China considers combining carbon credits and CARC in one policy — what could go wrong?

China is still struggling with how to implement a Zero Emission Vehicle-like credit program. Concurrently, it is working on a new fuel economy CAFÉ-type regulation, and aims to implement an industrial carbon credits program. As usual, China won’t simply borrow California’s ZEV program, or copy someone else’s carbon credit program. The ministries in Beijing want to come up with their own, one with Chinese characteristics. And that could be a problem.
Back in November of 2014 I blogged about how China was interested in putting together a program similar to California’s Zero Emission Vehicle program, or ZEV. The program requires automakers to sell a certain number of zero emission vehicles in the state, a number determined by the total volume of vehicles that automaker sells in California, where I live.
I wrote about China’s ZEV plans again in November of 2015. At that time, An Feng, co-founder of the non-profit Innovation Center for Energy and Transportation (iCET) told me ICET wants to establish four pilot cities in China to try out the ZEV program, An told me back then — Beijing, Shenzhen, Chongqing, and Shanghai. The caveat, he said, would be enforcement. “California has worked because it has a very high penalty,” said An “In China, who has the authority to introduce the penalty and manage it?”
That is still a good question. A number of ministries in China have their toe in the transportation/energy policy pond. That has slowed implementation of any ZEV-type programs. As well, ZEV programs, with their multiple levels of credits for various types of low- or zero-emission vehicles – are complicated enough (just try reading the details of California’s ZEV credits regulation without having your eyes glaze over), but China wants to make such a program even more complex. It wants to combine an automotive carbon credits program i.e. a ZEV-type program with an industrial carbon credits program. A two-track carbon credits program under one umbrella, as it were.
Meanwhile, a new corporate average fuel consumption program (China’s version of CAFÉ) is being created. And this is where it gets tricky. The Ministry of Industry and Technology (MIIT) is working on the CAFC standards. The National Development and Reform Commission (NDRC) is working on implementing the carbon credits program.
“There is a consensus now that some form of mandate will be adopted,” said one of my sources. And there is an agreement between MIIT and NDRC that the policy should be a national one to avoid local protectionism, he says. But, MIIT wants the CAFC regulations and ZEV/carbon credits program to be part of the same policy. This is very problematic, says the source.

“A ZEV mandate is futuristic. If the future is a cliff, you can pay someone to jump off the cliff for you,” he says. “CAFÉ is like high school graduation; you either make a passing grade or you fail. With ZEV you can buy your way out, CAFÉ is not tradeable.”
What is the danger if China combines the two? Well, the CAFC details haven’t been worked out as to how many credits each kind of alternative fuel vehicle will be worth. And, each automaker will almost certainly have to produce a certain number of EVs to meet CARC, but Beijing is considering also requiring them to produce some EVs to meet the carbon credits requirement.
The source posits a hypothetical situation that shows how problematic combining the two policy goals may be: A local automaker that produces mainly SUVs has several possible strategies. It could innovate with its ICE vehicles, using lightweight materials and the like, to improve the vehicles’ fuel economy. Or it could produce a lot of hybrids. Or the automaker could go all-in on EVs, founding its own EV manufacturing company which produces “some garbage EVs” which the automaker then sells to its own leasing company, thus meeting the quota. None achieve the government’s goal of making China a production center for high-quality EVs.
Another possible outcome: The EV quota is set very high. The automaker can’t meet the quota for the stringent standards. That forces the automaker to either produce trash EVs or cheat and bribe its way into compliance. “How do you know in a mixed system what is the proper level of EV requirements for the quota?” he says.
The debate continues regarding a combining CAFC and ZEV/carbon credits under one policy. I guess the good news is that MIIT and NDRC have agreed that any policy needs to be nationwide to avoid local protectionism. The bad news is it could be a bad policy.