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What's behind Beijing's steeper-than-expected cuts in EV subsidies?
Yang Jian | 2019/3/29

SHANGHAI -- By slashing subsidies and banning them for provincial governments Tuesday, Beijing has cut financial incentives for domestically built electric vehicles and plug-in hybrids by some 75 percent. 

The aggressive step is mainly intended to prevent automakers from relying on subsidies for sales and to curb local protectionism, government ministries said. 

But other factors may well have prompted Beijing to slash the subsidies deeper than expected. 

Beijing is eager to ease the fiscal burden central and provincial governments have come under because of the generous program. 

The Chinese government hasn¡¯t disclosed how much in subsidies it has provided for EVs and plug-in hybrids. 

The International Institute of Strategic Studies, a Washington think tank, estimated last year that China spent 245 billion yuan ($36.5 billion) in government subsidies for electrified vehicles from 2009 to 2017.

Beijing is now cutting business taxes to stimulate the slowing economy. To avoid adding to the country¡¯s budget deficit, it faces a pressing need to wind down the subsidy program. 

Central government leaders also face international pressure, especially from the Trump administration, to end interventionist industry policies.  

According to a February report in  The Wall Street Journal,  during trade negotiations between China and the United States, the Chinese side floated a plan to scrap subsidies for domestically produced electrified vehicles as part of concessions to help resolve bilateral trade disputes.

Beijing is also anxious to prevent the rapid expansion of electrified vehicle output by domestic brands from derailing its new carbon credit program. 

That may sound ironic because the subsidies and carbon credit program are both crafted to incentivize the production and sales of EVs and plug-in hybrids. 

Under the carbon credit program, effective this year, passenger vehicle manufacturers in China must accumulate enough credits by producing enough EVs and plug-in hybrids to hit a threshold equal to 10 percent of annual sales in 2019. The level will rise to 12 percent for 2020.

The program also allows carmakers that fail to produce sufficient numbers of electrified vehicles annually to buy carbon credits from peers.

But the reality is that as domestic Chinese automakers, enticed by government subsidies, continue to churn out electrified cars, the price of carbon credits they generate keep falling. 

In 2018, EV production surged 66 percent to 792,000 while plug-in hybrid output soared 143 percent to 278,000. 

As a result, carbon credits traded at a range of between 300 yuan and 500 yuan each in January, according to ChinaEV100, a Beijing industry trade group whose members include a wide range of domestic EV makers and suppliers.

The low prices have made it hard for the carbon credit program to entice companies to expand electrified vehicle output.

By slashing subsidies for EVs and plug-in hybrids, the government can stabilize production and improve the effectiveness of the carbon credit program.

Beijing is set to phase out the subsidy program for EVs and plug-in hybrids by the end of 2020. It expects the carbon credit program to take over thereafter to push car manufacturers in China to keep up their electrified vehicle output.

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