 15,000 yuan ($2,090) in 2026 and 2027.
Going for a song
Compared to China, US federal EV tax breaks are more generous – up to $7,500 per vehicle – and combined with various state rebates and cash incentives (Colorado’s adds up to a mouthwatering $13,500), buying an electric vehicle should be in reach for most Americans.
To qualify in the US, the MSRP of electric vehicles must be $80,000 or less for SUVs, vans, and trucks, and for all other EVs must be $55,000 or less. In November, the average price paid in the US for an EV was $52,345 — down more than $12,000 compared to last year, mostly on the back of Tesla’s price cuts for its pre-refresh Model 3.
Unlike the US, under the Chinese rules, the price of a vehicle does not alter the eligibility for tax breaks. No-one says no to a tax break, but average selling prices in China are already some 50% below US MSRPs for comparable models.
The best-selling electrified car in China in 2023 is the BYD Song Plus DM-i plug-in hybrid, with a range of 1,000km, including 150km in fully electric mode, and a price tag of $23,000. Number two, Tesla’s ageing Model Y, now starts at $36,550 following a price hike in November.
While average US selling prices have fallen dramatically the past year, rules published by the US Treasury Dept earlier this month will render the vast majority of EVs for sale in the world’s second largest auto market ineligible for the $7,500 tax break.
Starting from 2024, EVs that contain any battery components manufactured or assembled by a Foreign Entity of Concern (read China) will not be eligible for the tax credit.
The incentive cut-off date for any lithium, nickel, cobalt and graphite or other battery metals produced by, or which make their way through China, is 2025. Rare earths, found in more than 80% of EV motors globally, are already subject to these rules.
Less than a fifty-fifty chance
To what extent incentives at the retail level have boosted China’s EV market is debatable although frenzied buying during previous years in the run-up to subsidy schemes ending or changing suggest it has played some role.
However, the country’s dominance of all aspects of the global mine-to-megawatt supply chain – the key to affordability – likely had a much bigger impact and helps explains the eye-popping reality that from January through September, the total battery capacity of all newly sold BEVs and PHEVs in China was more than three-times the battery power hitting US roads.
BEV and PHEV registrations in China constituted 27% of total passenger car sales in the nation through September, up from 23% last year. In the US, the EV penetration rate is only 9%, an improvement from 7% during the same period in 2022.
That’s a long way away from the US government’s goal of EVs at 50% of overall sales by the start of the next decade. And with the new FEOC rules affecting made-in-China EVs and batteries, that goal looks like it may now disappear over the horizon.
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The electric vehicle (EV) sector in China, as elsewhere, has benefitted from government support in its early phase as an up-and-coming green industry. The government has been subsidising producers of EVs for public transport, taxis and the consumer market since 2009. EV consumers in China, moreover, have received purchase subsidies from the government for a number of years.
More than 200 billion yuan (US$28 billion) was spent on EV subsidies and tax breaks in China over the 2009-2022 period. In 2022, the country sold more than 6 million EVs, accounting for half of all sales globally.
As the market has matured, government support and subsidies have declined. Purchase subsidies for EV consumers were phased out at the end of 2022. And, according to information gleaned by China Dialogue from an internal industry meeting, it is likely that other subsidies for EV producers, such as tax breaks, will also be phased out.
Can China maintain its frenetic pace of transport electrification as subsidies disappear? And will the rate of carbon reduction in the sector be affected?
As of the end of 2022, carbon emissions from transport accounted for about 10% of China’s total carbon emissions, making it the third largest source after the power sector and manufacturing. The major share of those transport emissions came from road traffic. Electrification has a significant part to play in reducing road transport emissions and enabling peak carbon to come as soon as possible.
China needs to meet domestic demand for new cars with EVs, making sure they capture the new market, while also accelerating the EV substitution of conventional combustion vehicles on the existing market. To this end, a comprehensive set of financial support policies have been rolled out.
At a national level, China uses exemptions on consumption tax to help lower production costs for EVs and fuel cell vehicles. (In China, consumption tax is payable by producers of luxury and environmentally unfriendly goods, including cigarettes and cars.) At the same time, consumers have been spurred with purchase subsidies and relief from vehicle purchase tax. China also exempts car owners from vehicle and vessel tax, while providing infrastructural support to optimise conditions for EV usage.
PolicyEnd dateSpecificsExemption from consumption tax and vehicle & vessel taxNot specifiedCarmaker exemptions from consumption tax and vehicle & vessel tax for production, subcontracted processing and importation of EVs.Purchase subsidyEnd of 2022Maximum subsidy of 12,600 yuan per vehicle for battery electric vehicle (BEV) passenger cars; and 4,800 yuan for plug-in hybrid (PHEV) passenger cars, including extended-range PHEVs.Meanwhile, regional administrations can offer localised subsidies and other incentives to businesses and consumers, complementing central government support and making EV ownership even more attractive. The municipal government in Chengdu, for example, which wants 800,000 EVs on the road by 2025, awards up to 50 million yuan to any carmaker that develops and brings to market a new EV model, and also gives individual consumers 8,000 yuan for acquiring an EV.
The EV industry and market have grown rapidly in China, with policy backing, and for eight years now the country has ranked number one in the world for both production and sales. EV ownership in China at the end of 2022 reached 13.1 million units, accounting for more than half of the global total.
As the market has developed, there has been a winding down of incentives.
One of the best-known was the vehicle-purchase subsidy for EVs, particularly for private buyers. Funded by the state, the policy gave consumers a 4,800-yuan discount on the cost of a PHEV and a maximum 12,600 yuan on a BEV, enabling them to afford EVs that met the policy criteria.
In 2015, the Ministry of Finance announced that subsidies for models other than fuel-cell vehicles would be reduced year by year, and in 2019 the end was declared on subsidies for BEV passenger vehicles with a range of less than 250km. A further announcement in 2020 specified another reduction, and the subsidy was fully withdrawn at the end of 2022, after 13 years.
Support in the form of purchase-tax exemptions has also tailed off, having been extended three times since launching on 1 September 2014. Under the terms of the most recent of those extensions, the tax-free allowance for an electric passenger car purchased between 1 January 2024 and 31 December 2025 is a maximum of 30,000 yuan. For a vehicle bought between 1 January 2026 and 31 December 2027, purchase tax will be levied at 50%, with a maximum allowance of 15,000 yuan.
The withdrawal of vehicle-purchase subsidies and phasing out of purchase-tax incentives raises costs for buyers, which could result in higher prices for EVs coming onto the market, deterring consumers.
Potential buyers inspect a Chinese-built Tesla Model 3 electric car on display in Shanghai (Wang Gang / Alamy)
In fact, some car companies were facing losses even before subsidies were withdrawn. Corporate earnings reports show that most Chinese EV brands have failed to achieve profitability, having relied on the major technology companies and traditional auto manufacturing to establish themselves. Among Chinese carmakers solely selling EVs into the domestic market, BYD is the only one making an annual profit.
Investment in R&D and fixed assets is the main reason for car company losses. As a report points out, EVs require much higher technology R&D investment than conventional vehicles. At a scale of 400,000 vehicles, for example, EV makers invest more than twice as much as producers of conventional cars. Fluctuating prices for battery materials, the rising price of traction batteries and the tight supply of chips also add to the pressure on EV makers.
EV firms may not be profitable as yet, but this is not the key criterion for deciding on the timing for phasing out incentives. A recent article by the lead specialist at China Automotive Technology & Research Center (CATARC), Liu Bin, lists eight key factors affecting the timing for withdrawing vehicle-purchase tax incentives: the scale of the EV market as a share of new car sales; the reaching of price parity between EVs and conventional vehicles; the degree of consumer acceptance; the industry’s stage of development; the government’s financial situation; requirements for environmental protection; the withdrawal of support policies abroad; and the need for domestic economic stimulus.
According to data from the Ministry of Commerce, the share of EVs as a fraction of new car sales increased from one-eighth in 2021 to one-quarter in 2022. Addressing the 2022-2023 annual conference of the China Clean Transportation Partnership (CCTP), Liu Bin said: “It is generally forecast to be over 30% this year and around 40% in 2025. Looked at this way, the gradual withdrawal of vehicle-purchase-tax incentives should be considered without delay.”
In terms of full life-cycle cost of ownership, the gap between EVs and conventional vehicles is shrinking. A report from the International Council on Clean Transportation (ICCT), released in 2021, analysed eight EVs compared with conventional vehicles. It found that lifetime costs for only one of the EVs were on par with those of conventional vehicles in 2019. For the model with the largest gap, the cost of ownership was around US$6,000 higher. However, by 2030 lifetime costs for the four BEVs among the eight were predicted to be $6,000-$8,000 lower than that for conventional vehicles. While costs for the other four, which were PHEVs, essentially matched those of conventional vehicles.
Regarding market development, the scale of the EV market will gradually stabilise, with technology and products becoming basically mature and market competition being relatively intense, predicted Liu Bin in his article. Firms will focus more on improving efficiency, reducing costs and seeking competitive differentiation. Liu Bin believes that policy should give more ground to the market at the current stage, allowing incentives to be steadily withdrawn.
However, he also suggested that compared with the scenario of restoring a 10% levy, maintaining vehicle purchase tax incentives beyond 2023 will benefit EV sales to the tune of around 1.3-2.6 million units per year. Continuing to offer EV purchase-tax incentives will significantly accelerate electrification of the transport sector, he wrote. It will also bring forward, from 2030 to 2025, achievement of the 40% target for sales of new-energy-based and clean-energy-powered transportation affirmed in China’s “Action plan for carbon peaking by 2030”, he noted.
By 2025, all Shanghai buses, government vehicles and city-centre goods vehicles will be electric, according to the city’s 14th Five Year Plan (Image: Alamy)
“China is still providing support for EVs in terms of policy, but the policy is shifting from carrot to stick”, ICCT researcher Chu Yidan told China Dialogue.
Since 2018, China has operated a “dual-credit” scheme for makers of passenger cars. This involves parallel sets of credits determined by “average fuel consumption” levels and output of “new energy vehicles” (NEVs). Firms that meet the benchmarks are awarded positive credits, while those that fail to, receive negative credits. One way for firms to offset negative scores and reach zero is by buying NEV credits from other companies. Those that fail to get to zero have to submit their offset plans to the Ministry of Industry and Information within a specified period, and realise those plans. Otherwise, the offending company is subject to penalties, including suspension from producing and selling high-fuel-consumption products, and from expanding production capacity. To meet benchmarks, carmakers have to produce more, cleaner, and better (having a greater range, for example) EVs. By tightening its policies in this way, China is accelerating its transition towards electrification.
From the corporate perspective, Liu Bin spoke at the CCTP conference about how reducing the green premium on the price of EVs is the key to achieving the transition to zero-emissions vehicles. Only by speeding up cost reductions can stakeholders in the market be lastingly incentivised to drive the transition to clean transportation.
Cost reduction begins with technology upgrading and product differentiation. “Apple phones replaced Nokias because they added new features that won favour with consumers”, says Liu Bin. “New features brought in with EVs include functions for assisted driving and smart cockpits, which also encourage consumers to buy them. If added features do not attract buyer support, however, then the increased costs become a drag on sales instead.” Internal management and strategy also become key factors for a company in reducing costs. Carmakers should consider key nodes in policy development and the changing costs for different models, and determine their targets for profit, production and sales accordingly.
Municipalities may also manage to continue supporting new EV development by providing subsidies and tax incentives in lieu of central government. According to He Hui, project director at ICCT China, there are a range of financial and non-financial incentives that cities can exploit. These include exclusive parking spaces and ultra-low- or zero-emission zones; privileged right-of-way or road use; convenient charging facilities; and reduced or exempted service fees for parking and charging. These can strongly incentivise development of EVs and spur consumer interest in buying the vehicles, He added.