China Unveils Plan to Ban Fossil Fuel Vehicles

by Latham & Watkins LLP
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Addressing a car forum in Tianjin, Xin Guobin, Vice Minister of Industry and Information Technology, announced that the Chinese government is developing plans to follow in the footsteps of some European countries to phase out fossil fuel-powered vehicles. “Some countries have worked out a timetable to stop production and sales of traditional fuel vehicles. Now the Ministry of Industry and Information Technology has launched a study as well, and will work with related departments on a timetable for our country,” Xin said. A phase out of fossil fuel vehicles could have a significant impact on air quality in China, where reports suggest that as many as 1.6 million people die each year from health issues related to air pollution.

With nearly 200 million registered vehicles at the end of 2016, China has the world’s largest car market. New energy vehicles and electric vehicle (EV) batteries are playing an increasingly important role in Beijing’s plans to turn China into a high tech powerhouse. China also has the largest cumulative total of new energy vehicles, ahead of Europe and the United States, which have the second and third largest totals respectively. In 2016, 53% of the 774,000 electric cars sold worldwide were sold in China. In order to meet next year’s demand, forecasters say that China alone needs to make 750,000 new energy vehicles — exceeding the combined worldwide demand in 2016.

Despite positive signals from the Chinese government, John Zeng, managing director of consultancy LMC Automotive, notes, “[a] sector of low-priced products heavily reliant on government subsidies is far from being a sunrise industry.” Earlier this year, however, the Chinese government said that, by 2020, it will replace subsidies with a new cap-and-trade system for fuel economy and emissions, and minimum quotas for new energy vehicle production. In a cap-and-trade paradigm, EVs and new energy vehicles will provide sustainable cost advantages to consumers over traditional fossil fuel vehicles.

Following Xin’s announcement, investors flocked to companies producing EVs and new energy vehicles. BYD Co., China’s largest new energy vehicle manufacturer, surged by 7.2% and Guoxuan High-Tech Co., an EV battery maker, rose as much as 8.3% in Shenzhen.

The UK and French governments have already confirmed that they will ban sales of petrol and diesel vehicles by 2040. However, China has not yet formally committed to such a ban, nor established a deadline for implementation. Liu Zhijia, an assistant general manager at Chery Automobile Co., the country’s biggest passenger car exporter, considers that, “The implementation of the ban for such a big market like China can be later than 2040.” He added, “That will leave plenty of time for everyone to prepare.” However, according to Neil Beveridge, an analyst at Sanford C Bernstein & Co in Hong Kong, 2040 would be “logical”.

This post was prepared with the assistance of Tegan Creedy in the London office of Latham & Watkins.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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