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Fuel for Thought: Automotive Electrification and Decarbonization - Shifting gears towards Net-Zero

21 July 2021 Vijay Subramanian

Automotive Monthly Newsletter and Podcast
This month's theme: Automotive Electrification and Decarbonization - Shifting gears towards Net-Zero

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Globally, a growing number of countries have pledged to achieve net-zero greenhouse gas emissions (GHGs). The European Commission (EC) proposed the first European Climate Law in March 2020, as part of the European Green Deal, to ensure the goal of net-zero carbon emissions by 2050 to be written into law and set a tightened target of 55% CO2 reduction from 1990 levels by 2030. Mainland China, currently the world's highest CO2 emitting country, also pledged to achieve a carbon peak by 2025-2030, then a 20% reduction from the peak by 2035, and eventually carbon neutrality by 2060. The United States (US) rejoined the Paris Agreement in February 2021, committing to achieve net-zero by 2050 and an interim CO2 reduction target of 50-52% by 2030 from 2005 levels in the Biden administration's climate plan.

Transport is one major source of CO2 emissions, accounting for more than 21% of total annual CO2 emitted globally, nearly 30% in the European Union (EU) and the US. The road transport sector contributes around 70-80% to transport CO2 emissions. Under the current policies, major markets like the EU, mainland China, and the US will face challenges to meet the pledge toward net-zero. The "Fit for 55" climate package initiatives proposed by the EC on July 14, 2021 include strengthened 2030 for cars and vans CO2 along with other measures like inclusion of transport sector in the Emissions Trading System (ETS) to further incentivize decarbonization. In the US, there is a move to revise current fuel economy and GHG standards, with a proposal expected by the end of July 2021.

Electrification is the most promising pathway to decarbonize the road transport sector. Phasing out internal combustion engines (ICEs) by the mid-2030s has been a trend in both regional policies and vehicle manufacturers' strategies. In EU The "Fit for 55" package proposes passenger car 2030 CO2 targets to be a 55% reduction from 2021 level, as compared with 37.5% reduction requirement in the earlier rule. Also proposed is 100% car CO2 reduction in 2035 from 2021 levels, which results in all new light vehicles registered in 2035 to be zero-emission. To meet the 55% 2030 reduction target, a further uplift of BEVs to reach more than 55% market share plus nearly 10% of hybrid plug-in electric vehicles (PHEVs) will be required in EU. This increased electric vehicle market will drive 36% additional battery capacity demand, leading the battery production to be 468 GWh in 2030 to meet the revised CO2 target. At the same time, with the proposed battery regulation, battery carbon footprint reduction and end-of-life handling (e.g., recycling efficiencies) will be key in transport decarbonization in the era of road transport electrification.

The further increase in the electrification trend will also reduce the battery cost significantly allowing cost parity with gasoline start-stop fitted vehicles during the 2026-28 timeframe. Market-average battery pack cost is forecasted to drop around 40% from the current levels to 94USD/kWh by 2030, according to IHS Markit. In recent years, the automotive industry has already witnessed about 20USD billion of funds raised through Green Bonds, of which 75% is issued by car manufacturers and the remaining by battery suppliers. Sustainable financial instruments such as Green Bonds are also projected to fund further investments in transportation decarbonization, said Monika Punshi, Senior Cost and Investment Research analyst at IHS Markit. Approximately 60% of this money will be allocated towards the development of battery-electric, fuel cell, and other electrification components such as e-motors and hydrogen tanks. Recent revisions of the European Green Bond standards (EUGBS) framework announced by the European Commission on July 6, 2021 will also ensure robustness and transparency on these investments' utilization on sustainable projects toward net-zero ambitions.

Well-designed economy-wide LCA guidelines are key to promoting feasible and efficient CO2 reductions under Europe's integrated 'Fit for 55' climate package

Decarbonization of the transportation sector will also require integration with other regulatory mechanisms like Renewable Energy Directive (RED), Alternative Fuels Infrastructure Directive (AFID), the Battery Regulation as well as carbon cap-and-trade within the Emissions Trading System (ETS) to deliver co-jointly. The proposed AFID requires each member state to install charging and refuelling stations at regular intervals on major highways -- every 60 km for electric charging and every 150 km or hydrogen refuelling. The EC expects to deliver approximately 3.5 million recharging points by 2030. AFID also requires member states to enhance charging capacity and have a total power output of at least 1 kW and 0.66 kW respectively for each battery-electric light-duty vehicle and plug-in hybrid light-duty vehicle registered in their territory provided through publicly accessible recharging stations.

As the road transport sector moves gradually to electrification, the focus of regulations will be moving from tailpipe to upstream fuel and electricity supplies. The revision of RED II increases the overall renewable energy share target to 40% by 2030, raised from 32% in the earlier regulation. An energy efficiency directive (EED) proposes 36% energy efficiency target, i.e., energy savings from 2007 projections, a boost from 32.5% set previously. RED II requires member states to achieve the target of 14% renewable energy share in the transportation sector. Each member state should ensure a GHG intensity reduction of at least 13% by 2030 using renewable fuels and renewable electricity supplied to the transportation sector.

For the first time, road transportation has been added to the Emissions Trading System (ETS). The trading coverage start year will be 2026. A separate carbon trading market will be created for road transportation, and a carbon price will be put on it. The carbon cap-and-trade mechanism will simultaneously regulate fleet emissions under the cap and incentivize behavioral changes which maximize decarbonization beyond mere compliance. A new Carbon Border Adjustment Mechanism is also in the released package, putting a carbon price on imports of a targeted selection of products to ensure EU's contribution to global decarbonization instead of generating "carbon leakage".

The Battery Regulation proposed in December 2020 requires the carbon footprint to be reported from 2024 and complied from 2027. In 2030, the battery collection rate target is 70%. Recycle content requirements are 4% for lithium and nickel, 12% for cobalt, and 85% for lead by 2030. In the meantime, recycling efficiencies of 70% for lithium-based batteries and 80% for lead-acid batteries, along with material recycling efficiencies of 70% lithium and 95% cobalt, copper, lead, and nickel are expected. These elements, when Life Cycle Assessment becomes the accounting methodology, will impact the carbon intensity of a vehicle's value chain.

On July 6, 2021, the EC also announced the European Green Bond standards (EUGBS) proposal. Sustainable financial instruments such as Green Bonds are projected to fund further investments in transportation decarbonization. Approximately 60% of this money will be towards the development of battery electric vehicles, fuel cell vehicles, and other electrification components such as e-motors and hydrogen tanks. The EUGBS provides a voluntary framework to guarantee robustness and transparency on the investment's utilization on sustainable projects toward net-zero ambitions.

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Posted 21 July 2021 by Vijay Subramanian, Director, Global CO2 Compliance, Cost and Powertrain Forecasting, Automotive, IHS Markit

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