Green Autos Drive China's Economic Future

On June 30, the Chinese government announced hefty subsidies for green vehicles, which will play a crucial role in the development of a domestic green auto industry. It is a smart investment for China as the country is relying on its massive and ever-expanding auto market to be the catalyst for future GDP growth, while at the same time it aims to reduce carbon intensity, defined as CO2 emissions per unit of GDP.

Currently, China is the largest and fastest-growing auto market in the world, which presents opportunities and challenges. China is engaged in a balancing act. It seeks to switch from export-led growth by encouraging domestic consumption, and in this process, supporting the domestic car market plays a vital role. However, automobiles account for 25 percent of carbon emissions worldwide. Hence, the growth of the auto market is counterproductive to China s efforts to reduce carbon intensity by 45 percent of 2005 levels by 2020.

Right now, China s per capita carbon emissions are actually lower than those of developed countries like the United States, and the main reason for this is because of the gap in the level of car ownership one that is growing narrower on a daily basis. If Chinese consumption is not channeled toward green autos, then many of the country s other efforts, such as developing clean energy and updating the inefficient grid, will be in vain as the rise in auto emissions will nullify any gains.

This is why subsidies to China s green auto industry are timelier than ever. China is home to a number of companies that are leading the world in the development of all-electric and hybrid vehicles. Chinese automakers pin their hopes on the burgeoning green auto market because it is one where no one company has established dominance.

Green cars were the stars of an auto show held in Beijing earlier this year. Leading automaker SAIC unveiled its innovative, if somewhat unusual, Leaf concept car and BYD auto showed off its E6 model, which is scheduled to go on sale in the United States by the year s end.

At present, green cars would seem to have greater potential in U.S. and European markets where environmentalism possesses a certain chic and can influence buyers as much as, if not more than, other factors such as cost. But at the same time, those markets continue to be affected by the lingering aftershocks of the financial crisis, with unemployment remaining high and relatively stagnant GDP growth still a nagging problem.

If Chinese automakers hope to strike it big in this green gold rush, they need to look to their home market. This too is problematic, however, since many of China s car-buyers are first-time buyers who, according to analysts, tend to be more concerned with costs than their Western counterparts. At present, the cost of all-electric and hybrid vehicles when compared to much cheaper conventional autos remains prohibitively expensive for Chinese consumers.

For example, in March of this year, BYD released its F3DM model, which had previously been available only to institutional customers, to individual consumers at a price of 149,000 yuan. This is more than double the cost of cars that run on conventional fuel.

Fortunately, the generous new subsidies of 60,000 yuan and 50,000 yuan for pure electric cars and plug-in hybrids, respectively, go a long way to making alternative energy vehicles more affordable to the average Chinese consumer. But even with the subsidies these cars may still remain out of the price range for most ordinary Chinese who are first-time buyers.

Given the lower cost of conventional autos and the availability of relatively cheap gas, Chinese consumers still may have little rational incentive to choose green autos. It s possible that the central government may need to implement further measures, such as a gas tax or maybe even a tax on high-emission conventional fuel vehicles, to drive consumers toward greener options in order to close the gap.

If China can boost domestic consumption vis- -vis subsidies and other measures, it will create an economy of scale, which will ultimately drive the cost of manufacturing green cars down much to the benefit of China and the world as a whole.