Cognitive dissonance, the ability to believe contradictory things simultaneously, is getting a real work out amongst energy transition analysts and advocates, as on the one hand they are told “Electric Cars Closing in on Gas Guzzlers as Battery Costs Plunge” (Bloomberg 12/16/20) while also hearing “Tesla TSLA Raises Prices—Again” (autoweek.com, 4/12/21). It sounds like the debate between those who say the environment is terrible and those who say it’s improving: both can be true while appearing contradictory.
Because the point is that car prices and costs are not always identical when talking about electric vehicles. For one thing, manufacturers like Tesla receive significant income from selling pollution credits; Tesla made $1.4 billion in 2020, roughly twice its annual profits. The admittedly simplistic implication is that the company is not covering its costs from selling cars and needs higher prices to do so, even as battery costs are coming down.
Which is interesting because the above-mentioned Bloomberg story reported, “But researchers say that price premium will disappear once battery packs reach $100 per kilowatt-hour — a tipping point BNEF expects to occur in 2023, according to its 2020 Battery Price Survey.” If battery prices are so close to making EVs competitive on cost with ICE vehicles, then EV prices should be going down, not up.
The concept of a ‘tipping point’ where consumers will become indifferent to the choice between propulsion types is also misleading: as prices come down, the car will become more competitive, but not suddenly competitive. Consumer preference is not a step function but a curve and a curve that will be empirically visible only as prices evolve. The idea of competitiveness at $100 kwh is a guesstimate, and probably a bad one, as I discussed in an earlier column. Enthusiasm For Electric Vehicles Still Appears Excessive (forbes.com)
But the EV market is a bizarre one that does not give way to statistical analysis, as incentives and mandates drive many sales, and the acceptance of a product by first-adopters is not always indicative of future success. (Watched a Blue-Ray movie recently?) Needless to say, advocates point to strong EV sales in Norway (where the incentives are enormous), China (government mandates encourage many sales), or by Tesla (a favorite of early adopters). However, all the happy talk about EV adoption does not disguise the fact that sales are still very small. (See figure.)
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This matters because many of the scenarios that project GHG reductions rely on a significant market share for EVs, as the figure below shows. It is not impossible that EV sales will begin to soar in the next few years, but achieving these levels seems to be a challenge that is not close to being met as of yet.
And optimism about EVs contribution to greenhouse gas reduction ignores the greater problem of capital inertia: Even if EV sales soar, they can only gradually replace the existing automobile fleet. By my calculation, approximately 5% of vehicles is retired in a given year (based on data for sales and the existing fleet), which means that even with aggressive forecasts of market share for EVs, the existing stock of vehicles will continue to be dominated by petroleum-fueled vehicles.
Calculating the change in vehicle stock according to a conservative assumption (20% share of new vehicle sales by 2030, 40% by 2040) and an aggressive assumption (40% share in 2030 and 80% in 2040) still leaves ICE dominating the stock of vehicles as the figure below shows.
This is not to say that EVs won’t, at some point, dominate the automobile fleet but to imply that, first, current projections of rapid sales increases appear overly optimistic and second, reducing greenhouse gas emissions in transportation will be difficult and costly. Given that there is plenty of low-hanging climate fruit (think 27% of world energy from coal in 2019), building long, expensive ladders to reach the EV fruit does not appear to be the wisest use of our limited financial resources.
Data: Auto sales from International Association of Motor Vehicle Manufacturers. Forecasts/scenarios from
IEA World Energy Outlook 2019 pp 148-9. 48-9. Exxon: Outlook for Energy 2019, p. 15. BP: Energy Outlook 2020 edition, pp. 42-45. Shell: Scenarios, Sky 2018 pp. 36-37; DNV Energy Transition Outlook 2020 p. 8OPEC World Oil Outlook 2020 p. 123.