“All that glitters is not gold” - William Shakespeare
By Nina Lagron, CFA, Head of Large Cap Equites, La Française AM
Well on its way to limiting global warming to well below 2° C, the European Union has put in place ambitious legislative policy to reduce emissions by at least 60% by 2030 compared to 1990 levels. The European Climate law goes further to propose a legally binding target of net zero greenhouse gas emissions by 2050. Further CO2 emission standards for cars and vans (Regulation EU 2019/631) were set by the European Parliament and put into application as of January 1, 2020. In conjunction with this legislation, the European market is bearing witness to a boom in the sale of new electric vehicles. According to the European Automobile Manufacturers Association, sales of new electric vehicles including all-electric and plug-in hybrids jumped 51.8% to 110,630 in Q3 2019 alone. But is it a case of “green-washing” and what are the hidden environmental impacts of electric vehicles? Do low CO2 emission cars really exist?
Transport accounted for 24% of global carbon dioxide emissions from energy in 2018 (Source: IEA), of which passenger vehicles (cars and buses) accounted for 45%. Given the potential for reductions and the corresponding impact on global emissions, the development of electric vehicle technology is essential to reaching climate objectives.
However, it is important for an informed decision not to be blind sighted by the promise of zero tailpipe emissions for electric vehicles in full electric mode but rather to consider all the associated sources of greenhouse gas emissions resulting from all direct and indirect sources of CO2 pollution production, referred to as Scope 1, 2 and 3 emissions. These include the emissions associated with the manufacture and the extraction, processing and distribution of energy sources (electric power and fuel). A study published in the journal Nature Sustainability (Vol 3 June 2020, Net emission reductions from electric cars and heat pumps in 59 world regions over time) confirmed that electric vehicle technologies were worthwhile expanding, given the CO2 savings over conventional cars. However, the source of electricity has an effect on the emissions of the electric vehicle, which will vary by geographic area and its use of specific energy sources (i.e., natural gas, nuclear, coal, wind…) for electricity generation. For example, in a study conducted by German scientists and presented at the Ifo Institute on April 17, 2019, electric vehicles, when taking into account the production of batteries and the German energy mix, are said to generate even more CO2 than diesel models. Hence, disparities exist depending on the country and energy source.
Furthermore, the debate intensifies depending on the technology considered and climate conscious consumers should be weary of over-selling. For example, according to a recent study published by Transport & Environment (11/2020) entitled “Plug-in hybrids: is Europe heading for a new dieselgate?”, three of the most popular plug-in hybrid vehicles (PHEVs) sold in 2019 generated 28 to 89% higher emissions than advertised, in optimal test conditions. Whereas PHEVs boast low CO2 emissions that are generally no more than a third of a traditional combustion engine car, those three vehicles tested by Emissions Analytics, commissioned by Transport & Environment for the purposes of the study, all fell short of their promised carbon emissions savings objectives even when starting with a fully charged battery. And the results fell even shorter of objectives when starting with an empty battery, producing up to eight times more in CO2 emissions than advertised.
New Green Finance regulations could put a halt to manufacturers advertising PHEVs as “sustainable investments” as early as 2026 and hence accelerate the transition to fully electric vehicles, bringing Europe closer to the climate goal. Some proactive EU member states have already excluded PHEVs from tax breaks, which has resulted in a rise in sales of battery electric vehicles (Source: electrive.com, Is this the end of plug-in hybrid sales in the EU). However, it is important not to lose sight of the fact that the transition to electric vehicles does not always result in large greenhouse gas reductions, since electricity generation is not yet decarbonized. An accurate evaluation of Scope 1, 2 and 3 emissions over the full life cycle of the vehicle is necessary to evaluate on a case-by-case basis electric car manufacturers and their ability to contribute favorably and at the desired pace to limiting global warming to well below 2°C. The availability of accurate data to quantify Scope 1, 2 and 3 emissions is key.
In conclusion, keep in mind that all that glitters is not all green!
This commentary is intended for non-professional investors within the meaning of MiFID II. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It may not constitute investment advice or an offer, invitation or recommendation to invest in particular investments or to adopt any investment strategy. Past performance is not indicative of future performance. The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Asset Management was approved by the AMF under no. GP97076 on 1 July 1997.