#TIL: Why China’s dumping EV subsidies for a Credit trading system?

by Shilpi Samantray

As if the existing jargon around Electric Vehicles wasn’t enough, here’s another phrase that finds mention in EV discourse — Credit Trading system (CTS).

Before we get into the What, let’s first set the context for why we’re talking CTS. Like deployment of every new technology, EV roll-out too suffers challenges of high upfront investments in research and affordability. The predictable route for most governments is subsidies and incentives; except that China has found a way around. Enter CTS.

A credit trading system, as the name suggests, allocates ‘credits’ to car manufacturers based on various factors of a car like range, efficiency, etc. In China this is applicable to automakers who produce more than 30,000 vehicles annually. Starting 2019, automakers in China must get EV credits/New Energy Vehicle (NEV) credits of at least 10%, gradually aiming for at least 12% by 2020. Based on these credits, the Government would provide green credentials to vehicles. Vehicles with better quality will get higher credentials and the Government would be able to squeeze out lower quality vehicles from the market. But what happens if you as a car manufacturer are unable to get the desired credit score?

The manufacturers which don’t meet the 10% credit can purchase it from the companies that have surplus credits through an open trading market. This not only stabilizes the market for better credits, but financially rewards companies (through higher priced credits) that have invested in greening the auto-value chain, and places liability on those that haven’t.

Here’s an illustration where company A sells its credit to company B.

China has the highest number of EV sales in the world. The Chinese government has always taken the subsidy route to promote EVs. While this has accelerated the EV adoption in their market, it has also led to a proliferation of cars and batteries of low to mediocre quality. To address this, the Chinese government has dropped the EV subsidies by at least 65% this year and have launched a credit trading system to encourage auto makers to make better quality EVs. This system is being adopted by other countries too.

Today I learnt (TIL) is a weekly series by OMI that brings you interesting nuggets of information that you didn’t know you needed.