Bumps in the road for electric vehicles but long-term drivers intact
Transport has been a high profile focus of climate policy and investor interest. Greenhouse gas (GHG) emissions from transport represent just over one-eighth of global emissions, with passenger cars most of that contribution. Meeting the commitments global leaders have made to limit temperature rises to 2°C will therefore have an unavoidably disruptive impact on the industry.
The latest International Energy Agency (IEA) analysis shows that putting the global economy on track for a 2°C outcome will require fundamental changes in how transport is powered. The chart below plots the change needed in the energy sources fuelling global transport.
On its modelling, one-fifth of the energy used in the transport sector will need to come from non-petroleum sources in the next decade and a half. The IEA’s forecasts for electric car use mirror that transition, pointing to 300 million electric vehicles (EVs) on the world’s roads by 20401. Those projections demand rapid growth from the current stock of EVs; below three million vehicles.
We have written before about the policies countries - including the UK, France, Netherlands, Norway and India - have announced to phase out internal combustion engines over the next few decades. We have also referenced China’s ambitious plans to maintain leadership in the industry2.
However, the industry also provides a helpful reminder that growth rarely occurs in straight lines. Since the start of 2018:
- The US has announced it is relaxing fuel efficiency standards introduced under President Obama3. The impact of that move is unclear, given the country’s largest car market, California, has (for now at least) a waiver to impose tougher standards, along with 12 other States
- We have seen an unexpectedly sharp drop in global EV sales (see figure 2). Global sales in January and February were 70% higher than a year ago, but slipped to the slowest pace of growth in over 12 months in February.
- The Indian government has dropped its plans to introduce a national policy supporting EV use4. While the announcement has spurred criticism from environmental groups, the government’s limited investment in the infrastructure needed to support a transition to electric vehicles have made delivery unlikely since its announcement.
None of those data points change our conviction in low carbon transport’s long term growth prospects. Governments around the world continue to introduce new policies (figure 3) and the economics of electric vehicles are quickly falling into line with internal combustion engines as the market grows and costs fall.
However, no industry can expand at the exponential rate required of low carbon transport without bumps along the way.
Focusing on companies well placed to thrive despite hiccups, rather than those which are reliant on ever-expanding markets for their profitability provides a foil against those vagaries.
To help monitor and navigate trends across key markers of climate progress, we introduced the Climate Progress Dashboard last July, tracking change across a range of markets including the global electric vehicle market. We update that dashboard every quarter on our website5.
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.