Will Electric Vehicle Production Quotas Help Drive Adoption?
Encouraging consumers to adopt Electric Vehicles (EV) has been a difficult task. Policymakers continue to try and devise strategies to help create an environment for EVs to thrive. While most countries have struggled, notably, China has made giant strides. Last year, sales were more than triple that of the United States. Also, is set to introduce an EV quota to encourage OEMs to produce more electric drivetrains.
EV Fleets in Operation
EVs are a relatively new conversation for fleet operators. With that said, some operators have already adopted the technology. Currently, UPS has more than 1,000 EVs operating around Europe and the United States. They have also purchased 125 vehicles from Tesla and is testing delivery vans with the start-up Thor. Similarly, public agencies are cleaning up their transport network. Leading examples include NYC who operate around 29,000 EVs as part of their clean fleet initiative.
The shift to electrification is a result of operational benefits, which are further magnified when fleet vehicles are traveling long distances. A prominent upside is the cost of fuel. EVs run on electricity, the unit cost is much cheaper than the gasoline equivalent. Furthermore, electric drivetrains are simple machines, having fewer moving components than its internal combustion counterpart. As a result, maintenance costs will reduce significantly.
Nonetheless, widespread adoption in fleets has been a slow mover. Many incentives are available to help improve the environment for electrification, but more needs to be done. Production quotas are the latest addition to help improve EV adoption.
What is a Production Quota?
Quotas can often refer to restrictive practices, such as limiting some countries imports to help support local producers. However, quotas can work in many ways. In this context, it refers to a government policy to encourage production.
For the automobile industry, it is an attempt to motivate OEMs to reach a certain level of EVs as a percentage of their total vehicle production. Thus, in turn, limiting the output of internal combustion vehicles.
Such a strategy is no new concept. The EU Emissions Trading System (ETS) aims to reach similar goals by limiting the co2 emissions produced by various economic sectors. However, in practice has been criticized many fronts. The system has struggled with the so-called ‘carbon leakage.’ It is when emissions restricted in one country, are offset by increased emissions in another country. Therefore, having no or very minimal net impact.
With that said, China is readied to implement a production quota in early 2019.
Case Study: China
In absolute terms, EV sales in China are the strongest than any other country in the world. In 2017, they almost tripled the sales of the United States with just under 580,000 units. The graph below details China’s dominance.
Arguably, aggressive national policies have created a favorable environment for EVs, such as the exemption from purchases tax, which is 17 percent in China, and subsidies up to RMB 55,000 ($8,000). Furthermore, some local governments will match up to 50 percent of the national subsidy value. Therefore, relative to the rest of the world (except for Norway), incentives are incredibly generous in China.
The introduction of a production quota on OEMs is further confirmation that China is serious about the EV revolution.
The Dual Credit Policy
The breakthrough policy sets minimum EV production targets for OEMs. Under the plan, evaluations will take place to access factors such as fuel economy, driving range, and weight to qualify for EV credits. The policy instructs that OEMs with annual production of over 30,000 vehicles must obtain at least 10 percent of total vehicle manufacturing in EV credits in 2019, increasing to 12 percent in 2020. Failure to meet these requirements, OEMs must either buy credits on the open market (set up by the regulator) or face penalties.
The hope is that OEMs in China will not take advantage of the open market system, as already highlighted in the case of the EU ETS, and by shifting production elsewhere.
Will Fleets be Affected?
Despite potential loopholes, encouraging EV production through quotas can only be a step in the right direction. Successful implementation should result in a spike of competition as OEMs compete to occupy empty spaces. Furthermore, economies of scale should bring about a reduction in costs, and increase the availability of EV models — all of which a positive sign for consumers.
Another useful policy could be encouraging large fleets through quotas or otherwise to have a percentage of their fleet electric. Some may argue that this could harm operators. However, analysis has shown that EV total cost of ownership (TCO) over the vehicle life is advantageous.
For example, a recent TCO study of Japan, UK, California, and Texas concluded that although EVs have been propped up by subsidies, they are relatively cheaper than internal combustion vehicles, primarily as a result of cheaper fuel and maintenance costs.
Nonetheless, shifting the emphasis to EVs could help highlight other policies. For example, incentives for workplace infrastructure and installation, and EV specific electricity rates.
China is a stand out example of how policies can be a useful tool for EV adoption. Though it is yet to prove its worth, the hope is that production quotas will be a practical addition to EV incentives. However, will need to be wary of flaws, and explicitly taking advantage of the open market to buy EV credits.
In the short term, shaping vehicle manufacturers hands could spark a revolution in EV production. Fleet operators could well benefit from improved vehicle choice. On the flip side, creating a demand for EVs is equally essential. Investments and providing incentives, especially at the workplace could well be a recipe for EV success.