Environmental finance (02.2020) - Electric vehicles (EVs) have an important contribution to make towards a zero-carbon future and therefore are suitable for inclusion in a positive impact investment strategy.
However, there seems to be some confusion and misconceptions about a few basic characteristics of EV batteries which can result in investors as well as consumers making investment or purchasing decisions with unintended consequences.
The first thing to remember is that EV batteries are not zero emission. There is a section on Tesla’s website called ‘Carbon Impact’ which has a nice visual with a number changing in real time (3,550,634.88 tons, at last count) that claims to show the total CO2 saved by Tesla vehicles. The fine print at the very bottom of that screen says that CO2 savings figures reflect tailpipe emission reductions.
The reason this is misleading is that an EV’s emissions do not only consist of tailpipe emissions, which are, of course, zero. The lifetime emission of an EV is the total coming from the manufacturing of the battery (a very energy-intensive process) and charging. Depending on the country the EV is manufactured and charged in, the split may be 50–50. An EV manufactured and used in Poland, which has a very dirty grid, will emit a lot more CO2 than the same vehicle in Sweden, which has a very clean grid.
It is surprisingly hard to know the exact emissions related to the manufacturing of batteries. A comparison of eleven different academic studies on the subject shows a manufacturing emission range as wide as 30–494 kg CO2e/kWh. Leaving aside the outliers, the range could be narrowed down to around 56–106 kg CO2e/kWh, which is where most studies converge.
Why is there such a wide range of estimates of manufacturing emissions? In addition to the country of production, assumptions about the choice of chemicals used in the production process, the model used to estimate emissions, packaging design and geographical proximity to the supply of raw materials will all have an effect on the estimated manufacturing emissions. Mining cobalt in the Democratic Republic of Congo in Africa and transporting it nearly 20,000 km by land and sea to a manufacturing plant in China is not an emission-free process and this has to be taken into account for the calculation of lifetime emissions. This is at the root of many discussions regarding internal combustion engine (ICE) vehicle vs EV emissions. If one takes the lower end of the 30–100 kg CO2e/kWh range as the benchmark for manufacturing emissions, EVs are cleaner than ICE. As estimates move towards and beyond the 100 mark, it becomes increasingly difficult to back that claim.
When it comes to battery charging-related emissions, in addition to the country of charging, the most important determinant is the size of the vehicle and the battery pack. A vehicle with a battery pack of 40 kWh (around 1,500 kg) will emit less CO2 than a vehicle with a battery pack of 100 kWh (around 2,100 kg). This is because the heavier one is less efficient than the lighter one.
So, even though small EVs with battery packs of around 40 kWh are cleaner than any ICE vehicles, large EVs with large battery packs of around 100 kWh or more could be dirtier than smaller and efficient ICE vehicles, depending on the country.
Another variable to include for a full analysis is the status of battery recycling. As the number of batteries available for recycling grows, manufacturers’ reliance on newly mined material will diminish.
Recycling will itself create emissions, but this is likely to be significantly less than those produced by mining and transporting new raw materials.
Finally, on the issue of comparing ICE versus EV emissions, time is on the side of EVs. ICE is a technology that has been around since the industrial revolution and most of the easy efficiency gains have been made. Projected ICE efficiency gains are significantly lower than projected efficiency gains for EV batteries, even without considering some of the revolutionary technologies in the pipeline that could radically improve battery performance and efficiency. For example, according to Bloomberg New energy Finance, ICE emissions in China will fall by 1.8% per year during 2018-2040, whereas the same figure for EV emissions is 4.3%. In addition to efficiency gains on batteries, the grid for charging them is getting cleaner. Today, around 38% of global electricity generation is zero carbon. This is expected to rise to 63% by 2040, which will reduce the lifetime emissions of EVs.
To sum up, in a future where EVs will contribute towards a zero-carbon world, comparisons between ICE and EV emissions will gradually turn more in favour of EVs. However, during this transition it is important to remember that not all EVs and batteries are created equal. An impact investing strategy has to take into account many diverse factors like energy sources for manufacturing and charging, proximity to raw materials and suppliers, size of vehicles and batteries, chemistry, packaging, availability of recycling, and efficiency of production processes to choose companies in the ecosystem that minimise carbon emissions and maximise positive impact. This could also guide investors towards better financial returns as these companies are more likely to be the winners in the industry over the long term.
Eli Koen
Portfolio Manager Emerging Equities
