In our view there is scope for policy support to strengthen and spread to other markets as national governments take the risks posed by climate change increasingly seriously. A growing number of countries have now adopted so-called ‘net zero’ targets. As specified by the IPCC (Intergovernmental Panel on Climate Change), these net zero targets require emissions to fall to zero by 2050 and are designed to restrict the rise in global temperatures to 1.5°C. According to the UN, over 110 countries have now made some form of pledge to reach carbon neutrality (net zero on CO2
) by 2050, with China aiming for net zero by 2060. Eight countries including the UK have already enshrined a 2050 net zero objective into law and the EU’s Climate Law, which is likely to set deep interim (2030) emissions cuts, is expected to pass in 2021.
Exhibit 3: The IEA estimates net zero requires EVs to reach 50% of new car sales by 2030
Source: IEA (2020). World Energy Outlook. https://www.iea.org/reports/world-energy-outlook-2020/achieving-net-zero-emissions-by-2050#abstract. All rights reserved. As modified by Edisongroup Note: The IEA’s ‘passenger car’ segmentation may not directly equate to that used elsewhere in this report. NZE2050 is the IEA’s Net Zero scenario, STEPS is the IEA’s ‘stated policy’ scenario and Sustainable Development Scenario (SDS) reflects the goals of the Paris agreement.
These net zero targets have particular implications for the pace of decarbonisation required in the automotive sector. Given the ambition to reduce emissions to zero by 2050 and an average car lifespan of at least 12 years, it requires ICE sales to end (globally) by around 2035. Modelling by the IEA suggests that to be on track to deliver this and to ensure transport emissions remain within a net zero budget, annual new EVs sales must rise to over 50m by 2030 or 50% of new car sales globally. Meeting this target also requires some behavioural change and some adoption of fuel cell vehicles and EVs in road freight.
The need to align transport policy with net zero targets is beginning to feed directly into national policy. Until recently most of the countries with targets to completely phase out new ICEs sales were relatively small, or had set a date beyond 2035 – incompatible with a net zero target. However, over the last year policies have strengthened, particularly in jurisdictions that have made broader commitments to net zero. In September 2020 California announced all new car sales would be zero emissions by 2035. November saw the UK bring forward the cut-off date for ICE car sales from 2040 to 2030 (2035 for PHEVs) and in December Japan announced it would phase out ICE car sales by the mid-2030s. Together these commitments cover c 8m of annual car sales or 10% of the current market. Total national policy commitments, either to completely phase out sales of new ICE cars, or to target EVs reaching a certain proportion of new car sales, currently cover 19% of annual car sales by 2035 (Exhibit 4). There is no guarantee that countries will reach these targets of course and doing so may require additional policy support, however improvements in technology and falling costs are making these early phase-out targets appear more feasible.
Exhibit 4: Share of car sales covered by existing policy commitments to switch to EVs
Source: Edison Investment Research. Chart shows the proportion of the current annual car sales covered by current policy commitments, segmented by type of target (complete phase out (a and b) or partial target (c)). Note: (a) complete phase out target set before 2020 and year of phase out (in brackets): Norway (2025), Denmark, Iceland, Ireland, Israel, Netherlands Slovenia, Sweden (all 2030), Canada, France, Singapore, Sri Lanka (all 2040); (b) complete phase out target set in 2020 and year of phase out (in brackets): UK (2030), California and Japan (2035 and “mid 30s” respectively); and (c) Partial phase out target showing the proportion of new car sales EVs are expected to reach and the year (in brackets): China (20% by 2025), Colombia (10% by 2050), Pakistan (30% by 2030), South Korea (25% by 2030)
Where could policy strengthen?
Greater policy support looks likely in the US and could have a big impact on global EV growth. The US accounted for 18% of car sales in 2020 but EV penetration (excluding California) was just 1.6%. Biden’s recently proposed $2trn jobs plan aims to allocate $174bn (9%) over eight years explicitly to ‘win the EV market’. It aims to provide point of sale and tax rebates to incentivise consumers to buy US-made EVs, grants and other incentives to local government to build a network of 500,000 chargers and begin electrifying the federal fleet.
Additional policy measures could support this transition. Although it is unlikely the US will set a phase-out date, it may choose to strengthen its fuel-economy legislation. Reinstating the 54mpg (4.4 litres per 100km or c 102g CO2
e/km) by 2025 fuel economy standard for new vehicles, lowered to 40mpg (5.9 litres per 100km or c 137g CO2
e/km) by Trump, would help. While it would still be behind both the EU and China, it would imply accelerating the average annual increase in fuel economy from 2.4% currently to c.5% – a pace of efficiency gain that can only be met by increasing the mix of EV sales. As with the infrastructure plan, it is not a certainty that these proposals make it into legislation.
The EU could strengthen its fleet targets further. Existing 2025 and 2030 fleet-wide emission targets may need to be made even more stringent to comply with the pending European Climate Law. Most large EU countries (France, Germany, Italy and Spain) have yet to set phase-out targets consistent with net zero. At the same time, it is likely that the level of subsidies will continue to fall. This can have a big impact on a market in an individual year, as the flatlining of China’s EV sales in 2019 highlights. However, assuming reductions in battery costs continue, we believe that any reduction in subsidies is unlikely to have a dramatic impact on the long-term growth trajectory.
South Korea, 2% of the car market, has also made a national net zero pledge and may follow Japan by strengthening its existing (33% battery EV by 2030 target). We expect more countries to make commitments at or around COP26, scheduled for November 2021.
As the market develops, the focus of policy support is also likely to shift. With EV costs likely to reach parity with ICEs by 2025 (see Battery charge: The rise of lithium-ion – options and implications
), the need to incentivise EV sales will reduce. To sustain EV growth, attention will need to shift towards providing the charging infrastructure. For households without access to off-street parking, charging remains a challenge. The additional demand on the grid is likely to require investment in both distribution and generation capacity.
Significantly, carmakers anticipating both the direction of travel of policy and technological progress are beginning to set their own voluntary targets. In January 2021 General Motors, a company with a 7% share of the global passenger car market, announced it would stop selling all fossil fuel powered ‘light-duty vehicles’ including hybrids by 2035. It joins a growing list of automakers promising to end ICE sales including Ford (in Europe by 2030), Volvo (2030) and Jaguar Landrover (2036).