As usual I will be taking a break from writing this blog over the summer. I’ll be back in September.
The cap for Phase 4 of the EUETS, which runs from 2021 to 2030, needs to start at a level that matches the reality of emissions in 2020, rather than starting where the Phase 3 cap finishes.
The EUETS surplus will continue to grow through under current proposals …
The surplus of allowances in the EUETS looks to set to get worse with the Commission’s current proposals for the Phase 4 cap, which covers the period 2021 to 2030. In 2015 emissions covered by the EU ETS were already below the level of the cap for 2020. Emissions are expected to continue falling through the remainder of this decade, driven mainly by increasing deployment of renewables and weak electricity demand. By 2020 emissions look likely to be over 10% below the cap at the end of Phase 3 (see chart). This will lead to additional surplus allowances generated from the start of Phase 4, continuing through all or most of Phase 4. This will in turn lead to the EUETS remaining weak even in the presence of the Market Stability Reserve (MSR).
Chart 1: Currently proposed cap against emissions forecasts and 2020 gap to cap
This problem arises in large part because the starting point for Phase 4 cap is out of date. It was effectively set in 2010 as part of the cap for Phase 3, because the EUETS Directive implicitly assumes that the Phase 4 cap will simply continue from where the Phase 3 cap finishes. However the Phase 3 cap was set before many subsequent trends were known, including the growth of renewables and the length and depth of the economic recession. Consequently it does not form a suitable starting point for Phase 4, and now looks far too loose.
This problem can be mitigated by changing the starting point of the Phase 4 cap …
The Phase 4 cap needs to start at a level that reflects actual emissions (if this is, as expected, below currently proposed level, which would act as an upper bound in any case). Rebasing the cap in this way would lead to a much more effective EUETS that delivers effective signals for emissions reductions and investment. Without this sort of reform the EUETS risks being reduced to little more than an accounting tool, with a chronic surplus and individual Member States increasingly taking their own action to ensure the necessary investment.
This increases the robustness of the mechanism and is more effective than changing the Linear Reduction Factor ….
Rebasing to actual emissions increases robustness of the system by making it dependent on actual outcomes. Aligning the cap with actual emissions also tightens the cap more quickly and more effectively than changes to the Linear Reduction Factor (LRF – the amount of annual emission reductions built into the EU ETS during the phase). This is shown in the chart below.
The LRF would need to approximately double from the currently proposed value of 2.2%, to 4.2%, to have the about the same effect on cumulative number of allowances over Phase 4 as rebasing the cap, even in a high emissions case. And an even greater LRF would be needed to match the effect of rebasing if emissions by 2020 are low. Even then, changing the LRF reduces the level of the cap more slowly than changing the starting point of the cap. However increasing the LRF in addition to rebasing the cap helps ensure that surpluses are eroded and do not re-emerge through Phase 4, and so increasing the LRF remains a useful complement to rebasing the cap.
Chart 2. Decrease in the total Phase 4 cap relative to the current proposal
Rebasing the cap is consistent with a range of precedents …
This approach of adjusting caps to reflect the reality of actual emissions, where these diverge from earlier expectations, has been applied elsewhere. For example, in the Regional Greenhouse Gas Initiative (RGGI) in the USA, the cap was reduced from 165 million short tons in 2012-3 to 91 million short tons in 2014 to more closely reflect actual emissions. As a result, prices have moved away from the auction floor price, where they were had previously been stuck.
Looking beyond carbon markets, incentive-based regulation of electricity, gas and water network charges in the UK in the 1990s imposed price caps typically lasting five years. In practice, costs fell more rapidly than was expected when the price cap was set, leading to high margins of price over cost. One-off cuts in the level of prices, referred to as P0 cuts, were implemented at the start of the next phase of the price control to realign the price cap with outturn costs, and thus capture the benefits of efficiency gains for consumers.
The new starting point for Phase 4 would also be closer to that which was envisaged under the December 2008 European Council Conclusions in case an international agreement was reached and the EUETS would start from a reduction of 30% from 2005 levels by 2020. A 30% reduction from 1990 would, assuming the EU ETS cap to have been reduced in line with the reduction in other sectors, have led to a starting point for the Phase 4 EU ETS cap of approximately in line with emissions now expected. This was made conditional on action by other countries. Commitments to such action have now been made under the Paris Agreement.
With the cap proposed by the Commission the EUETS seems likely to continue providing a largely ineffective signal for abatement well into the 2020s and possibly beyond. This would mean that by 2030 the EUETS will have been in existence for a quarter of a century, but will have provided an effective price signal for only a short period in the early part of Phase 2 (around 2009).
A simple adjustment to bring the cap at the start of Phase 4 into line with the reality of emissions would go a long way towards solving this problem by reducing the Phase 4 cap, likely by around 2 billion tonnes or more over the 10 years of the phase. There are few easier and more natural adjustments to the scheme which could have such an impact.
Adam Whitmore – 20th June 2016
Thanks to Boris Lagadinov for providing the analysis shown in this post. This post is based on a recent paper Boris and I wrote for Sandbag – see http://www.sandbag.org.uk
 The cap for 2020 is 1816 MtCO2 excluding the effects of backloading. Emissions were 1802 MtCO2 in 2015.
Various policy driven scenarios show electric vehicles gaining market share over the next few decades but with the turnover of the vehicle stock taking longer.
I recently argued that BP’s projections showing almost no take-up of plug-in vehicles by 2035 was unrealistic in view of several convergent trends. There is increasing pressure to reduce CO2 emissions, there is large and growing concern about urban air quality, and electric vehicles are likely to prove attractive to consumers in many respects. In line with these drivers, sales are growing very quickly and many new models are coming on line, while battery technology is improving rapidly, with costs falling sharply and energy density rising.
However while these factors suggest that electric vehicles will gain substantial market share it does not say how much how soon. So how fast might the market for plug-in vehicles grow if policy drivers are strong and matched by favourable economics? Here I consider how quickly electric vehicles could gain market share on that sort of optimistic view.
Market share gains for new technologies
The transition to electric vehicles is in its early stages, so extrapolating historical trends offers only limited guidance. Similarly, highly detailed modelling may not offer robust insights, because too many assumptions are required. Instead it seems appropriate to look at some broad indicators.
A good starting point is to look at adoption other new technologies. The chart below shows the rates of penetration of new technologies in the USA over the 20th and early 21st centuries. It shows variants on a characteristic s-curve shape, with most technologies reaching eventual penetrations of 80-100%. The typical time to reach about 80% penetration following the first 1% or so of deployment (about where plug-in vehicles are now) is around 20-30 years, although some modern highly scalable technologies have become nearly ubiquitous faster than this, and other technologies have taken as long as fifty years or so to reach high penetration.
For example, cars themselves experienced rapid growth between around 1910 and 1930, reaching 60% of households, before experiencing hiatus and decline during the Great Depression and Second
World War, before growing steadily again through the to the second half of the 20th Century.
However these timings are for the USA, and, even in increasingly homogenous, world global adoption may take a little longer.
Chart: Transitions of major technologies
The chart mainly shows technologies that fulfil a new function, rather than those that replace existing technologies, as plug-in vehicles do. However replacement technologies can also gain market share quickly. Digital cameras replacing film almost completely over a period of around 15-20 years, and DVDs replaced VHS in less than 10 years. In these cases the new technology brought clear advantages. For plug in vehicles a combination of some advantages plus regulatory drivers could play a similar role.
Modelling the transition
EVs are rather different from many of these cases in that there is a large existing capital stock which is expensive to replace – a new car is much more costly than a new camera. This limits the rate of change of the stock. I have therefore applied the sorts of timescales shown above to a rough and ready model representing the potential rate of gain market share of new vehicles, rather than changes to the stock. The model uses a standard s-curve (logistic function). Changes in the stock are then calculated considering stock turnover.
I have developed three scenarios representing respectively strong policy drivers, more moderate policy drivers, and a delayed transition representing either weaker policy or greater practical or economic obstacles. The strong policy case fits better with the historic data, but this may not be a reliable marker as the history is so short and there are a number of particular circumstances at work.
I have assumed plug-in vehicles will eventually account for 80%-90% of the market for light vehicles, with markets for internal combustion vehicles likely to remain where consumers seek low capital costs or they need long range with poor infrastructure. There will doubtless also be small niches for car enthusiasts seeking experience of the internal combustion engine, just as there are for taking photographs on film. However these are likely to play only a small role.
The rate at which the stock of vehicles is replaced depends on how long vehicles last. I have assumed this to be 15 years, although there is obviously a distribution around this. If this were to lengthen further it would slow the change in the stock, or could be shortened by incentives to scrap older vehicles. The life of new electric vehicles is unproven (although battery guarantees of typically around 8 years are available), but in any case I have assumed buyers replace their battery packs, or replace their EVs with other EVs rather than returning to internal combustion engines.
Growth of the vehicle fleet leads to a faster proportional changeover of the stock, assuming plug in vehicles gain the same share of the larger market, because current sales are a greater proportion of the historic stock. I’ve here assumed a 2.5% p.a. global growth rate for car sales.
The results of this analysis are shown in the chart. Annual sales of EVs reach 20-60% of the market by 2030, expected to be over 100 million vehicles p.a. by then. They by then account for around 7-22% of the vehicle stock, or around 100-330 million vehicles. By 2050 electric vehicles account for a majority of light vehicles on the roads in all the scenarios.
Global market share of plug in light vehicles
So do these projections make sense, and what might stop them?
Cost competitiveness. Analysis by a variety of commentators show EVs becoming economically competitive in the early to mid-2020s, varying between geographies depending on factors such as driving patterns and petrol prices. This timing corresponds with the period when vehicles begin to gain market share much more rapidly in the above model, especially in the first two cases, which appears consistent.
China. A large proportion of vehicle sales in the coming years will be in developing countries, especially China. Concerns around urban air quality, development of the indigenous automotive industry, infrastructure development, and oil imports look likely to tend to favour EVs in China. Driving patterns based around lots of shorter distance urban driving are also compatible with EVs. For these reasons government policy in China strongly favours EVs. Again this seems consistent.
Growth rate. The compound annual growth rate for annual sales over the period to 2030 ranges from 25% to 33%, both well below current growth rates of around 60% p.a.
Scale-up. The need to produce tens of millions of additional EVs by 2030 is a formidable challenge. However the international car industry increased production by about 35 million units p.a. over the two decades between the 1990s and 2015, and added 20 million units p.a. in the last decade alone. Replacing models with electric equivalents at this scale does not seem like an insuperable barrier, at least in the lower two scenarios. However the challenges of achieving this for the stronger policy scenario are formidable, and policy drivers would need to be correspondingly strong to overcome these barriers.
Battery production would also need to be scaled up by orders of magnitude. There don’t appear to be any fundamental barriers to supply of the vast quantities of lithium that would be needed, but it may take time to develop the infrastructure.
The need to ramp up production of both new models and batteries may act to slow growth, at least for a while and especially in the strong policy case, but do not seem likely to act as a fundamental longer term constraint.
Grid constraints. EVs are likely to require reinforcement of grids, but again this does not look like a major barrier given the timescales involved.
These projections show much faster growth than analysis by BNEF, which suggests 35% market share by 2045. However the reasons that BNEF sees growth being so restricted are unclear, and there appear to be few examples where the penetration of a new technology has been so slow. It seems a more likely estimate for a share of the stock by that date, though even then looks to be towards the low end of the range.
Goldman Sachs estimates 22% of the market being EVs by 2025. This includes conventional hybrids, with the share of plug-in vehicles being only about a third of this, closer to the moderate case. However it would not seem to require a fundamental change to the market’s development for a greater share of hybrids to be plug-in, so Goldman’s analysis seems at least potentially consistent with the strong regulation case shown here.
Other scenarios show something close to the moderate case shown here. The IEA 450 scenario and Statoil’s reform scenario both show EV sales reaching around 30% of the market by 2030.
Outturn will doubtless differ from these projections. But they do highlight the extent to which policy might succeed in stimulating a major transition in car markets in the next two or three decades.
Adam Whitmore – 24th May 2016
 All estimates here refer to pure electric vehicles and plug in hybrids, which get much or all of their energy from externally generated electricity. Depending on driving patterns, a PHEV may typically get 70% of its energy from external electricity. I exclude conventional hybrids, which are essentially a variant of internal combustion engines with increased efficiency, in that still get all their energy from petrol.
 Some have made the case that on pure resource cost grounds internal combustion engine vehicles will continue to predominate. See http://www.energypost.eu/can-battery-electrics-disrupt-internal-combustion-engine-part-1/ This is potentially true in the absence of any policy drivers due to emissions or other factors, but this seems unrealistic.
 For comparison, BP assume a doubling of the vehicle fleet by 2035, about a 3.5% p.a. growth rate (see there 2035 outlook).
 See Lost in transition, Carbon tracker p. 102 for plots of these projections
The role of biomass in the world energy system looks likely to be constrained, so there will be a need to focus on high value applications where there are few low-carbon alternatives.
This is the second of two posts looking at the role of biomass. Here I focus on potential resource constraints.
A wide range of possibilities
The amount of biomass available to provide energy depends a lot on the amount of land available to grow energy crops, and how much that land can yield. Different assumptions on these variables produce quite different estimates of the total resource, and numerous studies over the years have produced a wide range of results. The amount of waste biomass available also matters, but potential availability from this source is smaller.
A comprehensive review of estimates of the biomass resource was carried out two years ago by researchers at Imperial College[i] (see chart). It showed a variation in estimates of a factor of around 40, from of the order of 30 EJ to over 1000 EJ (1EJ =1018 J, or a billion GJ, or 278 TWh). This compares with total world primary energy demand of just under 600 EJ, transport demand of around 100 EJ, and at least 250 EJ to produce present levels of electricity, assuming biomass combustion to remain relatively inefficient[ii].
Estimates of available biomass resource
Source: Slade et. al. (2014)
The authors examine reasons for differences in estimates, which I’ve summarised in the table below. The differences are largely assumption driven, because the small scale of commercial bioenergy at present provides little empirical evidence about the potential for very large scale bioenergy, and future developments in food demand and other factors are inevitably uncertain.
Reasons for variation in estimates of total biomass supply
|Up to 100EJ||Limited land available for energy crops, high demand for food, limited productivity gains in food production, and existing trends for meat consumption. Some degraded or abandoned land is available.|
|100-300 EJ||Increasing crop yields keep pace with population growth and food demand, some good quality agricultural land is made available for energy crop production, along with 100-500Mha of grassland, marginal, degraded and deforested land|
|300-600EJ||Optimistic assumptions on energy crop availability, agricultural productivity outpaces demand, and vegetarian diet|
|600 EJ +||Regarded as extreme scenarios to test limits of theoretical availability|
Reasons for caution
In practice there seem to me to be grounds for caution about the scale of the available resource, although all of these propositions require testing, including through implementation of early projects.
- There will rightly be emphasis on protection of primary forest on both carbon management and biodiversity grounds, with some reforestation and rewilding.
- There is little evidence of a shift away from meat consumption. With the exception of India, less than 10% of people in most countries are vegetarian despite many years of campaigning on various grounds[iii]. In China meat consumption is associated with rising living standards.
- Demand for land for solar PV will be significant, although a good deal of this will be on rooftops and in deserts
- The nitrogen cycle is already beyond its limit, constraining the role of fertiliser, and water stress is a serious issue in many places (agriculture accounts for 70% of current fresh water use). The UN Food and Agriculture Organisation has projected fairly modest increases in future yields.
- Difficulties in limiting lifecycle emissions from biofuels are likely to lead to caution about widespread deployment.
- Concerns about food security may limit growth of biofuels.
Small scale to date, despite many years of interest
- There has been little progress to date compared with other low carbon technologies. Though traditional biofuels remain widely used, modern biofuels account for a very small proportion of demand at present. World biofuels consumption currently accounts for only 0.2% of world oil consumption[iv] . Many biofuels programmes have had subsidies cut and there is still limited private sector investment.
In this context some estimates of the potential for biomass to contribute to energy supply seem optimistic. For example, Shell’s long-term scenarios (Oceans and Mountains) show biomass of 74 EJ and 87 EJ respectively for commercial biomass, 97-133 EJ including traditional biomass by 2060[v]. These totals are towards or above the more cautious estimates for the resource that might ultimately be available (see table above). A recent review article[vi] suggested that by 2100 up to 3.3 GtCp.a. (around 12 billion tonnes of CO2) could be being removed, and producing around 170EJ of energy. However the land requirements for this are very large at about 10% of current agricultural land. The authors suggest instead a mean value for biomass potential of about a third of that, or 60EJ.
On balance it seems that biomass is likely to account for at most less than 10% of commercial global energy (likely to be around 800-900EJ by mid-century), and potentially much less if land availability and difficulties with lifecycle emissions prove intractable.
It thus seems likely that biomass energy will be relatively scarce, and so potentially of high value. This in turn suggests it is likely to be mainly used in applications where other low carbon alternatives are unavailable. These are not likely to be the same everywhere, but they are likely often to include transport applications, especially aviation and likely heavy trucking, and perhaps to meet seasonal heat demand in northern latitudes. For example, according to Shell’s scenarios aviation (passengers + freight) is expected to account for perhaps 20-25EJ by 2050, and biomass could likely make a useful contribution to decarbonisation in this sector.
None of this implies that biomass is unimportant, or has no role to play. It does imply that policies focussing on deploying other renewable energy sources at large scale, including production of low carbon electricity for transport, will be essential to meeting decarbonisation targets. And the optimum use of biomass will require careful monitoring and management.
Adam Whitmore – 11th April 2016
[i] Slade et.al., Global Bioenergy Resources, Nature Climate Change February 2014
[ii] Data on final consumption and electricity production from Shell and IEA data. 35% efficiency for biomass in electricity is assumed, which is likely to be somewhat optimistic, especially if CCS is employed.
[iv] BP Statistical Review of World Energy
[v] http://www.shell.com/energy-and-innovation/the-energy-future/shell-scenarios.html These totals include biofuels, gasified biomass and biomass waste solids, and traditional biomass.
[vi] Smith et. al., Biophysical and economic limits to negative CO2 emissions, Nature Climate Change, January 2016. The paper estimates land requirement for 170 EJ of 380-700 Mha, around 10% of total agricultural land area in 2000 of 4960Mha.
The potential for biomass with CCS and direct air capture of CO2 should not distract from deployment of CCS on fossil fuel plants over the next few decades. Among other things, learning from CCS on fossil fuels will help make eventual deployment of CCS on biomass cheaper and more effective.
There appears to be increasing likelihood that atmospheric concentrations of greenhouse gases will grow to exceed levels consistent with the target specified in the recent UNFCCC Paris agreement of limiting temperature rises to “well below” two degrees. Such an outcome would require CO2 to be removed from the atmosphere faster than natural sinks allow, in order to restore concentrations to safe levels. Near zero net emissions in the latter part of this century will also be needed to stabilise concentrations.
Many models of future emissions pathways now show negative emissions technologies (technologies that result in a net decrease in CO2 in the atmosphere) needing to play a major role for in meeting climate goals. They have the potential to remove carbon dioxide from the atmosphere in the event of “overshoot” of target atmospheric concentrations, and to balance remaining emissions from sectors where abatement is difficult with a view to achieving net total emissions of close to zero. But the application of such technologies should not be considered in isolation.
Bio Energy with CCS (BECCS)
Bio energy with CCS (BECCS ) is the most widely discussed approach to negative emissions. BECCS is not a single technology but a combination of two major types of CO2 removal. Bioenergy from burning biomass to generate electricity or heat emits a substantial amount of CO2 on combustion – around as much as a coal plant. However much of this can be captured using CCS. More carbon dioxide is reabsorbed over time by the regrowth of the plants, trees – or perhaps algae – that have been harvested to produce the bioenergy. Together, the capture of the CO2 from the flue gas and the subsequent absorption of CO2 from the atmosphere by regrowth of biomass can lead to net removal of CO2 from the atmosphere, although this takes time. (The net amount of CO2, that is emitted on a lifecycle basis from burning biomass without CCS depends on the type of biomass and is subject to considerable variation and uncertainty – a controversial topic that would need another post to review.)
However at an energy system level, where the CO2 is captured – biomass plant or fossil fuel plant – is less relevant than the total amount that’s captured. Broadly speaking, if there is a biomass plant and fossil fuel plant both running unabated the same benefit can be achieved by capturing a tonne of CO2 from either.
Indeed there may be advantages to putting CCS on a conventional plant rather than biomass plant. It may be technically more tractable. Furthermore, CCS require a lot of energy to capture the CO2 and then to compress and pump it for permanent storage. Biomass is likely to be supply constrained (again, this is an issue that requires a post in itself), so using biomass rather than fossil fuels to provide this energy may limit other applications. Only when there are no fossil fuel plants from which to capture CO2 does biomass plant become unambiguously a priority for CCS. This is clearly some way off.
Furthermore biomass with CCS for electricity generation may not be the best use of bioenergy. Converting sunlight to bioenergy then turning that into electricity is a very inefficient process. Typically only 1-2% of the sunlight falling on an area of cropland ends up as useful chemical energy in the form of biofuels. There are various reasons for this, not least of which is that photosynthesis is a highly inefficient process. Burning biomass to make electricity adds a further layer of inefficiency, with only perhaps a third or less of the energy in the biomass turned into electricity. Sunlight therefore gets converted to electricity with an efficiency of perhaps 0.5%. This compares with around 15- 20% for solar cells, implying that scarce land is often likely to be best used for solar PV. (The calculation is closer if solar PV is used to create storable energy e.g. in the form of hydrogen). For similar reasons the use of biofuels rather than electricity in transport is inefficient, in part because internal combustion engines are less efficient than electric motors.
Limited available biomass may be better used for those applications where it is the only available lower carbon energy source, notably in aviation and (likely) heavy trucks, or for other applications such as district heating with CCS, where the ability to store energy seasonally is especially valuable.
At the very least, detailed system modelling will be required to determine the optimal use of biomass. Suggesting that BECCS should have a major role to play simply because in isolation it has negative emissions may lead to suboptimal choices.
Direct Air Capture (DAC)
Direct Air Capture (DAC), where carbon dioxide is chemically absorbed from the atmosphere and permanently sequestered, can also reduce the stock of CO2 in the atmosphere. However the typical concentration of CO2 in a flue gas of a power plant or industrial plant is several percent, about a hundred times as great as the concentration of 0.04% (400 ppm) found in the atmosphere. This makes the capture much easier. Furthermore, millions of tonnes can be captured and piped from a single compact site using CCS, generating economies of scale on transport and storage. In contrast DAC technology tends to be more diffuse. These considerations imply that CCS from power plants and industrial facilities is always likely to be preferable to direct air capture until almost all the opportunities for CCS have been implemented, which again is a very long way off.
Uncertainties and optionality
There are many uncertainties around negative emissions technologies, including the availability of biomass, cost, and the feasibility of reducing emissions in other sectors. For these reasons developing optionality remains valuable, and research to continue to develop these options, including early trial deployment, is needed, as others have argued[i].
One of the best ways of developing optionality is to deploy CCS at scale on fossil fuel plants. This will reduce the costs and enable the development of improved technologies through learning on projects. It will also help build infrastructure which can in turn benefit BECCS. This needs to run in parallel with ensuring that the lifecycle emissions from the bioenergy production chain are reduced and biodiversity is safeguarded.
Negative emissions technologies may well have a role to play in the latter part of the century. But they seem likely to make more sense when the economy is already largely decarbonised. In the meantime deployment of CCS, whether on industrial facilities or power plants, needs to be a much greater priority.
Adam Whitmore – 21st March 2016
[i] Investing in negative emissions, Guy Lomax, Timothy M. Lenton, Adepeju Adeosun and Mark Workman, Nature Climate Change 5, 498–500 (2015) http://www.nature.com/nclimate/journal/v5/n6/full/nclimate2627.html?WT.ec_id=NCLIMATE-201506
BP’s latest long term outlook for the energy sector looks particularly unrealistic in its projection of a “most likely” case of almost no uptake of electric vehicles by 2035. This needs to change in their next review.
Electric vehicles (pure EVs and plug-in hybrids) will make almost no difference to the transport sector until beyond 2035 – that is according to BP in their latest long term projections for the energy sector[i], which were published last week. It is easy – and perhaps accurate – to dismiss this view simply as an incumbent not facing up to the effects of a disruptive new technology, the equivalent of a silent movie producer suggesting in the late 1920s that talking pictures were a merely a fad which would never catch on.
However sales of electric vehicles remain a small proportion of the market, with continuing challenges around cost, range and charging infrastructure. And they are presently a relatively expensive way of reducing CO2 emissions.
So why does the BP analysis look to be so far from being the most likely outcome that it’s presented as? There are several reasons for this.
The trend is of rapid sales growth
Although small, the market for electric vehicles looks to be growing exponentially at present. Annual sales have grown from almost nothing 5 years ago to approaching 1% of the total market of just over 70 million cars p.a.[ii]. Sales have roughly doubled every 18 months over the last three years, which is similar to the growth rate of solar PV in its early years.
Simply extrapolating this growth rate would imply annual sales of nearly 5 million vehicles in 2020, with a cumulative total of about 13 million vehicles, or 1% of the world stock which is currently about 1.3 billion vehicles[iii]. Even a slower rate of growth, with sales doubling every two and a half years, would imply annual sales of over 2 million vehicles by 2020 (about a 3% annual market share), and a cumulative total of 7.8 million. This figure is close to Bloomberg’s projection of 7.4 million electric vehicles by that date.
Annual global sales of plug-in vehicles in thousands [iv]
New models are increasingly coming on line
Growth in sales looks likely to be sustained by new models. Pure electric vehicles with mainstream market prices and a range of around 200 miles are expected over the next couple of years or so, including new versions of the Nissan Leaf and Chevrolet Volt, and the new Tesla E, while in China BYD is introducing its e5 300 EV. General Motors also plans to produce its first fully electric car, and Apple is widely understood to be undertaking a major programme to produce an electric car. Meanwhile major manufacturers including BMW, Mercedes and Porsche are gradually migrating plug-in hybrid drive train options across their ranges. These developments should greatly increase the number of customers who can find a model that fits their needs.
Battery technology is improving rapidly
This growth is being underpinned by rapid improvements battery technology, with cost and weight per kWh halving or more in the last five years. This trend is expected to continue in the coming years. Goldman Sachs[v] estimates that continuing advances in technology (see chart below) will lead to major improvements in cost and performance over the next five years.
Projected battery cost reductions and performance improvements
Source: Goldman Sachs
CO2 emissions standards will continue to tighten
Regulations limiting average CO2 emissions from cars are tightening across the world. As this trend is sustained and extended electric vehicles are likely to play an increasingly important role in reaching targets. As adoption of electric vehicles increases this is in turn likely to lead to governments to seek tighter standards, knowing that the technology to meet them is available. Furthermore, a move to electricity in transport is consistent with wider programmes of emissions reduction that include increasing decarbonisation of electricity generation. However, lifecycle emissions including from vehicle production will require continuing attention.
Regulations to promote urban air quality are likely to tighten
Just about every major city in the (increasingly urbanised) world has problems with poor air quality. Vehicles are responsible for much of this. Concerns about this are likely to lead to increasing prevalence of low emissions zones in cities. The UK Conservative party manifesto went further in its 2015 election manifesto, setting out an aim for nearly all cars and vans on the road to be zero emissions by 2050[vi]. Indeed, improving local air quality is often seen as a more pressing problem than reducing CO2 emissions because of the immediate and localised health effects.
Such regulations are likely to lead to greatly increased take-up of electric cars and buses. (Around 46,000 electric buses were already in use worldwide by 2014[vii].) This is among the reasons why choices between EVs and internal combustion engine vehicles won’t simply be a matter of which is cheaper. EVs only need to be close enough in cost and sufficiently available for tighter regulation to be practicable.
Consumer preferences and lifestyle are likely to favour electric vehicles
Electric vehicles are quieter than those with internal combustion engines, especially at low speeds (at higher speeds wind and road noise tend to predominate for all vehicles). They are also good to drive, with excellent acceleration and road holding, and they reduce or eliminate trips to petrol stations (never pleasant places despite the best efforts of those involved). They fit with consumer preferences for cleaner vehicles, which seem likely to increase in tandem with regulatory action. And they fit comfortably with trends towards increased functionality of communication systems (cars as “smart phones on wheels”), driver assistance and autonomous driving, and greater prevalence of car sharing models. These trends look to be significant, especially for younger consumers.
Together these trends give a convergent story of much earlier and more rapid growth in EVs than suggested by BP. Norway shows what can be done. Electric vehicles reached 16% of sales of new cars there in 2015[viii]. Changeover of the vehicle stock will take a while. And oil products look likely to continue to predominate in aviation and heavy trucking. But their future in light vehicles seems much more challenged. Electrification of light vehicles is likely to lead to substantial changes in the transport system over the next 20 years. It is to be hoped that the next edition of BP’s long-term outlook includes a much more realistic view of this.
Adam Whitmore – 18th February 2016
[i] http://www.bp.com/content/dam/bp/pdf/energy-economics/energy-outlook-2016/bp-energy-outlook-2016.pdf , see p.22-23 of the presentation
[iii] See BP presentation page 25 for current global total
|[iv] Data is from:|
[v] See http://www.goldmansachs.com/our-thinking/pages/new-energy-landscape-folder/report-the-low-carbon-economy/report.pdf See p.23for sales projection
Carbon markets need some liquidity to provide efficient price signals, but low cost abatement is the ultimate objective, not more trading.
Carbon markets have become widespread because trading can allow emissions to be reduced at lower cost, providing flexibility to emitters and revealing information about where low cost abatement is available. However, this does not imply that higher trading volumes should be an end in themselves. Liquidity needs to be sufficient to allow for emitters to take advantage of flexibility and to understand their own costs in relation to others’. Beyond this, large trading volumes may be a sign of difficulties, for example excessively volatile prices.
In particular, some have claimed that higher trading volumes imply that the EUETS is functioning better than the California scheme. Trading volumes are indeed higher in the EU than in California relative to the size of the market, but this does not make for a more effective price signal. Indeed the California scheme seems currently to provide the better price signal.
The chart below shows data from Bloomberg New Energy Finance (BNEF) on the ratio of trading volumes to the annual cap in the EU, California and China. This data is for trading on secondary markets – it excludes the volumes from the original auctions. In the EUETS trading is about three times the volume of the cap. In California the volume of trading is slightly more than the annual cap, implying that on average allowances are bought and sold once after their original auction. In contrast there are very few trades at all in the Guangdong or Shanghai pilot schemes in China, with only 5 and 2 million tonnes of recorded trades respectively (other Chinese pilot schemes show similar behaviour), about 1% of the annual cap.
Ratio of traded volumes on secondary markets to the annual cap in different emissions trading schemes in 2015
Source: Bloomberg New Energy Finance
The low volumes of trading in the Chinese schemes indicate that the schemes are not yet functioning effectively to provide market-determined price signals in the way they would in Europe or the US, although this does not, of course, imply that the schemes are having no effect. However the greater volume of trading in the EUETS is not the sign of a more efficient price signal than in California.
Trading in California seems clearly sufficient to allow higher cost emitters to purchase allowances rather than undertake expensive abatement, especially given that these trades are in addition to the original auctioning of allowances which in itself creates a market price. The main reason that trading volumes are lower than California than in the EU looks to be that the auction reserve price in California has led to a stable market price, close to the reserve price, and this is likely to persist as the auction reserve price continues to escalate at its specified rate of 5% p.a. plus inflation. In contrast, the EUA price continues to remain relatively volatile, creating more opportunities for trading (although price volatility is a feature of most commodity markets and not necessarily a sign of a badly functioning market). Yet prices in California are both higher than in the EU (currently about $13/tCO2 in California compared with about $7/tCO2 in the EU), and more stable. Higher, more stable prices give a better signal for companies looking at low carbon investment.
There are also some additional restrictions in the California scheme such as allowance holding limits, which are intended to prevent market manipulation and may affect some market participants. However none of these rules seem likely to inhibit efficient price formation.
There continue to be some, especially in the EU, who object to price containment, such as auction reserve prices, in principle. However these objections are not well founded. In the California system additional opportunities for abatement below the auction reserve price lead to more abatement, rather than lower prices. This is a more efficient outcome, and more in line with the way that normal markets work (see here). Indeed, even the California price lies well below the social cost of carbon, so is still too low.
Markets are a means to an end: efficient emissions reduction. Trading should serve this overall objective. Suggesting that the EUETS is somehow a better functioning market than California because it has higher trading volumes misses the larger goal, which is efficient abatement, not increasing the number of opportunities for traders.
Adam Whitmore – 28th January 2016