In recent decades, China’s rapid economic growth has enabled more and more consumers to buy their own cars. The result has been improved mobility and the largest automotive market in the world — but also serious urban air pollution, high greenhouse gas emissions, and growing dependence on oil imports.
To counteract those troubling trends, the Chinese government has imposed policies to encourage the adoption of plug-in electric vehicles (EVs). Since buying an EV costs more than buying a conventional internal combustion engine (ICE) vehicle, in 2009 the government began to provide generous subsidies for EV purchases. But the price differential and the number of buyers were both large, so paying for the subsidies became extremely costly for the government.
As a result, China’s policymakers planned to phase out the subsidies at the end of 2020 and instead impose a mandate on car manufacturers. Simply stated, the mandate requires that a certain percent of all vehicles sold by a manufacturer each year must be battery-powered. To avoid financial penalties, every year manufacturers must earn a stipulated number of points, which are awarded for each EV produced based on a complex formula that takes into account range, energy efficiency, performance, and more. The requirements get tougher over time, with a goal of having EVs make up 40 percent of all car sales by 2030.
This move will have a huge impact on the worldwide manufacture of EVs, according to William H. Green, the Hoyt C. Hottel Professor in Chemical Engineering. “This is one of the strongest mandates for electric cars worldwide, and it’s being imposed on the largest car market in the world,” he says. “There will be a gigantic increase in the manufacture of EVs and in the production of batteries for them, driving down the cost of both globally.”
But what will be the impact of the mandate within China? The transition to EVs will bring many environmental and other benefits. But how much will it cost the nation? In 2016, MIT chemical engineering colleagues Green and then-graduate student I-Yun Lisa Hsieh PhD ’20 decided to find out. Their goal was to examine the mixed impacts of the mandate on all affected factors: battery prices, manufacturing costs, vehicle prices and sales, and the cost to the consumer of owning and operating a car. Based on their results, they could estimate the total societal cost of complying with the mandate in the coming decade. (Note that the Chinese government recently extended subsidy support for EVs for two years due to the Covid-19 pandemic and that this analysis was performed before that change was announced.)
Looking at battery prices
“The main reason why EVs are costly is that their batteries are expensive,” says Green. In recent years, battery prices have dropped rapidly, largely due to the “learning effect”: As production volumes increase, manufacturers find ways to improve efficiency, and costs go down. It’s generally assumed that battery prices will continue to decrease as EVs take over more of the car market.
Using a new modeling approach, Green and Hsieh determined that learning effects will lower costs appreciably for battery production, but not much for the mining and synthesis of critical battery materials. They concluded that the price of the most widely used EV battery technology — the lithium-ion nickel-manganese-cobalt battery — will indeed drop as more are manufactured. But the decline will slow as the price gets closer to the cost of the raw materials in it.
Using the resulting estimates of battery price, the researchers calculated the extra cost of manufacturing an EV over time and — assuming a standard markup for profit — determined the likely selling price for those cars. In previous work, they had used a variety of data sources and analytical techniques to determine “affordability” for the Chinese population — in other words, the fraction of their income available to spend on buying a car. Based on those findings, they examined the expected impact on car sales in China between 2018 and 2030.
As a baseline for comparison, the researchers first assumed a “counterfactual” (not true-to-life) scenario — car sales without significant adoption of EVs, so without the new mandate. Under that assumption, annual projected car sales climb to more than 34 million by 2030.
When the subsidy on EV purchases is eliminated and the mandate is enacted in 2020, total car sales shrink. But thereafter, the growing economy and rising incomes increase consumer purchasing power and drive up the demand for private car ownership. Annual sales are on average 20 percent lower than in the counterfactual scenario, but they’re projected to reach about 30 million by 2030.
The researchers also projected the breakdown in sales between ICE vehicles and battery EVs at three points in time. According to that analysis, in 2020, EVs make up just 7 percent of the total (1.6 million vehicles). By 2025, that share is up to 21 percent (5.4 million). And by 2030, it’s up to 37 percent (11.2 million) — close to the government’s 40 percent target. Altogether, 66 million EVs are sold between 2020 and 2030.
Those results also track the split between two types of plug-in EVs: pure battery EVs and hybrid EVs (which are powered by both batteries and gasoline). About twice as many pure battery EVs are sold than hybrid EVs, even though the former are more expensive due to the higher cost of their batteries. “The mandate includes a special preference for cars with a longer range, which means cars with large batteries,” says Green. “So carmakers have a big incentive to manufacture the pure battery EVs and be awarded extra points under the mandate formula.”
For the consumer, the added cost of owning an EV includes any difference in vehicle expenses over the whole lifetime of the car. To calculate that difference, the researchers quantified the “total cost of ownership,” or TCO, including the purchase cost, fuel cost, and operating and maintenance costs (including insurance) of their two plug-in EVs and an ICE vehicle out to 2030.
Their results show that before 2020, owning either type of plug-in EV is less costly than owning an ICE vehicle due to the subsidy paid on EV purchases. After the subsidy is removed and the mandate imposed in 2020, owning a hybrid EV is comparable to owning an ICE vehicle. Owning a pure battery EV is more expensive due to its high-cost batteries. Dropping battery prices reduces total ownership cost for both types of EVs, but the pure battery EV remains more expensive out to 2030.
Cost to society
The next step for the researchers was to calculate the total cost to China of forcing the adoption of EVs. The basic approach is straightforward: They take the extra TCO for each EV sold in each year, discount that cost to its present value, and multiply the resulting figure by the number of cars sold in that year. (They exclude taxes embedded in the purchase prices of the vehicle, of electricity and gasoline, and so on, as the society will have to pay other taxes to replace that lost revenue.)
Using that methodology, they calculated the incremental cost to society of each EV sold in each year as well as the extra cost per kilometer driven, assuming that the vehicle has a lifetime of 12 years and is driven 12,500 kilometers each year. The results show that the incremental cost of owning and driving an EV decreases from 2021 to 2030. The cost declines more for pure battery EVs than for hybrid EVs, but the former remain more costly.
By combining the per-car cost to society with the number of cars sold, the researchers calculated the total extra cost incurred. In their results, the total number of EVs sold in a year more than offsets any decrease in per-vehicle cost, so the incremental cost to society grows. And that cost is sizeable. On average, the transition to EVs forced by the mandate will cost 100 billion yuan per year from 2021 to 2030, which is about 2 percent of the nationwide expenditure in the transport sector every year.
During the 10 years from 2021-30, the annual societal cost of the transition to almost 40 percent EVs is equivalent to about 0.1 percent of China’s growing gross domestic product. “So the cost to society of forcing the sale of EVs in place of ICE vehicles is significant,” says Hsieh. “People will have far less money in their pockets to spend on other purchases.”
Other considerations
Green and Hsieh stress that the high societal cost of the forced EV adoption must be considered in light of the potential benefits to be gained. For example, switching from ICE vehicles to EVs will lower air pollution and associated health costs; reduce carbon dioxide emissions to help mitigate climate change; and reduce reliance on imported petroleum, enhancing the country’s national energy security and balance of payments.
Hsieh is now working to quantify those benefits so that the team can perform a proper cost-benefit analysis of China’s transition to EVs. Her initial results suggest that the monetized benefits are — like the costs — substantial. “The benefits appear to be the same order of magnitude as the costs,” she says. “It’s so close that we need to be careful to get the numbers right.”
The researchers cite two other factors that may impact the cost side of the equation. In early 2018, six Chinese megacities with high air pollution began restricting the number of license plates issued for ICE vehicles and charging high fees for them. With their lower-cost, more-abundant “green car plates,” EVs became cost-competitive, and sales soared. To protect Chinese carmakers, the national government recently announced that it plans to end those restrictions. The outcome and its impacts on EV sales remain uncertain. (Again, due to the pandemic, policies restricting car ownership have mostly been relaxed for now.)
The second caveat concerns how carmakers price their vehicles. The results reported here assume that prices are calculated as they are today: the cost of manufacturing the vehicle plus a certain percentage markup for profit. With the new mandate in place, automakers will need to change their pricing strategy so as to persuade enough buyers to purchase EVs to reach the required fraction. “We don’t know what they’re going to do, but one possibility is that they’ll lower the price of their battery cars and raise the price of their gasoline cars,” says Green. “That way, they can still make their profits while operating within the law.” As an example, he cites how U.S. carmakers responded to Corporate Average Fuel Economy standards by adjusting the relative prices of their low- and high-efficiency vehicles.
While such a change in Chinese automakers’ pricing strategy would lower the price of EVs, it would also push up average car prices overall, because the total car sales mix is dominated by ICE vehicles. “Some people in China who would otherwise be able to afford a cheap gasoline car now won’t be able to afford it,” says Hsieh. “They’ll be priced out of the market.”
Green emphasizes the impact of the mandate on all carmakers worldwide. “I can’t overstate how hugely important this is,” he says. “As soon as the mandate came out, carmakers realized that electric vehicles had become a major market rather than a niche market on the side.” And he believes that even without subsidies, the added expense of buying an EV won’t be prohibitive for many car buyers — especially in light of the benefits they offer.
However, he does have a final concern. As more and more EVs are manufactured, global supplies of critical battery materials will become increasingly limited. At the same time, however, the supply of spent batteries will increase, creating an opportunity to recycle critical materials for use in new batteries and simultaneously prevent environmental threats from their disposal. The researchers recommend that policymakers “help to integrate the entire industry chain among automakers, battery producers, used-car dealers, and scrap companies in battery recycling systems to achieve a more sustainable society.”
This research was supported through the MIT Energy Initiative’s Mobility of the Future study.
This article appears in the Autumn 2020 issue of Energy Futures, the magazine of the MIT Energy Initiative.
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.