Guide to Challenges in International Economics

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An article by: Riccardo Fallico

Will giving up gasoline or diesel engines really stop climate change and global warming? Many are beginning to question this.

Political efforts to promote the electric car

The differentiation of technologies related to vehicle propulsion, such as hybrid or hydrogen engines, has always been linked to the reduction of energy security risks, associated with the scarcity of oil reserves and the increasing costs and difficulties related to its extraction. However, in the recent past, transport electrification has been “chosen” by many governments as a necessary and indispensable tool to combat climate change. The political effort to promote electric vehicles was enormous and squandered in the form of subsidies and/or other forms of “privileges” for motorists who switch to electric vehicles. In Norway, one of the countries most determined to eliminate internal combustion engines, the government has passed various laws over the years to encourage people to buy electric cars. The results were remarkable, but at the same time of little significance. Although more than 80% of vehicles sold in July 2023 were electric, the vast majority of the national fleet, about 72%, are internal combustion engine vehicles. Economically, the incentive structure was very expensive, so much so that in 2022 alone, when most of these incentives had already expired, it amounted to $4 billion, or 2% of total state spending, the same amount as highway maintenance spending. Things are not much better from an environmental standpoint either. Norway has managed to reduce its total emissions by 16%, which is commendable in itself, but the validity is questionable, as the United States was able to achieve the same result after switching from coal to gas for electricity generation.

Protests of “traditional” manufacturers and car rentals

While governments are reluctant to admit that mass electrification of the transportation system is actually impossible, private companies don’t seem to use that much diplomacy to protect their economic and financial bottom lines. In 2021, Hertz announced that it wanted to create the largest fleet of electric vehicles among rental companies, planning to purchase more than 300,000 electric vehicles, but backtracked in 2024. Hertz CEO Stephen Scherr said his company will start investing in gasoline-powered cars again because of the high maintenance costs of electric vehicles, while at the same time planning to sell 20,000 electric cars. But soon, based on analytics presented in April, Hertz decided to increase the number of electric cars for sale to 30,000. As early as October 2023, Ford blocked a reported $12 billion investment in electric vehicle production, citing that they are too expensive. This followed terrible financial results from the US manufacturer’s energy division, which expected to end 2023 with a loss of more than $4 billion. General Motors predicts that the first positive results associated with sales of electric cars won’t appear before 2025. Both American automakers said in April 2024 that, given also declining sales of battery-powered vehicles in the USA, their strategy was to return to vehicles with internal combustion engines.

WEF promotes electric vehicles

However, in 2018, the World Economic Forum (WEF), in collaboration with the consulting firm Bain & Company, published a study titled “Electric Vehicles for Smarter Cities: the Future of Energy and Mobility,” which announced a mobility revolution for the whole world thanks to the introduction of electric vehicles. In September 2021, McKinsey published a study “Why the Automotive Future is Electric,” which stated that transport electrification will revolutionize not only the automotive sector, but all related activities, as well as the economies of countries in general, given the necessity to build huge factories to produce the batteries needed for vehicles. Data provided in July 2023 by the International Energy Agency (IEA) showed that the proliferation of electric vehicles has grown exponentially in the recent past, so much so that the total number of units sold by the end of 2023 is expected to possibly reach 14 million. At that rate, again according to the IEA, oil consumption could fall by 5 million barrels per day by 2030.

Main obstacles hindering transport electrification

So, what’s holding back the transport electrification is its political nature. In 2020, for example, the European Union set very ambitious targets for the automotive sector: by 2030, the total number of electric vehicles in Europe should reach 30 million units, four times the current number of electric and hybrid vehicles. What were these established targets based upon?

From an economic perspective, pursuing various environmental policies, such as net zero emissions by 2050, does not seem to take certain factors into account in the first place. In order to increase the number of electric vehicles, the number of batteries that can be installed on the vehicles must be increased accordingly. Therefore, in order to meet the growing demand for batteries, it is necessary to increase the extraction of all the materials needed to produce them. Given current technology, these are primarily lithium, cobalt, nickel, magnesium, iron, graphite, zinc, and copper, and taking into account the announced new mine development projects, the supply of nickel, cobalt, and lithium will not be able to meet future demand. This imbalance could cause major shocks to the supply of the metals and minerals themselves, driving up the final price of electric vehicles. This will then require a lot of new battery manufacturing facilities. According to IEA estimates, battery demand will reach 3.5 TWh per year by 2030, more than doubling the 1.5 TWh in 2022. It will even reach 5.5 TWh per year if the net zero emissions policy is fully achieved. The demand can be met by opening at least 50 production facilities with a capacity of at least 35 GWh per year. In monetary terms, according to BloombergNEF’s Electric Vehicle Outlook 2023, this would entail a minimum cost of $23.5 billion per year through 2030 and $27.8 billion between 2030 and 2040. Moreover, under a net zero emissions scenario, the amounts would be $44.4 billion per year through 2030 and another $57.2 billion per year from 2030 to 2040. However, statements by Dominic Barton, president of Rio Tinto, the second largest mining company in the world, showed that the mining sector is unable to support the energy transition. Given the decline in investment that began back in 2015-2016, there is a shortage of financial resources, amounting to hundreds of billions of dollars, needed to develop new projects.

Electric battery’s headache

Increasing the number of batteries in operation will, in turn, increase the demand for the electricity needed to both produce and power them. According to the same BloombergNEF’s Electric Vehicle Outlook 2023, total global electricity demand could reach about 40,000 TWh by 2050, of which 14% would be dedicated to electric vehicle batteries. Since electricity cannot be found in nature and must be produced, further investment will be required to generate additional amounts of electricity. Given the current energy mix of electricity generation, the main sources are primarily hydrocarbons, gas and coal, followed by nuclear power, with renewable sources accounting for about one-third of the total. Therefore, in this context, the energy sector should invest additional financial resources in the short to medium term to increase both hydrocarbon production and plants to convert them into electricity. However, in the long run, investments should be directed towards the development of new renewable technologies that currently cannot generate a constant or predictable flow of electricity. At the same time, new investments in nuclear power will be required. According to IEA, total investment in energy projects in 2023 was expected to be $2.8 trillion, of which $1.2 trillion in energy production, $980 billion in hydrocarbon and biofuels distribution, $377 billion in energy efficiency, and “only” $247 billion for electrification. According to World Energy Transition Outlook 2023, prepared by the international renewable energy agency IRENA, the goal of limiting annual global warming to 1.5°C by 2050 requires supporting investments of US$1.4 trillion in renewable energy generation and US$1.5 trillion in energy efficiency and conservation. However, the 2023 “Net Zero Roadmap” by IEA states that investment in alternative energy is expected to reach $4.5 trillion per year by 2030 and $4.7 trillion by 2050, more than double the $1.8 trillion to be spent in 2023 to meet the zero emissions goal.

Logistics, refueling stations, and other puzzles

These astronomical figures do not include investments in the logistics network, electrical grids, and refueling stations needed to expand the use of electric vehicles. According to IRENA’s World Energy Transition Outlook 2023, $364 billion per year is needed for electric vehicle charging stations and another $800 billion per year for electric grids to transmit electricity. Power grids are by far the weakest link in the transport electrification chain. In October 2023, the IEA published a report stating that 80 million kilometers of transmission lines will have to be replaced or added globally by 2040 to cope with the increase in electricity demand. The IEA said it would take at least $600 billion per year to solve the problem. In the United States, the electrical grid is no longer able to withstand and cope with the sudden increase in the amount of electricity being transmitted, potentially putting lives at risk. The situation is no better in Europe: the Grids for Europe’s Energy Transition report by the Ember think tank shows how the grid development plans of many European countries are being implemented in contrast to the political choices of governments regarding electrification and do not take into account the real development needs of the European electricity grid. The report even says the REPowerEU program underestimates needed investments by at least $5.3 billion per year.

Are investments in transport electrification justified by the fight against climate change?

The investments required are astronomical and seem unfeasible, especially at a historical moment when the world is experiencing geopolitical uncertainties that could cause further disruptions in production and logistics supply chains. But can these investments be considered absolutely necessary to combat the number one threat to humanity caused by climate change and global warming? Not really. A 2023 report by the European Commission’s research center, “Greenhouse Gas Emissions of All World Countries,” shows how emissions from transport in the European Union, despite all the green policies implemented, even increased by 4% between 2021 and 2022. Moreover, while, on the one hand, transport electrification would reduce emissions produced by internal combustion engines, on the other hand, it would increase emissions associated with mining and mineral processing, all with very high energy intensity for the processing of metals, minerals, and hydrocarbons needed to support the electric transportation industry. The US Department of Energy (EIA), in its World Energy Outlook 2023, estimates that the growth in energy consumption between now and 2050 will exceed marginal increases in energy efficiency and result in a permanent increase in emissions. The UN Environment Program’s Emissions Gap Report 2023 found that global emissions continue to rise steadily, having set a new record in 2022, reaching 57.4 Gt of CO2. The IEA says that in 2023, 37.2 Gt of CO2 was emitted globally, associated with various forms of energy, which was 1.1% more than in 2022.

The amount of internal combustion engine emissions that could be eliminated through electrification is approximately 6% of total emissions. The figure is certainly noteworthy, but in absolute terms it represents less than half of the emissions produced in electricity generation, or 29% of the total.

Verdict: the global share of electric cars cannot exceed 30% of the total number of cars in operation

Toyota President Akio Toyoda said in March 2024 that the global share of electric vehicles will not exceed 30% of the total number of vehicles in use. Even to meet the most ambitious carbon reduction targets, electric vehicles must be supported by other driving technologies, because the underlying technology is not yet developed. The convenience of the electric car has always been exogenous given the government incentives available, but consumers will still be interested in electric cars, as in the case of Norway, once the government realizes the negative impact these same incentives have on the national coffers.


Riccardo Fallico