Greening  the  economic  framework

most notably Japan, are further advanced in the technological development; the Ministry of Science and Technology envisioned that China can become a world leader in BEVs if it develops the technology first (Liu, 2011, Yoshioka, 2011). On the second question, the Ministry of Industry and Information Technology preferred the target of 500,000 NEV and the Ministry of Science and Technology wanted a more ambitious target of one million NEV by 2015 (Hannon et al., 2011). Little is known about the role of business in this process despite its central role. The final version of the plan aims for 500,000 NEV by 2015 and 5,000,000 by 2020 (State Council of the People's Republic of China, 2012a). Even though it is the lower number, the target is very ambitious, in particular given the projections for the market development, which are considerably lower. The reason for these ambitious targets is the political wish to proceed faster than technology allows (Song, 2012). However, constant overshooting can undermine the leadership position of the CPC.

Governing the Transition to a Green Economy 157 significantly lower since electricity is more efficient than gasoline to reach the same distance

with a vehicle (Kley et al., 2011). This underlines that generally green technologies require higher upfront investments but have lower operating costs. Analysts assume that electric vehicles use only a quarter of the energy of an ICE powered vehicle resulting in costs between two and four EUR for driving 100 kilometres (Reichert et al., 2011). In the Chinese context, the fuel economy of a BEV is 300% better than that of an ICE while in a life cycle analysis they use 27% less total primary energy (Ou and Zhang, 2010).

Gasoline and electricity prices are key to the further development of running cost differences.

The National Development and Reform Commission is in charge of the fuel price, which it regulates according to a formula that is linked to international crude oil prices. It is comparatively low at approximately 4.90 USD (3.74 EUR) per gallon (3.8 litres) which is position 45 (more expansive than in the United States, but much cheaper than in EU member states) in a comparison of 60 countries (Randall, 2012). The intention is to enable universal access with these subsidies (Lin and Jiang, 2011). However, the “pain at the pump” (Randall, 2012), meaning the average share of household income to buy a gallon of gasoline, is high: A person spends 30% of one day’s income to buy one gallon of gasoline. Increasing gas prices remain a social challenge for low-income households (if they own a car) even though prices are subsidised. A similar story can be told for the electricity price as “China continues to lack a formal, transparent mechanism for linking costs and retail prices in its electricity sector”

(Kahrl et al., 2011: 4034). Higher prices for commercial buyers subsidise private consumption. As a result, prices are rather low in an international comparison with the effect that charging stations are not profitable. Li and Ouyang (2011) find that either energy prices need to rise by 25% or the price of batteries needs to fall by 25% in order for this to change.

This discussion of energy prices demonstrates that the Chinese government is not only involved in the marketplace through and directly intervenes in the pricing mechanism. These interventions are triggered by social rather than by environmental considerations. The current design does not internalise externalities. Hence, it actually increases demand for fossil fuels.

The World Bank (2012) sees misleading economic incentives as the primary obstacle to green development in China. While the government is unlikely to take fast action to correct these distortions or reduce its interventions because of the potential for social unrest (Hannon et al., 2011), it has realised that slow changes are necessary. The 12^th FYP marks a considerable shift in industrial policy towards green technologies, which will receive more investments and other incentives. In addition, experiments with carbon pricing take place. A carbon price

would not only make electrified transport economically more attractive in comparison to gasoline-powered transport but it would incentivise investments into the required infrastructure and research. However, it is unlikely that they offset all the support going to fossil fuels. Since most businesses are SOEs, they are unlikely to desire for change.

4.2.3.1.1. First  experiments  with  a  carbon  price  

As of now, China does not have a nation-wide carbon price in place. Hence, transport does not have to pay for the inherent pollution it creates. This favours ICEs under most circumstances because they emit more GHG emissions than electric vehicles. However, China has started local carbon exchanges and installed low-carbon development pilots in 2010, which were encouraged to experiment with carbon pricing (Han et al., 2012). The 12^th FYP mentions the gradual implementation of a carbon market without further specification (People's Republic of China, 2011). The rationale is that in order to reduce pollution, decision-makers have realised that command and control regulation is less efficient than carbon trading (Han et al., 2012). Five cities (Beijing, Tianjin, Shanghai, Chongqing and Shenzhen) and two provinces (Guangdong and Hubei) will serve as test grounds for ETS and during the next FYP, starting in 2016, a national scheme is supposed to be implemented (Xinhua, 2012a). A major problem of these efforts is the lack of reliable GHG emission registers (Guan et al., 2012). Without knowing the exact annual GHG emissions, it is impossible to set and enforce an adequate cap. Here the limited environmental-administrative capacities come into play, as government officials might not grasp the complexity of the issue at hand. Hence, Grubb (2012: 667) correctly concludes that it “seems implausibly fast, but with the pace of Chinese developments, who knows”. While Han et al. (2012) are correct, when they argue that the next five years are crucial because of the currently existing political will to implement carbon trading, this might overburden the administrative system. The first pilot ETS in Shenzhen that went into effect in early 2013 underlines these challenges as not an overall cap is set but emissions intensity targets are used and, in addition, analysts expect an over-allocation of permits (The Economist, 2013b). However, the example of the implementation of the European ETS shows that the design has to adjust to changing circumstances, which requires time. Hence, it is promising that China begins to experiment with this instrument but it will require persistence and time.

Governing the Transition to a Green Economy 159

4.2.3.1.2. Substituting  fossil  fuel  subsidies  with  demand-­‐side  measures   As a member of the G-20, China has signed the pledge to remove fossil fuel subsidies.

However, Koplow (2012) finds that China still has some subsidies in place. To ensure universal access to energy, it subsidises fossil fuel sources to steer the prices. The result is a low gasoline price that reduces costs for consumers but at the same time creates high costs for government and the environment. The International Energy Agency (2012b) reports that in 2011 China subsidised fossil fuels with more than 30 billion USD (22.9 billion EUR) as one of the biggest overall spenders. As a result, the Chinese power generation companies have generated losses, which the government accepts to protect low energy prices (Lin and Jiang, 2011). SOEs are not necessarily geared towards economic prosperity but fulfil political goals, which is a burden on public budgets that limits other investments and endangers the economic viability of electro mobility. However, the taxation system sets incentives to buy energy-efficient cars. The excise tax on vehicles is lower for smaller cars and increases with the size of the car (Zhang, 2010). A new fuel tax put in place in 2009 raised the gasoline consumption tax rate from 0.2 to one RMB (0.02 to 0.12 EUR) per litre and the diesel consumption tax rate from 0.1 to 0.8 RMB (0.01 to 0.10 EUR) per litre. Furthermore, some Chinese NEV models are exempted from the vehicle’s tax (Stewart et al., 2012).

The central government has put in place demand-side subsidies to overcome the significant price disparity between ICE and electric vehicles. Several countries have chosen this policy, for example Japan (10,000 EUR), Spain (6,000 EUR), France and United Kingdom (5,000 EUR) as well as Portugal (4,500 EUR) (Reichert et al., 2011). The ‘10 cities, 1,000 vehicles’

project included subsidies for public buyers between 50,000 RMB (6,046 EUR) for HEVs, 60,000 RMB (7,255 EUR) for BEVs and 250,000 RMB (30,230 EUR) for FCEVs (Gong et al., 2012, Kubach, 2011), which puts China in the top regions of the international comparison.

In June 2010, the government selected five pilot cities, which are all home to major car manufacturers (Shanghai, Changchun, Shenzhen, Hangzhou, and Hefei; Beijing was later added), that offer subsidies to private consumers of similar size (Earley et al., 2011, PRTM Management Consultants, 2011). Overall, the central government has set aside 30 billion RMB (3.6 billion EUR) to support the market introduction by giving subsidies to consumers and 20 billion RMB (2.4 billion EUR) specifically towards the introduction of HEVs (Tagscherer, 2012). While Liu and Kokko (2013) argue that the differing support for HEVs and BEVs underlines that China favours BEVs over HEVs, the existing price difference is another possible explanation. Otherwise this would be a contradiction to the emphasis that is

put on HEV technology in the Energy-saving and New Energy Vehicle Development Plan.⁶⁷ In general, subsidies are only paid if demand exists. So far, the subsidies have not been sufficient incentives for consumers to shift from ICE to electric vehicles. The same can be said about most other markets that emphasise demand-side policies. One reason might be that the price differential is still not completely offset. McKinsey & Company (2012a) estimates that electric vehicles are up to 150% more expensive than ICE vehicles despite the subsidies.

The government has included a provision that aims to strengthen Chinese manufacturers.

Eligible for subsidies are only vehicles that are on the ‘Recommendation List of Vehicle Types for the Demonstration programme of Promoting Energy Conservation and Alternative Fuel Vehicles’ published by the Ministry of Industry and Information Technology (Zheng et al., 2012). In order to qualify for that list, vehicles must be produced in China to strengthen the domestic industrial base. However, many of the models are not readily available since the technological development of Chinese companies is not fast enough (Gong et al., 2012).

Hence, this government requirement, which is supposed to force international companies to enter joint ventures with domestic businesses, harms the transition efforts. The lack of demand for electric vehicles shows that significant financial incentives have not overcome existing opposition to the technology so far.

4.2.3.1.3. Employment  effects  are  largely  unknown  

The number of employees in the Chinese car industry is not exactly known. Estimates are that in 2009 the green transport sector (including rail and public transport) employed 2.9 million people (Pan et al., 2011). Given the young state of the NEV industry, little data on the employment effects is available. Once again, BYD is the focus of analysis: In 2010, 130,000 people were on the BYD payroll (Kasperk et al., 2010). However, this can have changed by now given the fluidity of the sector and it is unknown how many worked on electro mobility.

However, studies stress the employment potential as a political argument. A very optimistic prognosis of 15% of vehicle construction taking place in electrified power trains between 2011 and 2020 would yield 1.2 million jobs annually (Pan et al., 2011). However, this seems unrealistic given the slow market penetration. Nonetheless, the number demonstrates the immense employment potential of electro mobility for the Chinese car industry, which is of interest to the decision-makers because of their need to improve the living conditions of the population.

67 It points to the confusion surrounding the policy framework that stems from the lack of openness in the decision-making.

Governing the Transition to a Green Economy 161 When looking where people are working in the value chain, future problems of Chinese

electro mobility efforts arise on the horizon: Currently, workers are needed researching and developing the new technologies, which are required before the low-cost production can scale up. However, a lack of well-trained workers is a problem in China. BYD tackled it through job rotation (Kasperk et al., 2010). While this might work for a single company, it is not a working formula to solve the problem of an entire industrial sector that is supposed to grow.

Since the lack of technological solutions partly explains the lack of progress in China, the government needs to find ways to improve the level of training. The car producers must grow into interesting employers that attract high-skilled engineers.