Climate change and the automotive sector

The UN’s IPCC estimates that the transport sector accounts for approximately 23% of total energy-related CO2 emissions. The IPCC also argues that there is a danger that transport emissions could increase at a faster rate than emissions from other end-use sectors as per capita transport demand accelerates.

Rising incomes and the development of infrastructure in developing countries over the decades to 2050 will put upward pressure on greenhouse gas generation. As economies develop more industrial activities, the GHG-intensity of economic output goes up as people and goods in new supply chains move about more. Higher final household demand for consumer goods also follows higher incomes – particularly as economies move from being per capita low-income to middle-income.

Breaking down the transport total, the IEA estimates that road vehicles – cars, trucks, buses and two- and three-wheelers – account for nearly three-quarters of transport CO2 emissions. However, it also says that the Covid-19 pandemic caused a big decline in road transport in regions with lockdowns in place – dropping by between 50% and 75% in the first half of 2020, with global average road transport activity almost falling to 50% of the 2019 level by the end of March 2020. However, as the pandemic eases and economic activity picks up, so will transport-related emissions.

Regulators and governments cannot ignore the sizeable position of transport in the mix of national greenhouse gas emissions.

To take the UK’s case, if the target is for the country’s economy to be net carbon zero by 2050 – as the UK’s government has set out – then transport must be addressed. The UK’s 2050 net zero target — one of the most ambitious in the world — was recommended by the Committee on Climate Change, the UK’s independent climate advisory body. Net zero means any emissions would be balanced by schemes to offset an equivalent amount of greenhouse gases from the atmosphere, such as planting trees or using technology like carbon capture and storage. It’s a tall order if a government also wants to create the conditions for economic growth that raises incomes and wellbeing for its population. Transport is the constant beat at the heart of economic activity.

The goal of a greener road transportation sector, for both goods and people moving, also coincides with another important end-user benefit: Better fuel economy for lower vehicle running costs. National governments have also factored in other elements of the national interest – for example lowering oil imports and reducing traffic congestion on the roads (which also has considerable negative economic impacts). There is also rising evidence of the harmful health effects of small particulates and gases that come with other tailpipe emissions – most notably, nitrogen oxides. There is therefore a confluence of factors that make policymakers generally attracted to managing transport sector activity – and things like the overall modal split, especially in highly populated cities.

A look around the world shows a variety of policy making and regulatory levers at work, some better than others, within the general aim of reducing the transport sector’s consumption of energy and especially fossil-fuels. From a national strategic point of view, economies also benefit from having industrial sectors that are internationally competitive and that embrace emerging advanced technologies.

In automotive, that means having products meeting acceptable performance criteria – including running costs (or total cost of ownership) of which fuel economy will be a significant part. The market has generally been moving in the direction of – for a given class of vehicle – improved fuel economy being in the long list of consumer wants. Against that, manufacturers are under pressure to pack vehicles with ever more features and equipment – which comes with some weight penalty, even allowing for advances in design and materials that can counter that.

The US, for example, has its CAFÉ rules that come at the problem via manufacturers from a fleet average fuel economy direction (with penalties for non-compliance). The EU has also opted for manufacturer sanctions and fines tied to average fleet CO2 levels. Beijing’s approach has been more chaotic and led by national economic and strategic priorities – which have recently put electric vehicles center stage in its longer-term development plans.

The CAFÉ framework in the US was subject to considerable political debate during the Obama and Trump presidencies. Automakers – particularly the US domestics – have had to strike an uneasy balance. They don’t want anything too tough from the regulators, but they understand the direction of travel around the world and want US standards that don’t diverge from international norms, broadly speaking, even if the projected greener powertrain mix and associated investments add cost in the short-term.

In Europe, the EU has focused on a regime of fleet sales weighted CO2 averages and fines for companies that exceed CO2 gram/km targets. Like the US, it impacts vehicle companies directly with fines for missing targets. Companies are thus incentivized to ramp up sales of low CO2 models such as EVs and hybrids. Delays to model introductions can be costly, as illustrated by VW’s fine of over EUR100m when it just missed its 2020 target, blamed on delays to the launch of its ID.3 electric car.

European automakers are also having to absorb the higher costs that come with the demise of the diesel ‘solution’. Diesel was seen by European policymakers for decades as a convenient solution for more efficient and lower CO2 light duty vehicles. However, diesel share of the European car market has fallen back in recent years as diesel’s image has been tarred by VW’s ‘dieselgate’ scandal and governments have responded to mounting evidence of the harmful effects on air quality caused by diesel engine exhaust emissions, especially extremely small particulate matter. Clean air regimes for urban areas have increasingly targeted diesel vehicles. At the same time, gasoline engines have become more efficient due to the application of high-pressure direct injection systems; more hybrids and plug-in hybrid systems have also become available for the larger vehicles that suited diesels.

As a wave of newly introduced electric vehicles gathers pace, the competitive ante rises also. No manufacturer wants to ‘miss the boat’ and many are acutely aware of the market risks that come with the rollout of new technologies. Some will conclude that it is better to sell EVs for low margin – or even at a loss – to start, if that ensures acceptable market presence and helps to avoid EU fleet average CO2 fines. Moreover, the chips shortage and the preference for OEMs to fit available critical electronic components to high margin (and higher CO2) vehicles may also tip the balance in favor of accelerating the availability of EVs.

In short, the auto industry is moving in an apparently more environmentally responsible direction – in terms of its product offerings - on the back of regulatory and market pressures that are difficult to resist, even as they come with higher short-term product development costs. Engineers across the sector, working inside OEMs and suppliers, are obsessed with delivering greater energy efficiency in performance, securing incremental gains across all aspects of vehicle design – in powertrain, transmission, chassis, cockpit and materials usage. There are gains ahead, too, in the intelligent or smart management of road traffic – and again, huge technological advances and new techniques for the exploitation of huge data sets are facilitating such work.

Indeed, the industrial eco-system in automotive is developing rapidly, with startups and disruptors, as well as emerging hardware and software developers across the world, bringing a fresh business culture and impetus to an industry previously well known for its inertia mentality and heavy attachment to incumbent technologies and practices. The way we consume transport and the equipment – both hardware and software - that facilitates that is subject to transformative change. Environmental concerns – conflated with more efficient product performance aims that also meet other concerns and customer needs - will continue to be at the heart of the mix, all along the value chain.

Much attention is being paid to energy use in manufacturing and deploying sustainable solutions. Energy generation is one area where much progress has been made with on-site wind turbines and solar panels to generate electricity used in manufacturing facilities. Increasing attention is also being paid to significant GHG contributions along the supply chain. There is commendable progress being made, even in highly energy intensive areas such as steel production, with innovative fossil-free solutions being found. Much attention is being paid to waste materials, recycling and designing in more sustainability under circular economy principles (Renault a leader, there.

As the industry transitions away from fossil fuels, larger societal considerations also come increasingly into play. The GHG contribution of journeys made by different transport modes – especially in urban areas – will be under considerable scrutiny. How we move around and why has always been something of a movable feast, defined by required economic and social interactions alongside the prevailing mobility technologies of the times we live in. The automotive industry and transportation sector will have to continue to adapt to changing end-use demands and regulatory frameworks. There is at least a positive backdrop and opportunity in the form of the emerging advanced CASE technologies at the disposal of large companies with big R&D budgets. The companies that can ultimately best exploit the very latest technologies alongside business models that also meet rising environmental concerns and regulatory requirements will be tomorrow’s winners.

// Image credit: Nissan’s Leaf-making Sunderland facility is the UK’s largest vehicle manufacturing plant and ships most of its cars to EU markets