Monday Climate Focus: Powering an EV Transition, the Geopolitics and Future of Cobalt, & more
Edition #9
Welcome to another edition of Climate Focus.
I was kicking myself last week for not sharing this really cool simulation game. I am not sure if you have played simulations before and I am not sure how common it is in university.
The one thing that is common though about these simulation games is that it is always used when you have to explain trade-offs in complex systems. This one is no different.
You get to play the role of a City Mayor with the unenviable position of having to save its citizens from breathing unhealthy air. The choices you make will decide the trajectory of Smogtown and its citizens. To make things interesting, your choices will have to strike a balance between popularity and reduction in emissions.
(Pro Tip: You will only choke your city if you make a series of bad decisions. That’s the thing about complex systems - improvements and damages are only incremental at any given time, but exponential when fully complete)
Go ahead, give it a try.
I had written in a previous edition about how insurance companies are uniquely placed to stifle the flow of capital towards fossil fuels. (I cleverly called it bubble-wrap money)
Recently, the NY Times interviewed Thomas Buberl, the CEO of AXA, the French Insurance company. It is a fantastic read and one that sheds light on promising developments in accelerating our low-carbon transition.
Here is a short teaser:
Why do you believe that underwriting is the key to driving out the coal industry?
Even if all the insurers say, “We don’t invest in coal anymore,” even if all the banks say, “We don’t invest in coal anymore,” there is still private individuals who say, “I’ll give you the money for coal.” Whereas on the insurance side, if you don’t have the insurance, you will have no financing — whether it’s private, public, from an insurer, from an asset manager, whatever.
[…]
In 20 years, will major insurance companies be underwriting coal? You don’t need to wait 20 years for that.
As with most fantastic reads (except what you are reading here 😎), it is hiding behind a paywall. I can gift this article to 4 people by the end of this month, and this count resets to 10 in a few days. Write to me if you would like to read it and I will happily oblige.
Right. That was a fairly long prologue.
Let’s get to business. It is a little topical this week and I hope you find it interesting.
Powering an Electric Vehicle Transition
Before the COP26, Boris Johnson spoke about his four-point climate agenda so many times that I sometimes hear it when I am alone in my living room. It was coal, cars, cash, and contribution.
Here is a short excerpt from Edition #7 where I spoke about what the UK Presidency managed to achieve with cars. (You will get varying response on how successful they were on the other three).
At least six major automakers and more than two dozen national governments pledged on Wednesday to work toward phasing out sales of new gasoline and diesel-powered vehicles by 2040 worldwide and by 2035 in ‘leading markets’.
It’s a significant win in the current COP Presidency’s agenda to get countries to move away from combustion engines and towards electric vehicles.
These pledges, although non-binding, mean that there will be more electric vehicles than combustion-engine powered cars on our roads by 2035.
There are two integral elements without which we will not make much progress on hitting these ambitious numbers.
Battery technologies and charging infrastructure. One is tricky to crack while the other requires sound government policy (in that order)
The Tricky Part
Batteries in EVs rely on the same underlying technology as the batteries that power our smart phones.
But packing the energy to power a car into a suitcase-sized phone battery is not straightforward.
[EV batteries] have the same basic components : two electrodes -- a cathode and an anode -- and an electrolyte that helps shuttle the charge between them.
[…]
The priciest component in each battery cell is the cathode, one of the two electrodes that store and release electricity. The materials needed in cathodes to pack in more energy are often expensive: metals including cobalt, nickel, lithium and manganese. They need to be mined and processed into high-purity chemical compounds.
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. Looks good?
Except, there is one complication. How will manufacturers achieve economies of scale on metals that go into these batteries ?
Fun Trivia:
— More than 2/3 of world’s supply of cobalt comes from one country - the Democratic Republic of Congo (DRC)
— 70% of cobalt mining is either owned or financed by China
— 85% of world’s battery-ready Cobalt is processed and purified in China
How this came to be can make for a feature film plot.
A Geopolitical Segue
— Uranium, cobalt, copper and other ores from DRC were highly coveted, as early as the 1940s and 50s. (Einstein wrote a letter to FDR urging him to procure uranium from Congo as early as 1939 to get an upper hand in the nuclear race).
— Thanks to the Cold War, it was in America's interests to protect a resource-rich, post-colonial Africa from a Soviet Union takeover. DRC was one of the largest recipients of US overseas assistance.
— Concerns of rampant corruption, human rights violations, and governance issues in dealing with DRC and other African countries were temporarily overlooked (more on this later).
— Cold War ended in the 90s and a new war on terror began after 9/11 in the 2000s. The US government had very little time and attention for Africa.
— Meanwhile, Corporate America used its government’s long history to get mining licenses for copper and cobalt. Freeport-McMoRan, an Arizona-based mining company, moved early to work with a stable government in DRC. Freeport provided access to drinking water, roads, schools, and electricity, and offered jobs to the local population.
— In exchange for the infrastructure development and a generous ‘licensing fee’, Freeport-McMoRan was poised to become one of the largest suppliers of copper and cobalt in the world. The year was 2006.
— If it weren’t for a terrible bet made by the company in 2012, America would feel a lot more secure about its battery technology landscape. Freeport picked a wrong time to back fossil fuels, when they bought two oil and gas companies for $20 billion. Oil prices plummeted. The company found itself in terrible debt soon after.
— In 2016, Freeport-McMoRan announced it was going to sell one of its largest mines (Tenke Fugurama) in DRC. China Molybdenum tabled a serious bid of $2.65 billion, backed by Chinese government loans.
— The deal went through unencumbered, despite Cobalt making the list of metals and minerals deemed critical “to the nation’s security and economic prosperity.”, in the administrations of both Barack Obama and Donald Trump.
— In 2020, China Molybdenum bought another untapped site from Freeport-McMoRan for a cool $550 million.
(Read this fantastic New Yorker piece titled ‘The Dark Side of Congo’s Cobalt Rush’ to understand the complicated landscape well)
If Not Cobalt?
Cobalt is critical to battery cells because it improves the stability of Li-ion batteries. It doesn’t overheat or catch fire easily, which is more than just a good-to-have feature in your electric vehicle. Plus, cobalt ensures higher energy density and battery life. This means longer distances on the road on fewer charges.
Despite its obvious advantages, there are concerns that make cobalt a tricky bet to back -
— There is an over-reliance on supply from one or two countries. The supply comes with questionable safety standards and allegations of human rights violations (Thank you for overlooking this in the past, America)
— Cobalt prices have been highly volatile. This is largely because of fluctuations in nickel and copper prices. (Cobalt is a by-product of nickel and copper mining)
— Serious question marks about whether production and processing volumes will meet the growth in demand.
Can we not use something other than cobalt? Definitely yes.
EV batteries don’t need cobalt to work. In fact, other battery technologies that don’t use cobalt – such as nickel-iron-aluminum cathodes or lithium-iron-phosphate ones – not only exist, but are actively being developed for use in new EVs.
[…]
For instance, Tesla’s current vehicle batteries contain less than five percent cobalt and the company announced in September 2020 that they are developing their own batteries that will be cobalt-free. Others are dramatically reducing the amount of cobalt needed for their batteries, like GM, who last year unveiled a new battery system that uses 70 percent less cobalt than current batteries
Cobalt alternatives come with their own trade-offs though. The Lithium-Iron-Phosphate (LFP) batteries do not have similar energy density as cobalt batteries, and are currently used in buses that run shorter distances. This will not be an impediment to higher adoption if routes and charging stations are well planned.
A more permanent solution is to develop better battery chemistry. Here’s a video that speaks about the future of cobalt-free batteries. (It’s about 18 mins long, and everything after the 8-minute mark is about improvements to existing battery technology. Do check it out if you find it as interesting as I do!)
What works well for LFP batteries is that there aren’t any safety issues, given iron is a very stable element. Moreover, the raw materials are available in abundance and are a lot cheaper than other batteries.
Tesla announced that it was switching to LFP batteries in all standard-range cars last month, in a move that is sure to bring down the overall cost of EVs.
To Round Up
Coming back to the original question - how will manufacturers achieve economies of scale on metals that go into these batteries?
They can't. Instead what they can do is develop better technology and diversify reliance on fewer metals and combinations.
That doesn't mean cobalt does not have a role to play. Cobalt reserves in DRC and the processing capacity in China will still be used in batteries for electronic devices that don't need 14 kilos of cobalt for every unit made.
The range advantages of cobalt batteries also mean that they are that the only viable option for long-haul trucks and semi-trucks. As of now.
Not every battery in every electric vehicle has to be a cobalt battery. And that is how we will power this very ambitious EV transition.
(I can still hear Boris Johnson).