China’s Ministry of Industry and Information Technology announced a revision to its long-running “dual-credit policy,” in which local automakers earn certain calculated credits for each EV they build. The Ministry is reducing said credit by 40%, putting certain automakers in jeopardy of non-compliance and risk of losing their ability to sell to the public.

In many ways, China continues to lead the global transition toward all-electric vehicles – but steadfast adoption overseas is not necessarily due to respect for Mother Earth. Government and tax credits have incentivized automakers and consumers in China alike to get to this point, and have adjusted policy as seen fit while adoption continues to snowball.

As of 2022, one in four vehicles sold in China was electrified, but this successful adoption rate dates back to significant subsidies for New Energy Vehicles (NEVs) that began in 2014. In China, NEV’s are defined as battery electric vehicles (BEVs), plug-in hybrid (PHEVs), or hydrogen fuel cell vehicles.

The Chinese government ended that program last year, which led EV automakers like Tesla to slash prices to maintain its market share, igniting a price war that is just cooling off six months later. As a result of less tax credits available and a “wait and see” mentality growing among consumers in China watching EV automakers try to out-discount one another, sales began to dwindle and the market grew weary.

The re-stimulate growth in the EV segment, China’s Ministry of Finance introduced a new tax credit that will offer consumers another $72 billion in exemptions through 2027. On the OEM side, the Chinese government has been offering local automakers their own credit program – one many have used to offset carbon emissions to stay in the good graces of the state. However, those credits just got cut, putting some current production operations in jeopardy.

EV credits for automakers slashed in China

China’s Ministry of Industry and Information Technology (MIIT) shared details of its latest update to its tax credit policy for automakers earlier today, which reduces credits given for production of standard model NEVs by about 40% on average. Here’s how it will break down:

• BEV passenger cars, the credit formula for standard models is calculated as 0.0034 x R + 0.2
  • “R” = range in km
• For plug-in hybrids, a standard model’s credit is now 1
• The upper limit of the standard model credit for pure BEVs vehicles is 2.3

The current credit formula for BEVs is 0.0056 x R + 0.4, while standard model PHEV credits currently sit at 1.6. For further insight, a 600 km EV in China would earn its makers 3.76 credits today, but under the incoming reductions, the same vehicle only garners 2.24 credits – a significant reduction.

Especially when you take into account how OEMs in China are using these credits. Fuel consumption control requirements can put certain automakers still building combustion models in a whole of negative credits with the government, but NEV credits can be used as offsets.

Less available credits per EV built could temporarily (or permanently) put these same automakers into a bind of compliance, since any OEM that cannot get its negative credits back to at least zero must submit a product adjustment plan to the MIIT and set a deadline for once again becoming compliant. Until then, those substandard products cannot be sold to the public in China.

Additionally, today’s policy updates adds a credit pool management system, in which OEMs that are beyond compliant can store their excess credits in the pool, valid for five years. Should that automaker find itself back in the negative, it can withdraw it stored credits.

The MIIT says its new reduction to EV credits will kick in in China on August 1.