How the global automotive industry is approaching the energy transition
This research was authored by S&P Global Mobility.
Published: September 17, 2024
The growth of battery electric vehicles (BEVs) has been slower than initially expected due to factors such as high upfront costs, limited charging infrastructure, inconsistent regulations, and consumer preference for hybrid options. However, the adoption of BEVs is expected to accelerate in the coming years as battery technology improves, costs decrease, charging infrastructure expands and government policies support BEVs.
Automakers are facing the challenge of decarbonizing their value chain, with a focus on reducing Scope 3 emissions, particularly in the use phase of vehicles. Some automakers have set aggressive carbon reduction targets while others have opted for more moderate approaches. The transition to BEVs is expected to contribute to a significant reduction in global CO2 emissions from vehicles.
The decarbonization efforts need to shift upstream to the automotive supply chain as the demand for batteries to support BEV deployment increases. This will require addressing the increased energy and material inputs associated with vehicle supply chains and ensuring sustainable sourcing practices.
Authors
Xi Wang | Research and Analysis Associate Director, Sustainable Mobility, S&P Global Mobility
Xavier Demeulenaere | Research and Analysis Associate Director, Sustainable Mobility, S&P Global Mobility
Devin Lindsay | Research and Analysis Associate Director, Sustainable Mobility, S&P Global Mobility
Qifan Yang | Lead Research Analyst, Sustainable Mobility, S&P Global Mobility
Leo Lei | Sr. Research Analyst, Sustainable Mobility, S&P Global Mobility
Pintu Jha | Research Analyst, Sustainable Mobility, S&P Global Mobility
The irresistible force paradox asks: What happens when an unstoppable force meets an immovable object? Today, we are seeing a version of this paradox play out in the automotive space. In this scenario, we see the unstoppable force as the internal combustion engine (ICE), which continues to be the preferred customer choice. And as a result, automakers include internal combustion engines in 87% of the vehicles produced globally, according to S&P Global Mobility’s light vehicle production powertrain forecast.
In this scenario, regional commitments to lower carbon emissions are the immovable object. In the late 2000s, the automotive industry and government regulators made significant plans to begin phasing out the internal combustion engine and gasoline as the fuel source. However, this transition has been slower than many anticipated.
But the commitments and the regulatory requirements to decrease vehicle CO2 emissions in many regions are not going away, despite some delays. S&P Global Mobility’s light vehicle production powertrain forecast expects 2024 to end with approximately 15% of the global vehicles produced being battery electric, with that number rising to 63% by 2035. Will this be enough for automakers to comply with regulations and meet CO2 reduction targets? How are automakers progressing in reducing their use-phase emissions, or the emissions generated when their cars are driven, and does the internal combustion engine interfere with those efforts? What progress are automakers making in their upstream decarbonization efforts?
This paper will investigate the rate of conversion from the internal combustion engine as the primary propulsion system to the electric motor. We will explore the tailwinds facing this seemingly unstoppable force, which many thought would have much lower penetration rates in 2024. We will also explore the headwinds that remain for BEVs.
S&P Global Mobility’s light vehicle sales-based powertrain forecast defines propulsion as the power source that is mechanically responsible for powering the vehicle’s wheels. The exception to this is “ICE: Stop-Start," which is technology that stops the engine from idling unnecessarily when stopped to improve fuel economy. Hybridization means that an electric motor assists the ICE to propel the vehicle. For a BEV specifically, this means that the vehicle is powered only by the electric motor from electricity stored in the battery.
The growth of BEVs has been relatively slow compared to initial expectations from legislators, automakers, the media and many in the general public. Several factors have contributed to this slow growth.
First, the high upfront cost of BEVs remains a significant barrier for many consumers. Although the cost of BEVs has been decreasing over the years, they still tend to be more expensive than traditional ICE vehicles. The higher cost is primarily due to the expensive battery technology used in BEVs despite a decrease in overall battery cell costs. The cost of BEVs is expected to decrease further as battery technology continues to improve and economies of scale are achieved through mass production as manufacturers replace the ICE with a battery pack and electric motor in more models.
Second, limited charging infrastructure is a challenge for the widespread adoption of BEVs. Many consumers are concerned about the availability and accessibility of charging stations, especially for long-distance travel. The development of a robust charging network is crucial to alleviating these concerns and increasing consumer confidence. In 2023, the US under the Biden administration set out a goal to build a network of 500,000 chargers for public use by 2030. However, some reports suggest that only a handful of EV charging stations have been built nearly two years later.
Third, regulations in some regions may not be fully supportive of a more legislatively driven zero-emission vehicle (ZEV) push (e.g. through fuel economy standards or ZEV mandates). ZEVs include fuel cell electric vehicles and, in some regions, plug-in hybrid vehicles. For example, emission standards in the US remain dynamic depending on the political party that holds the presidency. Additionally, incentives or supportive policies in certain regions, such as the US Inflation Reduction Act (IRA), may be confusing and discourage consumers from considering BEVs as tax credits for buyers shift from one year to the next, depending on the amount of foreign content in a BEV.
The IRA includes stipulations about battery components and critical mineral contents for a BEV to be eligible for tax incentives. BEVs that do not qualify for this tax incentive can mean higher prices for customers, which is expected to impact sales.
|
Automotive powertrain glossary
|
Despite these challenges, production and sales of BEVs are expected to accelerate in the coming years, as the S&P Global Mobility light vehicle production powertrain forecast suggests. Advances in battery technology, decreasing costs, expanding charging infrastructure and supportive government policies will all contribute to the increased adoption of BEVs. As consumers become more aware of the environmental benefits and long-term cost savings associated with the powertrain, the demand for these vehicles is likely to grow.
Furthermore, there is more variety in BEV models and options compared to just a few years ago. Initially, a lack of BEV models in popular segments hindered sales growth. Many consumers have specific preferences and requirements for vehicle size, style and features. Today, customers can purchase a BEV in many styles — from a sports cart to a pickup truck to a luxury sedan.
According to the sixth assessment report by the Intergovernmental Panel on Climate Change, released in 2023, the transportation sector accounts for approximately 23% of global greenhouse gas emissions, making it one of the largest emitters among all economic sectors.
Electrification (e.g. adding an electric motor to assist or replace the internal combustion engine) is one of the most effective ways to reduce tailpipe CO2 emissions from vehicles in use and has been significantly driven by increasingly stringent regulations locally. Major markets such as the EU, China and the US have multiple mechanisms to incentivize fuel-efficient and alternative fuel technologies.
|
Snapshot of the regulatory landscape for automakers around the globe EU: The European Commission mandates marketwide CO2 emissions to be reduced to 93.6 grams per kilometer (g/km) from new cars and to 153.9 g/km for vans in 2025 and further lowered to 49.5 g/km for cars and 90.6 g/km for vans in 2030 (based on the Worldwide Harmonized Light Vehicle Test Procedure). The EU is currently the only major market that specifies a 0 g/km tailpipe CO2 target for cars and vans by 2035. US: The US requires the new light vehicle fleet to meet corporate average fuel economy (CAFE) and GHG emissions standards. In 2024, the US finalized new GHG and CAFE standards, targeting fleetwide 82 grams per mile GHG emissions in model year 2032 and an average of 50.4 mile per gallon fuel economy in model year 2031. China: China implemented a “dual credit” system that requires a fleet-level average fuel consumption of 4 liters per 100 kilometers (based on the Worldwide Harmonized Light Vehicle Test Procedure) and a credit-based 38% new energy vehicle quota by 2025. |
According to S&P Global Mobility’s light vehicle sales forecast, the share of ICE vehicles, including mild hybrid vehicles, in global sales will fall to 60% by 2025 from 92% in 2020 and 97% in 2015; this share will continue to decline to 18% in 2035.
Automakers have invested in technologies and strategic partnerships to comply with regional fuel consumption, fuel economy and tailpipe CO2 standards for their new car fleets. Market-level fuel consumption and tailpipe CO2 emissions are drastically reduced due to these efforts, although individual automakers’ performance and challenges to meet regional fuel and/or CO2 emission compliance requirements can vary significantly.
The vehicle performance and compliance forecast from S&P Global Mobility shows that in the EU, 2025 and 2030 marketwide targets are expected to be met overall. In 2025, the market is expected to be led by dedicated BEV manufacturers and several early adopters such as Kia, Volvo and BMW, while a significant number of traditional automakers need additional efforts to meet the regional fuel and/or CO2 emission compliance requirements.
With more lead time, most major automakers will be able to comply while several will still face challenges. The market average performance in the US often goes hand-in-hand with the fleetwide standards. Most automakers will have at least one sub-fleet (i.e., either passenger cars or light trucks) that needs to use the credit surplus from another sub-fleet or other allowances to meet fleet-specific compliance targets. China, as a leading BEV market, will have an overall overachieving fleet as compared to the market fuel consumption regulatory requirements through 2025.
As a result of the electrification efforts, S&P Global Mobility projects that the global new light vehicle fleet’s average tailpipe CO2 emissions to drop about 75% in the two decades between the mid-2010s through 2035.
The EU is expected to be the leader in terms of having the lowest light vehicle use phase carbon intensity on average as a combined result of electrification and lower carbon-intensive electricity generation. The EU is followed by China, which currently leads the BEV market in terms of BEV share of all light vehicle sales; however, the market overall has a more carbon-intensive electricity grid.
In the automotive industry there is growing recognition of the imperative to reduce the carbon footprint from the vehicle product use phase to the impacts of upstream supply chain. Many automakers in recent years have made commitments to reach net-zero or become carbon neutral, mostly by the 2040s and 2050s, along with interim milestones and actionable plans.
A notable trend is the increasing emphasis on Scope 3 emissions, which occur up and down an automaker's supply chain and when a customer uses the product. We see a particular focus on the use phase of vehicles, which refers to the total emissions associated with vehicle tailpipe and energy supplies to operate a vehicle. These use-phase emissions are also known as Scope 3 Category 11 emissions. Decarbonizing vehicles’ use phase CO2 emissions aligns with automakers’ technological road maps on vehicle energy efficiency improvements and electrification, which directly target tailpipe emissions reduction. Automakers such as Volvo and Jaguar Land Rover have set more than 50% carbon reduction goals for an earlier target year for the use phases of their products. Benz, BMW and Ferrari have opted for a more moderate approach, setting targets that align with industry averages. Ford and General Motors are targeting the mid-2030s for more than half of their carbon reductions per vehicle per lifetime mileage travelled, compared to their 2019–2018 use phase carbon profiles.
As BEV sales ramp up and gradually blend into the on-road fleet, the zero-emission perspective of BEVs need to be reevaluated holistically. Although BEVs do not emit tailpipe CO2, the electricity supply to operate a BEV and the energy-intensive processes to extract minerals and produce batteries can create CO2 emissions. To comprehensively evaluate BEVs’ decarbonization effects, the electricity generation for vehicle use as well as material sourcing and vehicle production phases need to be considered.
According to S&P Global Mobility’s global light vehicle use phase carbon data, ICE vehicles' contribution to global CO2 emissions declined significantly in 2023 and is projected to continue. By 2025, ICE vehicle use-phase emissions will fall to 64% of the global total. This share will continue to decline to 36% in 2035. For ICE vehicles, automakers can adopt various strategies to decrease use-phase carbon emission intensity. An effective approach is to continue to improve fuel efficiency by optimizing the engine design, reducing friction and reducing the vehicle’s overall weight. Other measures include the use of alternative fuels, also known as biofuels, such as ethanol and biodiesel.
If an ICE vehicle is replaced with a BEV, each vehicle can reduce its use-phase CO2 emitted per kilometer traveled by over 75%, although the specific decarbonization effect will depend on electricity sourcing and will vary by market. This reduction rate will continue to grow as the energy transition happens for electricity supply in major markets.
As BEV sales continue to increase, their share of global light vehicle use phase CO2 emissions is also increasing, from less than 1% in 2020 to 15% in 2030. According to forecasts, BEVs will account for 23% of global light vehicle use phase emissions in 2035. The decline in the grid emissions factor can promote the zero-emission process of BEVs. The emissions intensity of BEVs in EU, China and US markets continues to decline. Compared to 2014, China's grid emissions factor will be reduced to 75% in 2035. US markets will drop to 17% of 2014 levels, and EU markets will drop to 37%.
The global automotive industry's carbon reduction trend is positive. For traditional markets with stable demand, such as the EU and the US, total carbon emissions are expected to drop significantly in the next decade to meet government carbon reduction targets, with the prospect of binding regulations and relevant policies for transportation sectors and the automotive industry. The transition from ICE vehicles to BEVs based on incentive policies will also enable China to significantly reduce emissions during the vehicle use phase. For the South American and African markets, demand for passenger cars is growing steadily due to the continued development of these markets and the transfer of the global industrial supply chain.
Decarbonization pressures moving upstream of the automotive supply chain
Besides the stringent regulatory environment establishing a long-term market for electrified vehicles, the increase in EV sales is enabled by the sustained rise in average battery capacity for those vehicles. During the past 10 years the average capacity for BEVs and PHEVs grew steadily, and rather sharply in the case of fully electric vehicles, with the trend expected to continue in the coming decade. Compared to 2020, the average battery capacity in 2035 is predicted to increase 76% for PHEVs and 46% for BEVs, which will contribute to high battery demand levels. This has a beneficial impact on the electric driving range and is therefore associated with a commensurate rise in the average electric range of these vehicles. This increase remains a critical factor in alleviating consumers’ range anxiety and thus enabling the successful deployment of those EVs in all automotive segments.
The strong growth in sales of electrified vehicles, combined with the increasing average battery capacity, massively affects the global demand for lithium-ion batteries. The annual requirement for China, the EU and the US is expected to surge from 127 GWh in 2020 to 3,839 GWh in 2035, a 30-fold increase representing an annualized average rate of growth of 26%. This demand is dominated by BEVs with nearly 95% of the requirement for lithium-ion batteries, while China makes up a major part of this demand due to the size of its automotive market and the strict new energy vehicle mandate in force.
While increasing levels of electrification significantly help with automakers’ regional compliance in major markets and reduce their vehicle use-phase carbon footprint, the decarbonization focus needs to gradually shift to the upstream value chain. As BEV sales ramp up, new vehicles will be heavier, using more minerals, which sometimes are clustered by specific sourcing locations, and requiring higher energy density for the batteries to power vehicle performance. All of this implies potentially higher energy and material inputs associated with vehicle supply chains.
As new vehicle tailpipe CO2 emissions are being tackled by electrification and energy transitions are contributing to grid decarbonization, CO2 emissions embedded in material inputs will start to become the long-term focus to reduce a vehicle’s life-cycle carbon footprint. Most car manufacturers are reporting upstream CO2 emissions at about 15% to 20% of their value chain total carbon. According to S&P Global Mobility’s light vehicle carbon accounting on global light vehicle production and sales, upstream materials are expected to account for 30% or more in an average vehicle’s lifetime carbon footprint in the early 2030s. This share will differ by region and by vehicle type.
Gradually, future vehicles will use raw materials with lower carbon intensity in their supply chains and cleaner energy in their production as the energy transition progresses. However, the increased demand for longer electric range BEVs with larger and heavier batteries might offset the upstream decarbonization effects from lower carbon materials. Upstream decarbonization follows a slower trend compared to use phase carbon reductions. An average new BEV in 2030 will have a use phase carbon footprint that is approximately 35% lower than a BEV sold in 2020 during the vehicles’ lifetimes. The upstream carbon footprint reduction may only be around 10% to 15%. The increasing share of upstream carbon in automakers' value chains is projected to continue and become the key to delivering net-zero goals.
Meeting the demand for the raw materials used in BEVs will mean an even greater reliance on supply chains sourced heavily out of China. Some regions have undertaken efforts to encourage localization of battery materials and critical minerals to meet future demand — for example, the IRA in the US. Other efforts include sourcing from South America and Australia, and reliance on lithium-iron-phosphate (LFP) batteries that use less critical minerals. LFP batteries, while heavier with less power and range, are also less expensive and are beginning to be used by some automakers in lower levels of the pricing ladder.
The growth of BEVs has been slower than initially expected due to factors such as high upfront costs, limited charging infrastructure, inconsistent regulations, and consumer preference for hybrid options. However, the adoption of BEVs is expected to accelerate in the coming years as battery technology improves, costs decrease, charging infrastructure expands and government policies support BEVs.
While progress has been slower than initially expected, automakers have set carbon reduction targets to meet regional fuel/CO2 compliance standards and value chain decarbonization commitments. Automakers are expected to continue investing in BEVs to reduce the Scope 3 use phase of their vehicle fleet. BEVs offer an effective way to decarbonize an automaker’s overall use-phase carbon footprint. The decarbonization effects of tailpipe zero-emission BEVs depend on the sourcing of their electricity supplies.
The automotive industry’s electrification efforts are one part of a broader energy transition strategy. Decarbonization efforts will also need to shift upstream to the automotive supply chain as the demand for batteries to support BEV deployment increases. This will require addressing the increased energy and material inputs associated with vehicle supply chains and ensuring sustainable sourcing practices.
