Friday Climate Focus: The Year of the EV Proliferation, Good Things have an Expiry Date, Anti-Subsidies & more
Edition #14
Hi there!
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On to this week’s edition.
2021: The Year of Electric Vehicle Proliferation
Any growth (in China) is likely to come from electric-car sales, with analysts and industry executives expecting sales of internal-combustion-engine cars to remain flat or decline slightly this year.
That is pretty damn impressive for the largest automobile market in the world.
Chinese auto sales, which fell by 6% in 2020, beat a three-year downward trend buoyed by an increase in electric vehicle sales.
2021 was the year of the proliferation of electric vehicles, not just in China, but across the world.
It is difficult to discuss electric vehicles without talking about Tesla. The Texas-based electric car company (yup, they moved out of California last month) reported an 87% increase in deliveries globally, and a 117% increase in China.
The latter was despite increasing its prices for vehicles made in it’s Shanghai Gigafactory 3 twice in a span of five weeks to curb demand. Tesla is uniquely one of those companies that wants fewer orders to deal with.
A large part of this explosion in demand can be explained using one word: subsidies. And it is safe to say that it worked really well.
I had written about why subsidies are important for adoption of new technologies in a previous post.
As with most new technologies, achieving cost efficiencies early on is critical to sustained adoption. Here’s why -
Early technologies do not generate enough demand because customers have high inertia to change what they are used to
Insufficient demand means lower production numbers
Lower production numbers mean higher costs
Unless demand is addressed, early technologies will be stuck in a perpetuating cycle of high-costs.
That is where government subsidies help.
Biden’s latest spending bill promises nearly $12,500 in tax credits for every EV purchase. The cheapest Tesla costs a little under $40,000 without the tax credit.
This is one example. Governments across the world are giving out generous subsidies to speed up the EV transition and the commitments have only increased since COP26.
These subsidies increase EV demand and allow manufacturers to achieve higher production numbers. Higher production numbers mean manufacturers can pass the cost advantages to its customers. There will eventually be enough demand without government subsidies.
Good Things Come With an Expiry Date
But subsidies don’t last forever.
China announced earlier this week that it is reducing subsidies by 30% this year, and is likely to eliminate all subsidies starting next year. This is not sudden at all. The subsidies policy introduced in 2009 aimed for a prolonged period of incentives for EV uptake, with a plan to phase the subsidies out by 10% in 2020, 20% in 2021, and 30% in 2022. The pandemic threw a curve-ball, and with the automobile sector suffering deeply, China had postponed its plans to phase out the subsidies.
That changed earlier this week.
What is going to happen in China without the government subsidies?
I don’t suspect there will be a lot of bad things.
Thanks to a conducive policy and market environment, the electric vehicle ecosystem has thrived in China. The government continues to remain optimistic that it will be able to meet its target of 20% share of Electric Vehicles in new car sales by 2025.
What we can expect
a fair amount of consolidation in the highly fragmented EV manufacturing space; there are nearly 500 different EV manufacturers operating in China
while that happens and domestic EV sales might plateau, higher volumes of export from domestic battery manufacturers; China is a dominant force in global Lithium-ion battery production
without subsidies, competition will get intense and differentiation is likely to be through better quality, safety and performance (which is always a good thing)
With that said, it is a little unsettling to imagine a world where EVs compete on an even footing with Internal Combustion Engines. (eek!) China is just the first one to pull the plug on subsidies.
What can be done about that?
Subsidies can’t be Perpetual
Fairly obvious, that.
So do we just live with this unsettling feeling, you ask? (I know you didn’t, but I am still going to tell you).
Enter Norway.
Remember how I mentioned earlier that 15% of all automobile sales in China last year were Electric Vehicles or plug-in hybrids?
Norway operates in an alternate, super-charged universe.
65% of all new vehicles sold last year in Norway were Electric Vehicles. That 35% that you see in the chart below includes hybrids.
Some figures suggest that only 8% of all automobiles sold last year ran purely on conventional petrol and diesel. Yup, you read it right. 8% of the cars have internal combustion engines.
How did Norway…
1/ a country that set up a sovereign wealth fund in the 1990s because it made so much money through oil exports
2/ a country that continues to explore oil and gas in the Arctic,
3/ a country that expects that it will up its oil and gas output by 9% into 2024,
.. choose the option that has the lowest environmental footprint and implement it so successfully?
(It is not that they are any more environmentally-conscious than the rest of the countries.)
You guessed it right.. anti-subsidies. You didn’t see that coming, did you?
That’s a roundabout way to say taxes.
(Sidebar: I wrote a Twitter thread about Norway’s sovereign wealth fund and what it can do for global climate action some time ago).
The government […] taxes the sales of new polluting cars heavily but does not tax EVs at all, making EVs, which are more expensive because of their production costs, a competitive and appealing option.
Norway did the easier thing first.
Norway nudged those that were considering buying a new car to go electric. The government didn’t do that by making EVs cheap. They made the alternative expensive.
It’s a slam dunk of a policy from a demand perspective if you ask me, because it affects only new buyers and not existing owners of non-electric vehicles.
Direct subsidies aren’t the only way to incentivise adoption.
And they aren’t perpetual either, as we are realising with China.
The Scandinavian country gives us a credible, tested-in-the-real-world policy alternative to finance the electric mobility transition.
Taxing combustion engines isn’t likely to receive a lot of backlash, once we have enough options with electric vehicles, given how every automobile manufacturer has stated to go fully electric in the near future. A lot of them have already added high-performance and affordable electric variants into its roster.
May be it makes sense to start taxing the highest emitting variants to begin with, and use the proceeds to fund a clean mobility transition by building charging infrastructure and incentivising other enabling technology.
May be (x2) that will be the beginning of a glorious era of policymaking where we actually tax emissions. Sigh.
Before I go, here’s a very funny ad from the last year’s Super Bowl that speaks about how America wants to match Norway’s ambition when it comes to Electric Vehicles.
Bonus
New York mulls a first-of-its-kind Fashion Sustainability Act
The article on the tweet could be paywalled. Some of you wrote back the last time I posted a paywalled article. I am happy to send you a non-paywalled link this time around too.
Alternatively, please read the commentary here and here.
Goes Back Right Where It Came From
(and we are left wondering what was the point of it all)
When You Have Ambitions of Global Climate Leadership
… but you struggle to figure out how to be one exactly