Exploration into the Application Scenarios and Financing Potential of New Energy Vehicle Credits

LABEL： Automotive, Manufacturing & Industrial , Banking and Financing , Corporate and M&A ,

Developing new energy vehicles is an important strategic measure to achieve the transformation and upgrading of China's automotive industry, promote green development, and address climate change. The State Council's "Development Plan for New Energy Vehicle Industry (2021-2035)" proposes to promote the high-quality development of the new energy vehicle industry and accelerate the construction of a strong automobile country. In order to promote the achievement of the above goals, China officially established a new energy vehicle credit system as early as 2017 and has continuously improved it in recent years. This system, as a policy tool to replace subsidies for new energy vehicles, aims to promote the production of new energy vehicles and improve the energy-saving level of passenger cars through effective use of market regulation and policy intervention mechanisms. The basic operating principle is that if passenger car companies fail to meet the government set fuel consumption level for fuel vehicles or the standard value for new energy vehicle production/import volume, negative points will be generated. On the contrary, if a company meets the standards, it will generate positive points. Enterprises with negative points need to obtain positive points as compensation, otherwise they will face punishment. Similar to the carbon market, the new energy vehicle credit policy is a market-oriented incentive measure adopted by China to promote energy conservation and emission reduction in the automotive industry, and to promote the development of the new energy vehicle industry.
1、 What are the points for new energy vehicles

According to the "Parallel Management Measures for Average Fuel Consumption and New Energy Vehicle Points of Passenger Vehicle Enterprises" ("Dual Points Management Measures"), "Dual Points" respectively refer to the average fuel consumption points ("Energy Consumption Points") and new energy vehicle points ("New Energy Points") applicable to passenger vehicle enterprises (including traditional energy passenger vehicle and new energy passenger vehicle production enterprises and imported passenger vehicle supply enterprises) within China. The calculation methods for both are as follows:

Energy consumption points: The government sets a fuel consumption standard value, and calculates the corresponding positive or negative points based on the difference between the actual fuel consumption of the enterprise and the standard value.

           

*The energy consumption standard value and actual energy consumption value shall be based on the annual "Announcement on the Average Fuel Consumption and New Energy Vehicle Points of Chinese Passenger Vehicle Enterprises" issued by the Ministry of Industry and Information Technology. Please refer to the 2023 points announcement for details https://www.miit-eidc.org.cn/art/2024/7/10/art_1552_10813.html

New energy points: The government sets a new energy vehicle point ratio, which is multiplied by the traditional vehicle production/import volume of the enterprise as the standard value. Based on the difference between the actual value of the enterprise's new energy points and the standard value, the corresponding positive or negative points are calculated.

           

*According to Article 17 of the "Dual Credit Management Measures", the required credit ratios for new energy vehicles in 2019, 2020, 2021, 2022, and 2023 are 10%, 12%, 14%, 16%, and 18%, respectively. The requirements for the new energy vehicle credit ratio for 2024 and subsequent years have not been announced yet

For example, assuming that Company A produces 100000 traditional energy passenger vehicles and 10000 plug-in hybrid passenger vehicles in 2023, according to Annex 2 "Calculation Method for New Energy Passenger Vehicle Type Points" of the "Dual Credit Management Measures", the vehicle type point for plug-in hybrid passenger vehicles is 1. According to the above formula, A car company's new energy points are 1 × 10000-18% × 100000=-8000 (points).

Both negative energy consumption points and negative new energy points require positive points to compensate. Negative energy consumption credits can be offset through positive energy consumption credits carried over by the company, positive energy consumption credits acquired from affiliated companies, positive energy credits generated/carried over by the company, positive credits in the company's credit pool, and positive credits purchased from other companies; The negative points of new energy can be offset by the new energy positive points generated/carried over by the company, the new energy positive points in the company's point pool, and the purchase of new energy positive points from other companies. From this, it can be seen that only new energy positive points can be used for paid transactions, bringing tangible benefits to enterprises.
2、 Application scenarios of new energy vehicle credits
（1） For compliance of passenger car enterprises

According to the "Dual Credit Management Measures", if passenger car production enterprises and imported passenger car supply enterprises in China fail to offset negative energy consumption points and new energy negative points within the prescribed time limit, relevant departments will not include new products produced/imported by the enterprise that do not meet the fuel consumption target value of the "Evaluation Methods and Indicators for Passenger Car Fuel Consumption" in the "Announcement of Road Motor Vehicle Production Enterprises and Products" or issue mandatory product certification certificates, and may impose penalties in accordance with relevant regulations such as the "Development Policy of the Automotive Industry" and the "Regulations on the Management of Mandatory Product Certification". In the entire process of offsetting negative points in enterprises, attention should be paid to the following time nodes, proportions, and validity period restrictions:

           

If the energy consumption points and new energy points of this year have not been used up, they can be carried forward to subsequent years for use. However, enterprises should pay attention to the limitations on the validity period of the transfer and the annual transfer ratio, as shown in the following diagram:

Energy consumption points

           

New Energy Points

           

In recent years, the production and sales of new energy vehicles have significantly increased, resulting in a situation where the supply of new energy credits exceeds the demand, which has also led to significant fluctuations in the price of new energy credits. According to data from the Ministry of Industry and Information Technology, the average unit price of new energy vehicle credits in 2018 was mainly concentrated within 1000 yuan/min. In 2019, nearly 90% of transactions had a unit price of no more than 500 yuan/min, followed by 1204 yuan/min in 2020 and 2088 yuan/min in 2021. By 2022, due to the abundant supply of new energy vehicle credits, the average unit price had decreased by 45.9% year-on-year to 1128 yuan/min. In order to better balance the supply and demand relationship of annual points and regulate the price of points, the "Double Points Management Measures" will be revised in 2023 and implemented on August 1, 2023, adding a "points pool" system. The key mechanism of the "points pool" includes:

Storage of new energy positive points: When the national new energy positive points are higher than 200% of the sum of the national new energy negative points and the energy consumption negative points (minus the energy consumption positive points obtained through carryover and transfer), the point pool will be opened, allowing enterprises to store new energy positive points in the point pool. The storage quantity shall not exceed the product of the positive points of new energy vehicles in the previous year and the storage ratio of the enterprise. The storage validity period is 5 years and there is no requirement for the transfer ratio.

Extracting new energy positive points: When the national new energy positive points do not reach 150% of the sum of the national new energy negative points and the energy consumption negative points (deducted and transferred energy consumption positive points obtained), the point pool will be opened, allowing enterprises to extract new energy positive points from the point pool. The extracted quantity shall not exceed the product of the positive integration of new energy vehicles stored in the integration pool by the enterprise and the extraction ratio.

The extracted new energy positive points that have not been used after the end of the annual point trading should be returned to the point pool.

Through the "points pool" arrangement, when the supply of new energy positive points in the market exceeds the demand, enterprises can save the points and not engage in current buying and selling, which will increase the point price. After the price of points rebounds in the future, companies can extract points for monetization and obtain higher returns in the future. In addition, the "points pool" system also helps to enhance the predictability of point prices and maintain the stable development of the automotive industry.
（2） Used for trading

As mentioned earlier, one way for companies to offset negative energy consumption and new energy credits is to purchase positive new energy credits from other companies. The "Table of Average Fuel Consumption and New Energy Vehicle Credit Calculation of Chinese Passenger Vehicle Enterprises in 2023" released by the Ministry of Industry and Information Technology shows that joint venture car companies are the main demanders of the credit market, that is, the main enterprises with negative credits. In 2023, the top three companies with the highest positive points for new energy are two subsidiaries of BYD and Tesla. If calculated based on the average unit price of 1128 yuan/min for new energy vehicle credits in 2022 [3], BYD and Tesla will receive new energy vehicle credits worth 8.677 billion yuan and 3.237 billion yuan respectively in 2023. According to NIO's financial report, in the 2023 trading year, NIO generated a revenue of 10.6 million yuan from selling new energy vehicle credits; Tesla's Q4 2023 financial report shows that the total sales of Tesla's global compliance points (including new energy vehicle points in China and carbon points in other countries) reached $1.79 billion in 2023.

In order to coordinate the trading of new energy points, the Ministry of Industry and Information Technology has established a platform for managing automobile fuel consumption and new energy vehicle points ("Point Management Platform"). New energy points can be traded on the platform through bidding and targeted trading. In addition, the points management platform can also operate the accounting, transfer, and data reporting of points.

The tradable attribute of new energy vehicle credits lays the foundation for the development of its financing function. As a tradable asset, new energy vehicle credits can not only be bought and sold in the market, but also further explore their value through financial instruments, providing new financing channels for enterprises. The following will elaborate in detail.
（3） Social and brand value

The higher the energy-saving level of the enterprise's research and development of fuel vehicles, the higher the output of new energy vehicles, and the easier it is for the enterprise to obtain more positive points. Actively participating in the accumulation and trading of points for new energy vehicles can enhance the company's image in environmental protection and sustainable development, and increase public recognition and trust in the brand. Secondly, car companies have demonstrated their commitment to emission reduction targets through effective management and utilization of points, further consolidating their leadership position in the industry. In addition, with the increasing awareness of environmental protection among consumers, companies with good credit performance are more likely to attract green consumer groups, thereby enhancing market competitiveness and brand loyalty. Therefore, new energy vehicle credits not only provide trading and financing opportunities for car companies at the economic level, but also serve as an important tool to enhance social responsibility and brand value.
3、 Discussion on the Financing Feasibility of New Energy Vehicle Points

For companies with surplus positive points, in addition to being sold to car companies with negative points to generate revenue, other potential functions of positive points are still undeveloped. The continuous development of laws and regulations such as the "Dual Credit Management Measures" has provided broad imagination space for the credit financing market of new energy vehicles. Although the dual credit system is gradually improving, the development of supporting policies and infrastructure has not been as expected, especially the legal nature of new energy vehicle credits is not yet clear, which has added some uncertainty to the development of financial products for new energy vehicle credits. For example, how to establish guarantees based on new energy vehicle credits, whether the security interests established are movable property mortgages or rights pledges, how to handle guarantee registration, and how to specify them all need to be explored.

In recent years, although local governments have introduced policies to encourage the development of innovative products such as credit financing for new energy vehicles, and there have been cases of credit accounts receivable pledge financing for new energy vehicles in the market, due to the limited scope and scale of the credit trading market, financial institutions are still in the exploratory stage of accepting credit as collateral for financing.
（1） Legal nature of points for new energy vehicles

At present, the legal nature of new energy vehicle credits is not clearly defined in China's laws and regulations, and there is little discussion on this issue in the academic and practical circles. Even in the United States, where the car credit system has been implemented for many years and has considerable practical experience, there is no clear legal regulation on the legal attributes of new energy vehicle credits.

In terms of accounting treatment, the basic principle stipulated in the Notice of the Ministry of Finance of China on Issuing the Interim Provisions on Accounting Treatment of Carbon Emission Trading (Finance and Accounting [2019] No. 22) is that when key emission enterprises obtain carbon emission quotas through purchase, they should recognize the obtained carbon emission quotas as "carbon emission rights assets" on the purchase date and measure them at cost. If carbon emission quotas are obtained free of charge through government allocation or other means, they will not be accounted for. The same logic seems to be applicable to new energy vehicle credits, distinguishing between traded new energy vehicle credits and free issued new energy vehicle credits, in order to further clarify the "asset" attribute of new energy vehicle credits. After checking the financial statements of several leading new energy vehicle companies, it has not yet been recorded that the new energy vehicle points have been added to the table.

Although the legal nature of new energy vehicle credits has not been fully clarified, it does not hinder the market from actively exploring innovative financing practices. For emerging asset classes such as carbon credits and data assets, they also face similar legal nature definition issues. The legal nature definition of these asset classes is a gradual process, while innovation and experimentation in practice can drive market development and maturity. For example, carbon quotas and carbon credits, as another emerging asset, are gradually increasing in cross-border transactions, and the relevant legal framework and market mechanisms are constantly developing and improving. China has also issued high-level policies such as the "Guiding Opinions on Strengthening Data Asset Management" in the field of data assets, aiming to establish a data asset management system and promote the compliant and efficient circulation and use of data assets. Therefore, although the legal definition of emerging asset categories such as new energy vehicle credits is still under discussion, it has not become an obstacle to market innovation. On the contrary, market entities actively explore new financing and business models by utilizing existing market and legal frameworks to maximize asset value and promote the healthy development of the entire industry.
（2） Fundamentals of Regulations and Policies
1. Local policies encourage development

The development of new energy vehicle credit financing business requires more policy forces to promote. In recent years, some local governments have introduced policies to encourage the development of innovative products such as credit financing for new energy vehicles. For example, in January 2023, Zhejiang Province issued the "Action Plan for Accelerating the Development of New Energy Vehicle Industry in Zhejiang Province", which proposed to "encourage financial institutions to develop innovative products such as new energy vehicle credit income pledge loans"; In February 2023, Shenzhen issued the "Opinions on Shenzhen Financial Support for the High quality Development of the New Energy Vehicle Industry Chain", which includes twelve financial measures to support the high-quality development of the new energy vehicle industry chain, including "actively exploring the development of innovative products such as new energy vehicle point income pledge loans". The promotion of policies has brought space for the development of new energy vehicle credit financing business, indicating that this field may usher in more innovation and opportunities.
2. "Integral Pool" System

As mentioned earlier, the validity period of the points stored in the integration pool is five years, and there is no requirement for a carry over ratio. Compared to not entering the points pool, the remaining points can be carried over to subsequent years for a validity period of only three years, and there is a limit on the carry over ratio every year. This creates more uncertainty and risk for businesses when utilizing points. The establishment of the points pool extends the validity period of points and provides more flexible usage space for enterprises.

The mechanism of the points pool effectively stabilizes the price of points by balancing market supply and demand. This price stability and extended validity period reduce the risks caused by market fluctuations, enhance the attractiveness of new energy credits as financial instruments, and make credits or credit income rights more easily accepted by creditors as collateral, further promoting the development of credit financing functions.
（3） Exploration of possible financing methods
1. Accounts receivable/pledge of income rights

Due to some doubts about the legal nature of using new energy vehicle points as collateral and the feasibility of guarantee registration in practice, market entities have begun to attempt to provide financing through accounts receivable/revenue pledge. In the exploration stage of credit financing for new energy vehicles, local policies and practical cases have adopted a more secure approach, pledging the revenue rights of new energy vehicle credits.

In November 2021, the Agricultural Bank of China Huanggang Branch issued a "Green Car Loan" of 10 million yuan to Hubei Xinghui New Energy Intelligent Vehicle Co., Ltd., a subsidiary of WM Motor Group, marking the first new energy vehicle credit pledge loan in China. This credit is pledged with the "spot+forward" income right of enterprise new energy vehicle points, with a limit of 50 million yuan and a term of one year. The pledge right is registered and established in the unified registration and publicity system of the People's Bank of China Credit Information Center for movable property financing. [6]

In order to assist creditors in regulating the accounts receivable from the sale of points, creditors may require the pledgor to open a special accounts receivable pledge account and have the creditors control the account to ensure that the accounts receivable from the sale of points are only used to repay the secured debt. The "spot+forward" income rights correspond to existing and future points sales of accounts receivable. According to the provisions of the Civil Code, a right pledge can be established for existing and future accounts receivable, and the pledge is established upon registration of the pledge. According to the "Unified Registration Measures for Movable Property and Rights Guarantee", creditors should register accounts receivable pledge through the People's Bank of China Credit Information Center's unified registration and publicity system for movable property financing.
2. Repurchase transactions

In the case of legal uncertainty in directly pledging new energy vehicle points as collateral, another possible alternative guarantee method is repurchase transactions. Repurchase transaction is a financial contract in which one party (initial seller) sells its holdings of new energy vehicle credits to another party (initial buyer) and agrees to repurchase these quotas from the buyer at an agreed price on a future date.

Unlike pledge transactions, this type of repurchase (essentially a buyout style repurchase) transaction directly changes the ownership of the repurchase target (i.e. new energy vehicle points), and therefore does not rely on the legal effect of the pledge to take effect. In theory, any tradable asset with high liquidity has the potential for repurchase transactions.

The party holding positive points may theoretically obtain short-term funding through repurchase transactions. However, repurchase transactions also involve higher credit risks due to the inevitable transfer of ownership of the repurchase target in their trading model, especially in situations of significant market volatility. In order to cope with potential default risks, both parties can negotiate the establishment of margin mechanisms (including initial margin (IM) and variable margin (VM)).
3. Asset securitization (ABS)

New energy vehicle credits and carbon assets are both tradable assets. In July 2024, the "Shenzhen Guarantee Group Nanshan District SME 19 Asset Support Special Plan" was listed and issued on the Shenzhen Stock Exchange, becoming the first carbon asset securitization product for small and medium-sized enterprises in China. The underlying asset of this ABS is supported by the pledge loan debt of corporate carbon emission rights. This model means that companies use their carbon emission rights as collateral, pledge loans to form debt, and then package these debt into asset pools to issue asset-backed securities (ABS) products.

Referring to the above carbon asset ABS model, new energy vehicle credits may also consider designing specific structures to issue ABS products for financing. One possible model is similar to the pledged loan debt ABS model mentioned earlier, where the debt secured by new energy vehicle credits is used as the underlying asset of the ABS structure. The difficulty may still lie in how to use new energy vehicle credits as financing to increase credibility, as mentioned earlier, and whether feasible alternative methods can be found beyond traditional pledge financing.
epilogue

New energy vehicle credits are not only an indispensable tool for corporate compliance, but also have enormous economic value. With the rapid development of the new energy vehicle industry and the gradual improvement of the dual credit management regulations, new energy vehicle credits have the potential to become an important supplement to financing for car companies in the future. As an emerging asset, new energy vehicle credits, like other emerging assets, face challenges caused by gaps in traditional laws and regulations. While addressing risks in emerging markets, they also bring new opportunities. We look forward to future market entities and regulatory agencies jointly exploring new financing ideas, innovating risk mitigation measures, better responding to market fluctuations and credit risks, and enhancing the application scenarios and financing feasibility of new energy vehicle credits.

In addition, the "Dual Credit Management Measures" also propose to timely study and establish a linkage mechanism between the credit system and other carbon reduction systems. The automotive industry, as an important sector for energy consumption and carbon emissions, has not yet been officially included in the national mandatory carbon market or voluntary carbon market. But in order to achieve the connection between new energy vehicle credits and the carbon market, it may be necessary to address issues such as how to establish a fair, just, and open pricing system, and how to establish industry recognized carbon trading accounting standards and norms. I look forward to seeing more detailed regulatory policies in this area in the future.