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Electrification: Paving the road to emissions reduction

As investors focused on long-term sustainability, we have long focused on emissions, energy efficiency as well as long-term opportunities and threats in business models as it relates to their sustainability and competitiveness over the long run. This includes evaluating these considerations from an operations perspective, but also from a products and services perspective. Greening of transportation, greening of real estate infrastructure, greening of industrial tools and equipment—these are some examples of product life cycle innovation, on the road to drastically reduced emissions in the long term. In this piece, we focus on the potential opportunities relating to electric vehicles.

On-road vehicles are responsible for the majority of transportation-related greenhouse gas emissions. In particular, emissions from light-duty vehicles, which include passenger cars and light-duty trucks, accounted for 61% of total sector combustion emissions in 2016. Emissions from medium- and heavy-duty vehicles accounted for 23% of total sector combustion emissions while combustion emissions from all other transport modes together made up the remaining 16% of total transportation sector combustion emissions.

Electric Vehicles (EVs) are two to four times more efficient than conventional internal combustion engine models, which can reduce reliance on fossil fuels and can enable significant reductions in greenhouse gas emissions (GHGs) as well as air pollutants [IEA Global EV Outlook 2021].

By emitting no tailpipe emissions, EVs have the potential to significantly decarbonize the U.S. transportation sector. The question remains, however, how long will this take? While EVs of all types are already displacing over 1 million barrels of oil demand per day, the U.S. transportation sector currently remains far from zero emissions, as the composition of the current on-road vehicle fleet is mostly gasoline vehicles and the impact on overall GHG emissions is limited in the near term. EVs represent a growing yet small share of all vehicles on the road today while internal combustion engines will remain on the road for at least another decade or longer before being completely phased out. According to Bloomberg New Energy Finance (BNEF), as soon as 2030, nearly 60% of new car sales must be zero emissions, to stay on track for BNEF’s Net Zero Scenario.

EV commitments from governments and the private sector are necessary for the world’s net-zero goals to be met in the transportation sector. So far, gradual tightening of fuel economy and tailpipe CO2 standards, in the EU in particular, has augmented the role of EVs to meet the standards. Today, over 85% of car sales worldwide are subject to such standards. To date, more than 20 countries have announced the full phase-out of internal combustion engine (ICE) car sales over the next 10 to 30 years, including the U.K., China and several European countries. [IPCC, 2018] In response, the world’s major automakers have stepped forward with their own commitments to phase out internal combustion engine vehicles over the next decade.

Automaker Commitments

  • GM will invest $35 billion globally in EV and AVs through 2025. GM also plans to be carbon-neutral? by 2040 in its global products and operations.
  • Ford is investing $22 billion through 2025 to deliver battery EVs, and plans to be carbon-neutral by 2050.
  • Honda will sell only EVs and hybrids in Europe after 2022. By 2030, Honda says 40% of its North American vehicle sales will be either battery electric or hydrogen, and by 2040 all gas cars will be phased out.
  • Toyota will have 70 electrified models by 2025, 15 of them battery EVs and seven of them with the Beyond Zero bZ brand. Pickups will also get electrified, and Toyota has the goal of being carbon-neutral by 2050.
  • Volkswagen says that battery EVs will be 70% of its sales in Europe in 2030, up from a projected 35%. For the U.S. and China, the VW brand goal is more than 50% full-electric vehicle sales by 2030. The VW Group has 70 new electrified models in the pipeline, and several already on the market.

EVs Are on the Cusp of Rapid Expansion

Over the past decade, we have seen sales of EVs go from a trickle to a steady stream of rapid adoption. While EV penetration necessary to reach net zero by 2050 is a long way off, there seem to be signs that 2020 was a pivotal year for EVs, which are now on the cusp of rapid expansion and have momentum to move the transport sector towards a path to decarbonization. We believe the transportation sector will play a critical role in achieving the goal of the Paris Climate Change Agreement to keep global temperature rise to well below 2 degrees Celsius above pre-industrial levels.

Over 1 billion passenger cars travel the streets and roads of the world today, and by 2040, that number is set to double to at least 2 billion. There were 10 million electric cars on the world’s roads at the end of 2020, following a decade of rapid growth. Vehicle manufacturers have since announced increasingly ambitious electrification plans. Out of the world’s top 20 vehicle manufacturers, which represented around 90% of new car registrations in 2020, 18 have stated plans to widen their portfolio of models and to rapidly scale up the production of light-duty electric vehicles. The model availability of electric heavy-duty vehicles is also broadening, with four major truck manufacturers indicating an electric future.

As EVs continue to drive advances in battery technology, batteries keep getting better and more cost competitive. Average battery energy density is rising at 7% per year and new chemistries are hitting the market faster than ever. Maximum EV charging speeds are also rising. Lithium-ion battery pack prices fell 89% from 2010 to 2020, with the volume-weighted average hitting $137/kWh. Many expect underlying material prices will play a larger role in the future, but the introduction of new chemistries, new manufacturing techniques and simplified pack designs will keep prices falling.

Technology Solutions Enabling the Path to Electrification

Despite all the progress to date, much remains to happen in order to hit the 2050 Paris Climate Agreement goals, according to a report by the World Resources Institute.

According to the report, an aggressive multifaceted approach is needed to accelerate the progress. We can’t look to just one piece of the industry to solve the problem; for example, we need the grid/charging infrastructure for the renewable energy supply to power the EVs; we need more semiconductors; we need solutions for greening commercial trucks and transport. And while these technologies can improve the CO2 profile of vehicles on the road, there is potential for technologies like autonomous ridesharing to pull tens of millions of vehicles off the road altogether. The report indicates that all of these things in tandem will have a multiplier effect on achieving meaningful goals to expand electrification. We discuss the progress with a few of these solutions below:

Semiconductors

EVs require both more semiconductor content and more advanced chips than gasoline-powered vehicles. Semiconductors enable EVs to be efficient, safe and interactive, and are necessary for a car’s battery, powertrain and firmware. We believe the demand for semiconductors will only continue to grow and enable the expansion of EVs. Current supply chain shortages can largely be traced back to production cutbacks due to the COVID-19 pandemic.

Auto Parts/Auto Makers

Automakers are now enabling EVs to go mainstream. Every international automaker is introducing battery cars, and plug-in hybrid options are increasingly part of model lines. Global automakers are planning to spend more than half a trillion dollars on electric vehicles and batteries through 2030, according to a Reuters analysis, increasing investments aimed at meeting increasingly tough decarbonization targets. The most recent analysis shows carmakers planning to spend an estimated $515 billion over the next five to 10 years to develop and build new battery-powered vehicles and shift away from combustion engines.

Grid and Charging Station/Infrastructure

As the country adds more EVs to the road, charging infrastructure will be needed to support them. According to Department of Energy data, as of 2021 the U.S. has fewer than 46,000 EV public charging sites compared to more than 150,000 gasoline fueling stations.

President Joe Biden's $1 trillion infrastructure package, which was recently passed by Congress, includes $7.5 billion toward a nationwide network of 500,000 EV charging stations by 2030. We believe this is likely to fall short of what is needed but is seen as a much-needed boost for meeting the most immediate infrastructure needs.

 

Daniel Hanson is the Senior Portfolio Manager and Head of the U.S. Sustainable Equity team at Neuberger Berman, a sponsor of Firstlinks. This material is provided for informational purposes only. Nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security.

For more articles and papers from Neuberger Berman, click here.

 

5 Comments
GMS
June 17, 2022

There is no paving in sight yet in Australia. We are still on a very corrugated gravel road. The infrastructure is insufficient in certain areas and the state of maintenance is less than to be desired or typical Australian. Chargers are far and few between and out of order for weeks on end. If one were reliant on pure BEV then planning a longer trip becomes more difficult than a night flying exercise where you have to plan for alternates. Would not want to complicate my holiday that much. The other alternative is a plug in hybrid and here the Victorian Government has their hand in your pocket. Asking for 2c per km of road user charge on top of what you pay already on fuel excise. Considering the very same vehicle available as pure petrol and PHEV, the owner of the PHEV is overcharged by 15% with RUC + Fuel excise as compared to fuel excise only in the petrol version. Interesting concept to incentivise emission reduction.

I mean nothing against the concept of collecting a Road User Charge but it has to be in proportion. Because on the other hand the pure BEV would pay just 68% of RUC compared to the pure petrol vehicle or 59% as compared to the PHEV. But numeracy skills don’t seem to be the virtue of governments.

Trevor G
June 17, 2022

Why should the taxpayer subsidise development of EV charging stations infrastructure? As far as I know taxpayers don’t subsidise petrol stations.

Dennis
June 16, 2022

The most practical and economic sound approach for australia to take in the short to medium term is to fully develop the hybrid EV. This could ensure a balanced and timely transition period to full electrification of on road vehicles. This will take into account the delay in the development of infrastructure for EV Charging stations. huge issues
that have yet to be discussed - what will be the cost too charge EV’s at commercial charging stations and what tax will governments introduce for charging EV’s?






Lyn
June 16, 2022

Avidly read EV articles to learn re future replacement of vehicle. Price major inhibitor for the young and many retirees, seems nothing in mid-range cost, say $30,000 for small sedan, young would probably prefer cheap car & save for home deposit rather than $50,000 for an EV. Charging infrastructure still minor for trips on notoriously long distances in Australia and few motels/hotels yet to be equipped adequately for overnight charging. For city drivers and those with no driveway, will we be tripping on cables across footpaths? Just did 4500 K country trip & particularly looked for charging signposts on roads/hotels to assess re future holiday trips, saw no signposts, no mid-range motels equipped yet thro country NSW though did see a few new rest areas with charging, but not in older ones out in bush so it's a problem to solve due to distances and remoteness of where many like to travel. Recently saw row of only 6 chargers at relatively new shopping centre on level where spaces for hundreds of cars. No doubt there will be app to locate stations but no assurance if hundreds race for same points. Lone females won't feel safe waiting in dark corners of parking levels and country rest areas for long periods. Many conundrums to solve if we are to go green.

Dudley
June 16, 2022

In Australia, EVs cars are a fashion accessory - except where a car travels several times average distances.

The larger purchase price results in larger depreciation and life-cycle cost and time to refuel is a waste of time for too many. Non-EV owners subsidise EV owners purchases.

When life-cycle costs and refuelling time better ICE without subsidies then EVs have a future - until virtual reality does it better.

 

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