City smog is flipping the switch to electric vehicles

Climate change isn’t just about the weather, air pollution poses immediate and serious health problems. We look at how cities are trying to clear the air.

02-28-2017
Electric-car-on-charge

Authors

Sustainable Investment Team

The climate policy agenda is now moving from the high-level ambitions agreed in Paris to practical, on-the-ground change. More empowered cities and states are now becoming more influential, with climate change high on the agenda of the challenges that urbanisation creates.

air-pollution-levels-by-country
 

Source: SIM; WHO: Urban Ambient Air Pollution database (May 2016)

Air pollution is a major global health problem. The World Health Organisation (WHO) estimates 6.5 million deaths (11.6% of all global deaths) were associated with air pollution in 20121 and 92% of the world’s population lives in places where air pollution exceeds WHO recommendations, as shown by the yellow line in figure 12.

Pollution is a bigger problem in developing countries (see figure 1). Two out of three pollution-related deaths occur in South-East Asia and Western Pacific regions, where 30% of the world’s population lives. However, developed economies still suffer too, with 10,000 deaths attributed to nitrogen oxide pollution in the UK in 2013, the second highest number in Europe after Italy.

A tale of seven cities: does policy control pollution?

Stronger regulation can mitigate the problem and has already proven successful. As table 1 (and figure 1) show, cities with policies limiting diesel cars tend to be less polluted than similar size cities without such a policy.

Cities-with-diesel-policy

Source: Schroders, February 2017

Air pollution typically prompts action when it becomes acute. China’s 1.6 million annual deaths linked to air pollution prompted the government to emphasise environmental concerns in its current five-year plan. Beijing is phasing out 300,000 high-pollution vehicles and has pledged to reduce coal use by 30% this year3. This would mark the fourth consecutive drop and underline the strength of government policy.

The Chinese government is using greater environmental focus to reshape the transport sector that accounts for 10% of China’s emissions. The government has pledged to have 5 million electric vehicles on the road by 20204. Generous subsidies are being implemented, along with quotas forcing automakers to produce a percentage of electric vehicles.

We expect similar regulatory trends to accelerate in other cities with unsustainably high pollution levels. Diesel cars will bear the brunt of the effects. The cities in table 1 alone have an aggregate population of 119 million and represent two of the world’s ten largest cities. Many smaller cities have already introduced anti-diesel policies.

Although typically marketed for their efficiency and low carbon emissions5, diesel engines produce high levels of nitrogen oxide (NOx), making them liable to new anti-pollution regulation. As cities implement policies that penalise their use in central urban areas - or ban them from city centres - diesel sales are likely to fall, especially in Europe.

Europe is a key market for diesel engines. Just below 50% of auto sales are diesel, which Exane BNP Paribas expects to fall to 20% by 20306. We expect both manufacturers and consumers to use the decline of diesel to expand their production and purchases of electric vehicles. The industry’s electrification will be necessary to hit long-term fleet emission targets and the industry is more ready to transition to that power train than ever before.

Electric vehicle development is integral to the R&D programme of every major original equipment manufacturer. The growth of electric cars is well understood, but we don’t believe its magnitude or speed has been fully appreciated. The industry may look very different a decade or so from now.

1. http://www.who.int/mediacentre/news/releases/2016/air-pollution-estimates/en/

2. 20 µg/m³ of particulate matter

3. http://www.bbc.co.uk/news/world-asia-china-38545649

4. http://climatenewsnetwork.net/chinas-electric-vehicles-evs-bumpy-ride/

5. Typical estimates around 15-20% less carbon dioxide than equivalent gasoline engines (e.g. http://www.air-quality.org.uk/26.php) although we note that recent emissions testing scandals have shed doubt on those estimates

6. Exane BNP Paribas: European Autos, 2017: Encore Une Fois?

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The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.

Authors

Sustainable Investment Team

Topics

Equities
Global
Climate Change
Sustainability
Sustainability North America
ESG
Environmental
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