Fossil Fuel Free: A Plan to Phase Out China’s ICEVs

This is a guest post by Lucy Best and Michael Collins, research associates for Asia studies at the Council on Foreign Relations.

The Innovation Center for Energy and Transportation (iCET), a leading U.S. and China based think tank focusing on Chinese environmental policy, published a report in May 2019 detailing the structure and feasibility of China’s ambitious goal to phase out internal combustion engine vehicles (ICEVs) in favor of new energy vehicles (NEVs) by 2050. The report is part of a larger project launched by the National Resource Defense Council (NRDC) and Energy Foundation China in partnership with the Chinese Ministry of Ecology and Environment and the National Development and Reform Commission (NDRC). The project aims to reduce China’s oil consumption and improve its energy security through the development of renewable energy alternatives.

Any Chinese domestic move away from ICEVs would reverberate across global auto and oil markets. China is the world’s largest market for vehicle supply and demand. In 2018, the country’s annual production and sales volume reached thirty million units and total ownership exceeded two hundred million units. China surpassed the United States as the world’s largest crude oil importer in 2017, and was projected to import over seventy percent of its total crude oil in 2018. Automobiles accounted for 42 percent of China’s total oil consumption and over 80 percent of its total refined oil consumption. These factors demonstrate the massive shifts the recommendations in this report would require, both within China and abroad, and the huge implications for automakers and oil exporters.

Motivations for ICEV Phase Out

The report mentions multiple motivations for China to phase out ICEVs. One factor behind this policy direction is the technological dominance China would achieve should it become a leader in an auto industry increasingly projected to embrace green technology. In recent years, companies such as Tesla and BYD have built their reputations on electric technology, and electric vehicles are expected to spike in production by 2030. As the report itself states, China has the world’s largest car market, and thus can promote changes in the global auto market through its domestic regulations. Chinese President Xi Jinping himself has stated that developing NEV capacity compliments other efforts to improve China’s industrial strength. China currently is not a dominant player in the global auto industry; thus, the country has every incentive to push new technologies and production methods while they have time to build capacity and expertise in these developing markets. In demonstrating a path forward that accounts for anticipated trends in fuel efficiency and energy availability, the iCET report provides and advocates for a roadmap for Chinese predominance in both the domestic and international auto industries. Furthermore, given the number of people in China whose livelihoods depend on automobile access, it is strategic for policymakers and politicians alike to consider the best mechanisms to become more self-sufficient in this industry.

Another reason behind the ICEV ban policy is that the anticipated decrease in fossil fuel use from NEVs would improve Chinese energy security. China’s oil demand drastically outpaces its domestic production ability. The country has been a crude oil net-importer since 1996 and has progressed from importing about two million barrels of oil per day in 2004 to over eight million per day in 2017. These trends continued in 2018 despite increasing trade tensions with the United States and Iran, demonstrating the strength of China’s oil reliance. New energy vehicles rely on non-oil resources that are more abundant domestically. Although electricity sources such as coal conflict with public health goals, China has a rich coal supply. Furthermore, Chinese investments in solar power, natural gas, hydropower, and biofuels all can help power increasingly energy efficient and non-combustive vehicle engines in a less environmentally destructive way. Given energy reliance’s adverse effects on Beijing’s pursuit of its own goals, it serves Chinese strategic interests to invest in products that use renewable energy that it can produce independently from geopolitical tides.

The final motivation for ICEV phase out is this policy’s public health and environmental benefits. Promoting NEVs is compatible with preexisting Chinese policies, such as the "Blue Sky War" – an initiative that aims to protect the environment and public health. One of the most important elements measured in the air quality index (AQI) is PM2.5, a particulate matter that originates from combustion engine exhaust and carries severe health consequences for prolonged exposure. This is particularly true among young children, the elderly, and otherwise sensitive groups. One 2018 report found that 1.6 million Chinese people die prematurely due to air pollution each year, a trend largely reflected in incidences of cancer and cardio-respiratory diseases. The combustion process also produces ground-level ozone, a compound that inhibits plant growth, leading to massive inefficiencies in China’s agricultural sector.

iCET's Proposed Strategy

Unlike previous technological leapfrogging in China, transitioning from ICEVs will require a slower approach. Phasing out ICEVs in any country is a tremendous challenge. For China, the task is further complicated by the large disparity in economic development between its underdeveloped Western, Southern, and Northeast regions and the developed Eastern coastal region where major cities like Beijing or Shanghai, municipal governments have already begun to limit ICEV sales and encourage NEV purchases through subsidies or preferential traffic policies.

In the past, China has piloted large reforms in a handful of small regions before nation-wide implementation. To account for regional disparities in economic development and the disruption caused by transitioning from ICEVs, the report suggests the Chinese government use a multi-tiered phase-out plan. Under this proposal, cities are divided into four tiers based on economic development and severity of the region’s environmental degradation (See Figure 1). Leading the transition are tier one and two areas including cities like Beijing and Shanghai as well as capital cities like Xi’an in China’s “Blue Sky War” regions which are some of the most polluted in the country. Tier three and four areas include much of the country’s Northeast and Western regions such as Inner Mongolia, Xinjiang, and Tibet which are heavily reliant on coal and economically underdeveloped.

The report also divides vehicles into five classes: public passenger vehicles; privately owned passenger vehicles; municipal service vehicles; coaches and intercity light freight vehicles; and medium and heavy freight vehicles (See Figure 2). Passenger vehicles and municipal service vehicles will transition from ICEVs first followed by medium and heavy freight vehicles and coaches. In the next two decades, ICEV use might increase as China’s hinterlands develop. However, the report predicts that ICEV withdrawal will come close to completion by 2050.

Implications of ICEV Phase Out

The report’s plan carries important implications for global markets concerning both cars and the components necessary to support them. One consideration is that China’s peak oil consumption – and the world’s – will come earlier than anticipated. A study from researchers at Stanford University predicts that peak demand for conventional oil will occur in 2035, whereas less traditional liquid inputs will remain popular until 2070. Either way, both peaks will come earlier if China changes course away from ICEVs and deemphasizes one of its economy’s most petroleum-dependent sectors.

Along with this trend, the rare earth metals that comprise components for electric vehicles will increase in value should electric cars become mainstream in China. Elements such as nickel, lithium, lead, and cobalt are essential for the batteries in HEVs, PHEVs, and electric vehicles in general. Whereas economies reliant on oil sales will experience downturn, those with the raw resources for electric vehicle battery components will see a surge in activity. While these economies already are aware of these commodities’ anticipated values, this spike in value will occur sooner than projected should China advance its NEV technology according to iCET’s plan. For example, 49 percent of global lithium production in 2015 occurred in South America, positioning this market it particular to have advantages in a less oil-dependent future.

Along these lines, widespread NEV production implies that actors in Chinese industry would become more interested in economies that already have capacity to produce battery components. Therefore, China would become more interested in metal producing countries like Argentina, Chile, and the Democratic Republic of the Congo, while also deemphasizing the importance of oil exporting nations such as Russia, Iran, and Saudi Arabia in its foreign policy.

Furthermore, Chinese involvement overseas has the potential to compound the previously listed effects and broaden the plan's applicability outside of China. Initiatives like the BRI allow China to shape not only its own development, but also that of other countries. Although China’s sheer size allows it to shape the global market regardless, its economic reach provides an even more direct mechanism to expand its export market and promote global ICEV phase out should leaders in Beijing be inclined to this report’s suggestions.

On a larger scale, the potential for Chinese ICEV phase out in favor of more sustainable alternatives speaks to the global challenge of resource scarcity heading forward. Should the suggestions in this report materialize as policy, China would be providing an example of how to avoid relying on one of the more scarcity prone elements in the global supply chain. Consequentially, if countries like the United States cannot demonstrate that their policies provide more abundant resources and a better way of life, other countries will be inclined to cooperate with China given its system’s ability to deliver.

Obstacles to Implementation

The study concludes by outlining potential risks and problems China might encounter during the transition from ICEVs to NEVs. These problems can broadly be split into three categories related to policy limitations, resource scarcity, and infrastructure inadequacy.

In terms of policy limitations, the study encourages Chinese policy makers to clearly outline a ban schedule on ICEVs by setting up a cross-province and cross-industry committee to understand domestic and international impacts of the ban. Currently, Chinese priorities for transitioning to NEVs remain unclear to both producers and regulators, leading to implementation confusion on the ground. To avoid uncertainty going forward, the report suggests that policy makers should clarify regulatory documents to clearly state goals and expectations. Additionally, the government should implement policies to provide unemployment support for ICEV employees and bankruptcy protection for ICEV companies.

The authors go on to outline several concerning resource scarcities that might impact continued development and production of NEVs. The first problem is a scarcity of rare earth metals. Currently, China’s cobalt demand accounts for more than half of the world’s total. Nickel and lithium are also identified as potentially scarce materials. The report advises Chinese leaders to open new rare earth supply chains as well as improve battery recycling utility to prevent supply disruptions.

Finally, the report acknowledges several infrastructural problems that hamper the transition from ICEVs to NEVs. China’s electric charging infrastructure is not capable of meeting the demand of daily use of electric and plug-in hybrid vehicles. This deficiency is partly due to an overall lack of charging stations across the country. In areas with charging stations, they are often inconveniently or illogically located.

Even if stations were adequately constructed, China’s power grid is currently incapable of supporting the needed energy demand. According to the NRDC, China’s peak energy load will increase by 62 percent in 2020 and 58 percent in 2030. NEV charging during peak load hours will further strain an already struggling grid. The report advises policy makers to incorporate solutions to these infrastructural problems in future NEV transition policies.

Other disruptive technologies, especially autonomous vehicles, will profoundly influence any transition plans. While the report briefly touches on such technologies, the authors are uncertain of their effect on ICEV phase out. Regardless, the iCET report offers a comprehensive plan for Chinese policy makers to follow in restructuring the world’s largest auto market.