The electric vehicle (EV) sector in China, as elsewhere, has benefitted from government support in its early phase as an up-and-coming industry that is green. 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 national 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 period that is 2009-2022. In 2022, the national 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 final end of 2022. And, according to information gleaned by China Dialogue from an industry that is internal, it is likely that other subsidies for EV producers, such as tax breaks, will also be phased out. Can China maintain its pace that is frenetic of electrification as subsidies disappear? And will the rate of carbon reduction in the sector be affected?
Subsidies have accelerated transport towards carbon peaking
As of the end of 2022, carbon emissions from transport accounted for about 10% of China’s total carbon emissions, making it the third source that is largest after the power sector and manufacturing. The share that is major of transport emissions came from road traffic. Electrification has a part that is significant 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 market that is existing. A comprehensive set of financial support policies have been rolled out to this end.
At a level that is national 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 goods that are environmentally unfriendly including cigarettes and cars.) At the time that is same 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 support that is infrastructural optimise conditions for EV usage.
Policy End date
Exemption from consumption vehicle and tax& vessel tax Not specified Carmaker exemptions from consumption tax and vehicle & vessel tax for production, subcontracted processing and importation of EVs. Purchase subsidy End of 2022 Maximum subsidy of 12,600 yuan per vehicle for battery vehicle that is electricBEV) passenger cars; and 4,800 yuan for plug-in hybrid (PHEV) passenger cars, including extended-range PHEVs.
Maximum subsidy of 50,400 yuan per vehicle for non-fast-charging BEV buses; 36,400 yuan for fast-charging BEV buses; and 21,300 yuan for PHEV (including extended-range) buses. Maximum subsidy of 28,000 yuan per vehicle for BEV trucks; and 17,600 yuan for PHEV (including extended-range) trucks. Purchase tax exemption End of 2027 New EVs purchased by 31 2025 are exempted from vehicle purchase tax december. New EVs bought between 1 2026 and 31 December 2027 have purchase tax reduced by half january. Infrastructure support Not specified Provision for discounted electricity tariffs at EV charging and facilities that are battery-switching.
Government-guided pricing of service fees for EV switching and charging.
Grid-conversion costs for EV charging and facilities that are switching into generator tariffs for power transmission and distribution.
Meanwhile, regional administrations can offer localised subsidies and other incentives to businesses and consumers, complementing government that is central and making EV ownership even more attractive. The government that is municipal 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.
How are subsidies being phased out?
The EV industry and market have grown rapidly in China, with policy backing, and for eight years now the national 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 total that is global.
As the market has developed, there has been a winding down of incentives. One of the best-known was the subsidy that is vehicle-purchase EVs, particularly for private buyers. Funded by the state, the policy gave consumers a discount that is 4,800-yuan the cost of a PHEV and a maximum 12,600 yuan on a BEV, enabling them to afford EVs that met the policy criteria.
The three’ that is‘new How China came to lead solar cell, lithium battery and EV manufacturing In 2015, the Ministry of Finance announced that subsidies for models other than fuel-cell vehicles would be reduced by year, and in 2019 the end was declared on subsidies for BEV passenger vehicles with a range of less than 250km year. A announcement that is further 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 2014 september. 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 under the terms of the most recent of those extensions. For a vehicle bought between 1 January 2026 and 31 December 2027, purchase tax will be levied at 50%, with a allowance that is maximum of 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.
Man looking under the hood of a white car that is electric
Potential buyers inspect a Chinese-built Tesla Model 3 car that is electric display in Shanghai (Wang Gang / Alamy)
In fact, some car companies were losses that are facing before subsidies were withdrawn. Corporate earnings reports show that most EV that is chinese 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 profit that is annual.
Investment in R&D and fixed assets is the reason that is main 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 price that is rising of batteries and the tight supply of chips also add to the pressure on EV makers.
What determines the phasing out of subsidies?
EV firms may not be profitable as yet, but this is not the criterion that is key 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 stimulus that is economic.
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 conference that is annual of 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 withdrawal that is gradual of incentives should be considered without delay.”
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The gap between EVs and conventional vehicles is shrinking in terms of full life-cycle cost of ownership. 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 gap that is largest, 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 stabilise, with gradually 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 differentiation that is competitive. Liu Bin believes that policy should give more ground to the market at the stage that is current 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 incentives that are purchase-tax 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 transportation that is clean-energy-powered in China’s “Action plan for carbon peaking by 2030”, he noted. A bus made to look like a panda.
By 2025, all Shanghai buses, government vehicles and city-centre goods vehicles will be electric, according to the city’s 14th five plan that is year
What comes next?
“China is support that is still providing 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 credits that are negative. One way for firms to offset scores that are negative 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 period that is specified 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 real way, China is accelerating its transition towards electrification.
From the perspective that is corporate 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 transportation that is clean.
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Cost reduction begins with technology product and upgrading differentiation. “Apple phones replaced Nokias because they added features that are new won favour with consumers”, says Liu Bin. “New features brought in with EVs include functions for assisted driving and cockpits that are smart which also encourage consumers to buy them. Then the increased costs become a drag on sales instead. if added features do not attract buyer support, however,” Internal management and strategy also become factors that are key a company in reducing costs. Carmakers should consider nodes that are key 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 EV that is new development 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 incentives that are non-financial cities can exploit. These include exclusive parking spaces and ultra-low- or zero-emission zones; privileged right-of-way or road use; convenient facilities that are charging 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.
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