**5. Conclusions**

Our analysis showed that China's passenger vehicles underwent significant technological progress due to the rapidly increasing fuel-efficient technology adoption rate. However, to achieve the FCR target of 5.0 L/100 km in 2020 and 4.0 L/100 km in 2025, more than a 5% annual FCR improvement rate is needed from 2016. Our findings show that if we hold power and curb mass constant, a 2.3% to 2.9% annual technological progress was achieved between 2009 and 2016 for local and joint venture brands, respectively, which means an extra 2% technological progress is needed to achieve the future targets. As the NEVs are included in carmakers' CAFC calculations for compliance with the standard, and counted as multiple vehicles, the target for gasoline vehicles in 2020 could be higher than 5.0 L/100 km. We predicted that 1.7 million NEVs will be produced in 2020 (the target of 2 million NEVs including passenger and commercial vehicles) with a ratio of EV to PHEV of 3:1. We found that the FCR target of the conventional vehicle in 2020 is around 5.7 L/100 km, which means an annual FCR improvement of 4.4% is needed based on the year 2016. If the ERFC value of 100% is retained, an extra annual technological progress rate of about 2% is still needed to achieve the 2020 FCR target. Our results indicate that China still faces significant challenges in achieving the FCR targets of 2020 and the future.

Our findings show that the technological progress of local brands is slower than that of joint venture brands. The regression results show the effects of fuel-efficient technologies, such as advanced transmission, GDI and turbocharging, for local brands are smaller than those of joint venture brands, which gives a reasonable explanation for why the technological progress of local brands is slower than that of the joint venture.

Our results show that the ERFC value of China's local brands is decreasing from 63.5% (which means that 63.5% of total FCR reduction potential is used for improving fuel efficiency) between 2009 and 2012 to 9.1% between 2012 and 2016. This is mainly due to three reasons: 1) Local brands are more responsive to the high market demand for larger size and better performance vehicles such as SUVs and MPVs than joint venture brands. 2) The absence of non-compliance penalties of CAFC standards during 2012–2016. 3) Strong NEV incentive measures, such as multipliers, electric consumption considered as zero in the FCR standard, and fiscal incentives, resulted in rapid development of the NEV market, which reduced the willingness of local brands to develop fuel-efficient vehicles.

China introduced the CAFC and NEV Credits Regulation in 2017. All carmakers need to comply with specific CAFC requirements, while companies with large-scale production of conventional passenger vehicles need to comply with both CAFC and NEV targets. Under dual credit regulation, NEV credits can balance the negative CAFC credits. The carmakers with negative CAFC or NEV credits that are unbalanced will be not allowed to produce and sell new models that cannot comply with specific 2020 targets in the Phase IV standard (which is a stepped curve based on curb weight). As the deployment of NEV and fuel-efficient technology are two main compliance paths, in the future, we need not only pay attention to the tradeoff between FCR and vehicle attributes, but also the tradeoff between NEV and conventional vehicle technological progress under the newly introduced dual-credit scheme.

**Author Contributions:** Conceptualization, J.Z., R.Y. and Y.L.; methodology, J.Z., R.Y. and Y.L.; resources, D.Z.; writing—original draft preparation, J.Z., R.Y., Y.L. and Y.Z.; writing—review and editing, J.Z. and R.Y.

**Funding:** This research was funded by Energy Foundation China, grant number G–1607–24947 and G–1607–24944. **Acknowledgments:** The authors would like to thank the anonymous reviewers for their reviews and comments. **Conflicts of Interest:** The authors declare no conflict of interest.
