Consequences of China’s dual-credit policy

China's dual-credit policy was formally implemented in 2018. Since then, however, the rate of CAFC improvement has declined.

James Zhu, Powertrain Analyst, China

16 October 2019

The unintended consequences of China’s dual-credit policy

The parallel management method of Corporate Average Fuel Consumption (CAFC) and New Energy Vehicle (NEV) Credits for China’s Passenger Car market – known as the dual-credit policy – was formally implemented in 2018. Since then, however, the rate of CAFC improvement has declined. In other words, the rate at which the fuel economy of conventional vehicles is improving has slowed. That was not part of the plan.

China’s NEV industry has made enormous progress in the past few years under the influence of the previous (subsidy) policy, which, while being reformed, is still in operation and will run until 2020. A legacy of the subsidy policy was that the overall industry NEV credit achievement exceeded 18% in 2018, well in excess of the 8% requirement (as shown in the chart to the left).

The current dual-credit policy is structured in such a way that weak CAFC performance can be offset by over-reliance on NEV production – which is precisely what has happened, stifling technical development in ICE vehicles in the process (the effect can be seen in the chart below). In the meantime, growth in China’s vehicle parc helped drive dependence on foreign oil to more than 70% in 2018, an unintended consequence of the current policy. To remedy the situation, China’s Ministry of Industry & Information Technology (MIIT) decided to revise the dual-credit policy and solicited opinions from the wider industry in July 2019.

Four key ways to alter the current dual-credit policy have been put forward:

  1. Revised scope of qualifying ICE types to include alcohol (ethanol) in order to boost energy diversification; more flexible CAFC targets for small-scale enterprises with output of less than 2,000 units.
  2. Greater allowance for NEV credit carry-forward in order to avoid over-generation of credits, and to smooth the rhythm of product planning for OEMs.
  3. Modified test conditions after 2021.
    Under these modified test conditions, from 2021 onwards, ICE, plug-in hybrid vehicles (PHEVs) and non-plug-in hybrid vehicles (HEVs) would use the ‘Worldwide harmonized Light-duty vehicle Test Cycles’ (WLTC) to determine vehicle fuel consumption, electric consumption and pure electric driving range. Battery electric vehicles (BEVs) and fuel cell electric vehicles (FCEV) would use the ‘China Light-vehicle driving condition Test Cycles’ (CLTC) to determine the vehicle’s electric consumption and driving range.
    The table below shows the impact on the results of different segment models under two test conditions conducted by a European research institute. The test results of different models under WLTC have deteriorated to varying degrees. In short, changes in test conditions bring not only uncertainty to the compliance of the entire industry, but also new pressure on the carmaker’s powertrain calibration.
  4. Revised NEV credit quota requirement and calculation method.
    As a continuation of the previous scheme, the quotas for NEV credits in 2021-2023 are set at 14%, 16% and 18%, respectively. The key change under the revised calculation method is a significant reduction of the standard credit for different models.
    From a technical standpoint, the requirement of electric consumption per 100 kilometres is more stringent, while PHEVs move away from pure electric range regulation to the assessment of energy consumption in the Charge-Depleting (CD) mode and the Charge-Sustaining (CS) mode.


The draft also proposes the concept of the ‘Low-Fuel Consumption’ (LFC) Passenger Vehicle , which can be used to reduce the base output volume when calculating the NEV target credit. As an incentive to sell LFCs, each one of them is calculated at 0.5 vehicles.

When calculating CAFC, the preferential multiple of NEVs will decrease year by year, from 2.0 in 2021 to 1.6 in 2023.

The aim of reducing the NEV credit is to remedy the industry’s current credit surplus. In addition, the new technical requirements should force OEMs to widen their focus from just the cruising range to the comprehensive performance of NEV products.

The concept of the LFC vehicle is good news for the development of fuel-saving technology, in particular hybrid technology. More importantly, the reduction in the preferential multiple of NEVs makes it impossible for OEMs seeking to reduce CAFC to simply rely on producing more NEVs in the future, as has been the case to date.

We believe that this dual-credit policy revision will improve on the previous edition and should lead China’s automotive industry in the direction of both low-energy consumption and energy diversification. While OEMs will have a choice of ways to comply with the new policy, achieving the targets will not be easy. Some Small segment vehicles, including Basic and Sub-Compact, may be forced to become BEV-only as compliance costs would be prohibitive were they to remain ICE. This echoes the long-term situation in Europe.

What is clear from these changes is that the current direction of policy is altering the fundamental structure of the industry.


  1. Source: *Stefanos Tsiakmakis etc. “From NEDC to WLTP: effect on the type-approval CO2 emissions of light-duty vehicles”.
  2. The definition of a Low-Fuel Consumption Vehicle is that the fuel consumption in normal working mode is not larger than its target consumption multiplied by its CAFC requirement. (The target fuel consumption is defined by government standards that are related to the vehicle’s kerb weight. The CAFC requirement is a coefficient. For 2021, the CAFC requirement is 123%. For 2022, it is 120% and for 2023, it is 115%).