Driving Toward Zero: Solving Europe's EV Underconsumption Puzzle

 

Source: Generated by ChatGPT - Image Generator (OpenAI and ALOTAIBI, 2024)

Have you ever imagined how close we are to zero-emission transportation in the future? The EU and the UK want to prohibit the sale of new combustion cars to achieve the ultimate goal of zero-emission car transport by 2035 (IEA, 2023b).

Electric Vehicles (EVs) - a key factor in reaching zero transport emissions. Unlike diesel cars, EVs produce zero tailpipe emissions, reducing air pollution and greenhouse gases.

In the past decade, an EV revolution has been well underway across Europe. In 2023, global sales of EVs reached 14 million, with Europe experiencing significant market growth of 62% (BloombergNEF, 2023).

Figure 1: Global near-term passenger EV sales and share of new passenger vehicle sales by

market (BloombergNEF, 2023)

Persistent Challenges in EV Adoption

As sustainability gains more attention and the appeal of driving an EV increase, one would expect a surge in EV adoption. However, Europeans' consumption of EVs still lags behind that of Asia. Europe's projected annual growth rate between 2024 and 2028 is 12.11%, compared to Asia's 22% (Beard, 2024).

Relatively low EV sales can be attributed to these key reasons:

• High Costs: Major costs of EV production come from its battery and supply chain. In 2023, the average cost of a lithium-ion EV battery in the UK was $139/kWh compared to the price in China of $70/kWh (Wang, 2024). Additionally, supply chain constraints such as battery shortages and semiconductor supply disruptions have contributed to delays in manufacturing. On average, EVs cost over a quarter more than internal combustion engine (ICE) models. This high price makes them less accessible to consumers (Willige, 2023).
• Lack of Charging Infrastructure: Without adequate charging infrastructure like a robust network of charging stations, potential buyers fear running out of battery power without convenient access to a charging station, and this discourages them from purchasing EVs. The International Energy Agency reports that the ratio of public chargers to EV stock was less than 0.1 in many European countries compared to almost 0.2 and 0.5 in China and Korea respectively, therefore, consumers’ concerns are no unfounded (Broom, 2021).
• Battery technical constraints: The EVs on the European market generally have a shorter range than traditional cars (Winton, 2024). Cold weather in the Nordic may further reduce the battery life (10-20% less than in summer) (Finnerty, 2023). The battery life and cold resistance issue must be addressed to achieve full EV coverage.

Why does Underconsumption Matter?

EVs are tagged as a clean and green future, and their consumption creates a wild social benefit. However, when the social benefits of people buying EVs exceed their private benefits, this would lead to an economic concept called positive consumption externalities. Then, a snag may occur—market failure.

As mentioned earlier, EVs often have a higher upfront price than ICE. Although they save money on fuel and maintenance down the line, that initial investment can be a deal-breaker for some people.

Moreover, there is a charging station challenge. Insufficient charging stations may make EVs less attractive to consumers. It is a “which came first: chicken or egg?” problem (Boushey, 2023)—from firms’ perspectives, a lack of EVs on roads limits their supply of charging infrastructure.

Thus, switching to an EV may be challenging for some people, and the underconsumption of EVs results in a market failure: EVs' long-term potential social benefits, like reduced air pollution for everyone, are not prioritised over the immediate individual benefits.

To address EV underconsumption, we need a framework of regulations and objectives to guide producers and consumers.

Shifting the Focus of Intervention with Greater Ambition

In the initial uptake of EVs, European governments' fiscal incentives, including purchase subsidies, tax rebates, waived road charges, and the funding of installation of public chargers, narrowed the price gap with traditional vehicles, enhancing the EV manufacturing and battery industries (IEA, 2023b). These interventions not only made it cheaper for consumers to switch to EVs but also fixed some market failures by ensuring that the extra benefits of EVs are reflected in market prices, leading to the largest annual increase in EV sales, about 2.1 million in 2020 (IEA, 2023a).

However, making the 2020s the decade of EV transition demands the focus of incentives to change as markets mature (IEA, 2021).

From 2019 to 2023, most European nations gradually lowered purchase incentive levels for EVs and ended subsidies for Plug-in hybrid electric vehicles (IEA, 2023b). The rationale is a shift toward competitiveness, forcing car manufacturers to discover their cost savings strategies as sales expand.

In the second half of 2020, a striking 87% of the world's lithium-ion batteries for EVs were produced by just 6 companies—none of which were based in Europe (Ulrich, 2021). The European Commission (2023) is aware of this and proposed the Critical Raw Materials Act, aiming to boost battery production, recycling, and reuse. This may lessen import reliance, enhance the overall supply chain and cut production costs.

After ending EV subsidies, some European governments shifted focus to enhance charging infrastructure. The EU now desires to have 3 million public charging stations by 2030 (one every 60 km of road), and 1 million by 2025 (IEA, 2023b).

Accelerating Past ICE: Is Zero-Emissions Coming Too Quickly?

Despite multiple readjustments in the EU and UK's zero-emission regulation (DfT and Harper, 2023), there is a concern that EVs may still have difficulties in this transition regarding technology and cost.

As government incentives are phased away, whether buyers would consider EVs as an economically feasible alternative may depend heavily on their price, battery life and the accessibility of charging stations.

Although the European Commission (2023) has proposed regulations to address the battery technical issues (battery life and cold resistance), due to the lack of profitability, only a few European manufacturers, like Volkswagen and Renault, are currently actively solving these limitations (Winton, 2024).

Moreover, EVs and the power generation industry should develop simultaneously. Technological upgrading of green energy (renewable and non-polluting) could prevent the pollution created by charging and producing an EV when its demand increases.

We presume that zero transport emissions will ultimately be achieved, yet to get there, all market stakeholders must commit to transitioning to EVs.

References

Beard, T. (2024). Asia to lead global EV growth. [online] Economist Intelligence Unit. Available at: https://www.eiu.com/n/asia-to-lead-global-ev-growth/#:~:text=For%20Asia%20

as%20a%20whole.

BloombergNEF (2023). Electric Vehicle Outlook 2023. [online] BloombergNEF. Available at: https://assets.bbhub.io/professional/sites/24/2431510_BNEFElectricVehicleOutlook2023_ExecSummary.pdf [Accessed 18 Apr. 2024].

Boushey, H. (2023). Full Charge: The Economics of Building a National EV Charging Network. The White House. Available at: https://www.whitehouse.gov/briefing-room/blog/2023/12/11/full-charge-the-economics-of-building-a-national-ev-charging-network/.

Broom, D. (2021). 4 reasons why electric cars haven’t taken off yet. [online] World Economic Forum. Available at: https://www.weforum.org/agenda/2021/07/electric-cars-batteries-fossilfuel/.

DfT and Harper, M. (2023). Government Sets out Path to Zero Emission Vehicles by 2035. [online] GOV.UK. Available at: https://www.gov.uk/government/news/government-sets-outpath-to-zero-emission-vehicles-by-2035.

European Commission (2023). Critical Raw Materials: Ensuring Secure and Sustainable Supply Chains for EU’s Green and Digital Future. [online] European Commission - European Commission. Available at: https://ec.europa.eu/commission/presscorner/detail/en/ip_23_1661.

Finnerty, J. (2023). How Much Range Do Electric Cars Lose in the cold? GRIDSERVE. [online] 27 Nov. Available at: https://www.gridserve.com/2023/11/27/how-much-range-do-electriccars-lose-in-the-cold-and-why/ [Accessed 19 Apr. 2024].

IEA (2021). Policies to Promote Electric Vehicle Deployment. [online] IEA. Available at: https://www.iea.org/reports/global-ev-outlook-2021/policies-to-promote-electric-vehicledeployment.

IEA (2023a). Executive Summary – Global EV Outlook 2023. [online] IEA. Available at: https://www.iea.org/reports/global-ev-outlook-2023/executive-summary.

IEA (2023b). Policy Developments – Global EV Outlook 2023. [online] IEA. Available at: https://www.iea.org/reports/global-ev-outlook-2023/policy-developments.

OpenAI and ALOTAIBI, N.J. (2024). ChatGPT - Image Generator. [online] ChatGPT. Available at: https://chat.openai.com/g/g-pmuQfob8d-image-generator [Accessed 18 Apr. 2024].

Ulrich, L. (2021). The Top 10 EV Battery Makers. [online] IEEE Spectrum. Available at: https://spectrum.ieee.org/the-top-10-ev-battery-makers.

Wang, B. (2024). EV LFP Battery Price War at Less than $56 per kWh within Six Months. NextBigFuture. Available at: https://www.nextbigfuture.com/2024/01/ev-lfp-battery-price-war-w-55-in-six-months.html.

Willige, A. (2023). Electric car sales soar in Europe, but market barriers remain. [online] World Economic Forum. Available at: https://www.weforum.org/agenda/2023/11/electric-carsales-europe-barriersevadoption/#:~:text=Continued%20barriers%20for%20electric%20car%20sales&text=Electric%20car%20ownership%20is%20now [Accessed 18 Apr. 2024].

Winton, N. (2024). EU May Water Down Harsh 2035 EV Mandate and Reprieve Hybrids. [online] Forbes. Available at: https://www.forbes.com/sites/neilwinton/2024/03/27/eu-maywater-down-harsh-2035-ev-mandate-and-reprieve-hybrids/?sh=2bc2be6c6f44 [Accessed 17 Apr. 2024].