Listen: Whack-a-mole: Car makers look to supply chain CO2 hotspots as EV emissions fall

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Sam Humphreys:

It's Sam Humphreys here from EnergyCents, an S&P Global Commodity Insights podcast. And I'm here with Hill Vaden. Hill, how are you doing?

Hill Vaden:

I'm doing all right.

Sam Humphreys:

We have just recorded our podcast with Xi Wang on EV, electric vehicle life cycle emissions reporting and accounting. Fascinating topic. Hill, what are some things you think people should be listening out for?

Hill Vaden:

The big one, I guess, for me is just the fact that we're getting into this in the level of detail that she is doing is pretty fascinating for data junkies like me, I suppose. But just the challenge of all of these emissions reporting information. It's so challenging because the big thing with electric vehicles that yes, there's an improvement versus the ICE, the internal combustion engine because of the life cycle miles, and that's where most of the emissions come from. But then you're getting into details of where do you recharge? And how many emissions are associated with the development of the batteries? And how do those batteries compare to the fuel that comes out of the ground compared to an ICE? So, just all sorts of detail and information that varies by geography, varies by driver, varies by OEM, and she's all over all of it. So, really fascinating. How about you?

Sam Humphreys:

Yeah, I mean, absolutely all of those things. And just we're in the very infancy of this industry almost. So, she mentioned a few things that we should be looking out for in regard to policies and regulations, and just how different parts of the globe are tackling these things. So, it was a fascinating conversation. I think probably one you should dive into a little bit more later on as things evolve. But yeah, I hope everyone enjoys it.

Hill Vaden:

Me too.

Sam Humphreys:

And yeah, there we go. Enjoy. Just a note for everyone listening, we had a couple of technical issues in recording this episode with Xi, so please bear with us. I think we cleaned it up as best as we could, but if you hear a little glitching, don't be alarmed, it is just a couple of technical problems.

Hello and welcome to EnergyCents by S&P Global Commodity Insights, where we talk all things related to the intersection of energy and finance. Today, we're talking to CO₂ regulation expert, Xi Wang, about the full life cycle emissions of electric vehicles across the value chain. My name is Sam Humphreys and I'm joined as ever by co-host, Hill Vaden. Hill, how are you doing?

Hill Vaden:

I'm doing all right, Sam. How are you doing?

Sam Humphreys:

I'm good, thanks. So, in the news today, Taylor Swift has landed in the UK and they are already queuing ahead of her first gig. Which I think is tomorrow up in Edinburgh. And I was trying to think of a time where I queued for more than about an hour for something, which I think was the last Harry Potter book way back in the early '90s. Have you ever queued for such a long time for something? A gig or a book? Book is quite geeky, really.

Hill Vaden:

Virtual or in-person?

Sam Humphreys:

In-person. Oh, yeah. These guys are camped out.

Hill Vaden:

I don't think so. I've never done any. In the US, there's the day after Thanksgiving sales that people would queue up for a TV that's 10% cheaper or 30% cheaper, whatever. I've waited in digital lines for lots of things, including Taylor Swift. And I got kicked out of the line last year, but was able to come back and get my wife and daughter two tickets because I was part of the verified fan club. And so, I was like, dad/husband of the year.

Sam Humphreys:

I love that you're part of the fan club. But didn't you want tickets for yourself?

Hill Vaden:

I figured it would be harder to get three or four tickets than it would be for two. And so, I said, all right, I'm going to try to get two together. I'm going to send them to them. And they loved it. The only complaint, and this is one of these champagne problem complaints, the only complaint was that everybody in the stadium sings along. And if you're sitting beside somebody who doesn't have a very good voice, that person drowns out Taylor Swift. But it was not that. They had an absolute blast.

Sam Humphreys:

Well, well done. Anyway, I think we should bring Xi to this point actually. How are you doing?

Xi Wang:

I'm doing good. I just came back from Disneyland with my kids. So, talking about all the lines and waiting.

Hill Vaden:

Yes, you're used to waiting in lines.

Sam Humphreys:

Oh, fantastic. I'm very jealous. Anyway, today we're not talking about Disneyland as much. I think I could talk about that for many, many hours. We are talking about EVs and EV emissions across the value chain. We've done a lot of conversations about EVs and electrification of all sorts of parts of life essentially. And I think EVs we come back to as they are sold as a low carbon solution. But I think going forward, the tracking of emissions is not just going to be related to the running of the vehicles. So, Xi, can you expand on this concept initially?

Xi Wang:

Yeah. I think all those, I think in the past several years, two very common questions that I encountered are, first of all, is EV really the solution to decarbonize? Because is EV really "greener," or less carbon intensive than the traditional internal combustion engine, what we call the ICE? And the other question is now we are seeing all these policy changes across the major markets in the globe, EU, mainland China and the US. And then what will be the next step if EV, the electric cars, is being the majority of the market? Does that mean that the regulations won't matter anymore ?or does that mean that we need something new in terms of managing or promoting the decarbonization future?

So, I think that's very common questions from our audience, our clients. In general, I would say from our data and our assessments in the past years, I think in general we can confidently say that yes, even life cycle wise. Although EV is not zero emissions across its whole life cycle, but battery electric vehicle is, in general, less carbon intensive than a traditional ICE or ICE. But it depends on where the energy comes from, where the materials come from. So, it can be a case by case situation.

Let's say we did a study for all the new 2020 vehicles globally. And we can see that it's the decarbonization rate comparing from a traditional internal combustion engine versus an average battery electric car. The decarbonization rate is about, I would say 60%, 65% in the EU market because EU in general has relatively speaking, a cleaner electricity grid as compared to US and mainland China. The lowest potential is in mainland China, about maybe 45% reduction at the time. It will be a bigger pointer in later years, but that was the relatively speaking reduction rate in different markets. US is somewhere in between.

Hill Vaden:

So, China you said was a 45% improvement relative to traditional ICE. And Europe was, I think you said 60%. And that is going all the way from manufacturing through life cycle operations of the vehicle. So, it's taking into consideration the recharge. And even if I build all of this and recharge it with say, coal fire generation, I'm still seeing a 45% plus improvement in overall life cycle emissions as a driver.

Xi Wang:

Yes. Basically the answer is yes. We did compare the production material side and then the initial from the energy supply side that needs fuel consumption, fuel production versus electricity generation, and then the tailpipe. The thing is, the tailpipe is zero for battery electric cars. So, that saves a lot. So, you really assume that a car runs between 10 to 15 years per lifetime. We do have a study in mobility, say maybe in the US it's approximately certain years. In other regions, the number might be slightly different. And then we also need to assume the total mileage of car operates in their lifetime so that we can better quantify the energy usage and the energy emissions associated with those. A general assumption is 150,000 to 200,000 kilometers per lifetime of a car.

Hill Vaden:

Okay.

Sam Humphreys:

So, just to go back on these figures that you said for the general reduction in CO₂ emissions between typical ICE and EVs, if we're looking at production initially and removing the savings in the running of the vehicles, what is the difference between manufacturing an EV compared to an ICE? Is there a big difference? Are we seeing a significant saving there? Or is it the same, and the difference and the saving is purely made up from the running of the vehicles?

Xi Wang:

That's a great question because still we compare the 2020 vehicle. Let's say we took EU as an example. When we compare the 2020 vehicles, we consider the production as well as the upstream. So, the materials that's embedded in the car and in the batteries, if that's a battery electric vehicle. So, that there will be a huge difference in not necessarily India compare the absolute value, it might not seem significant. But when we compare the shares that those upstream materials take as compared to the downstream, that makes a big difference. So, we can say that battery electric vehicle can reduce 60% of CO₂ life time-wise.

But if we take the look at adaptation of upstream versus downstream, that means material versus the vehicle operation. We saw that in 2020 vehicle fleet about 15% to 20% of the emissions for the whole fleet. That means maybe more than 95% of ICE plus the single digit of battery electric vehicle or hybrid. 15% to 20% of the emissions life time-wise is from production as well as upstream supply chains. For BEVs in that 2020 feed, we see about 15% to 60%. So, again, it's a total lifetime, 60% reduced carbon in absolute values. But percentage-wise, we see much, much more for the BEVs with emissions associated with upstream instead of downstream.

Hill Vaden:

And BEV's, battery electric vehicle, just to spell that out.

Xi Wang:

Yes.

Hill Vaden:

And a lot of these OEMs, original equipment manufacturers, a lot of these car makers have committed to targets, to reduce their emissions. And I think, and correct me if I'm wrong, but I think those are more focused on scope three and the emissions is set up in a scope one, scope two, scope three. And most of what Sam and I talk about is from the energy side of things where people are more focused on scope one and two, which are those emissions coming from the manufacturing or the development of emissions or of energy. Whereas the scope three is perhaps the biggest problem or the biggest amount of emissions. And this is where the OEMs are stepping in?

Xi Wang:

Yeah, I think that's a good point. I think so far we've seen that a lot of major OEMs, the car manufacturers are committing net zero for carbon neutrality in the long term. But short term wise or midterm wise, they have those science-based target initiative commitments targeting the 2030s for their decarbonization goals. And usually they will separate the scope one and two versus the scope three because scope one and two, firstly, it just accounts for a small part, maybe 1% to 2% of the OEM's total carbon profile. On the other side, it's more controllable because that's more about the energy that you uses, the technologies that can increase energy efficiencies that you take into place the production site.

So, it's more controllable. When we look at the scope one and two, carbon reduction commitment is fueling more ambitions than scope three. On the other side, I think about a dozen of OEMs somewhere between 10 to 15, have already committed scope three, which is the indirect emissions that includes upstream and downstream associated with the production as well as their product. And most of them are now committing about somewhere between 35% to 60% reduction of the Scope 3 category 11, carbon reduction. Category 11-

Sam Humphreys:

Category 11? There you go. You were going to answer anyway.

Xi Wang:

Category 11 is called the use phase of product. So, basically that's the vehicle operation side. That includes the tailpipe plus the emissions associated with the energy that a vehicle uses for their lifetime. So, that is the most contributing part so far for OEMs, or the carbon profile in total. About 75%, 80% of their carbon are now in Scope 3 category 11.

Sam Humphreys:

So, one thing we've talked about with scope three emissions before the complexity in recording these values because they're not direct. We can't just stick a monitor on a car. So, how are these companies getting these values for emissions? How do we know how much they're saving for these, specifically for scope three emissions rather than one or two?

Xi Wang:

I think that's a complication that the market and some stakeholders face in these days. For the OEMs, I would say as compared to other stakeholders, that's a easier story because the OEMs knows their fleet, knows how many cars they produce and how many cars they sell. What are the efficiencies of those cars? What are the tailpipes? Because they need to get a car certificated based on the major markets requirements. And they know exactly what are the energy consumption levels of those cars. But there are still some uncertain factors because once the car's in the consumer's hand, the car's like how many mileage a car runs each year and how many years a car runs on the road is the uncertain question. So, that needs research work to back it up.

And on the other side, the actual energy inputs, where do the consumers get the electricity? What are the electricity are powered up using what kind of sourcing in each geographic location? That's the complexity of the quantification for their carbons. We do have some other inquiries from other stakeholders. Like OEM, at least they know the car's performance and efficiencies. Suppliers, they probably would know less. Financial clients, they probably do not have the overall vehicle-by-vehicle details of each OEM's product portfolios. So, what we are trying to do is we're trying to provide the comprehensive and consistent data from mobility side. Because sometimes when we talk to clients, one of the question is we see company A reports this data. We see company B reports this data. And then we want to compare, we want to rate, we want to understand the best practices, the worst practices, the potentials of the marketing is a reasonable benchmark. Are they actually on track with their commitment?

Hill Vaden:

Sorry, just real quick on that question. I'm trying to figure out, I guess in a way how this is really being done across the board that am I reporting if I'm an OEM? And does it depend by the OEM, my sales figures or my manufacturing figures? Because I could make a hundred vehicles. And if half of them are pickup trucks and half of them are electric sedans, that's one story. But if I only sell the pickup trucks, that's a completely different story. So, are the numbers that are being reported as they come off the manufacturing floor or as they come off the lot?

Xi Wang:

So, actually, the downstream part is usually based on the sales.

Hill Vaden:

On sales.

Xi Wang:

So, that's the same as the regulation. The regulation regulates how many cars you actually sold in a particular year and then evaluate the efficiencies on those parcels.

Hill Vaden:

Do you think that will affect any of the sales strategies of some of these automakers, that if I am selling into a market with say a lot of coal fired generation or selling into a market that I know is going to take more pickup trucks than electric vehicles, that it influences how I can meet these targets? Will the targets change or will the sales motions change?

Xi Wang:

The regulation is a big driver. And as we talk in general, we will say that electric cars still reduces CO₂ as compared to internal combustion engine. It might not be used as much as we wish depending on the energy sources if that's a coal generation. But overall, the electrification will reduce the total carbon footprint in the specific market. And then the thing with regulation is that so far the regulations are mostly on tailpipe. There are trends that the regulations might shift directions to include either the upstream energy or the total lifetime in the near future. So, I think EU is reviewing the life cycle based regulation draft at the moment. And China has indicated that there might be changes in the upcoming regulations or at least technical guidance on how to include the impacts from upstream and energy side. But so far, all the three major market EU, mainland China and US, just from the regulation perspective, I think that the OEMs are more regulated on the tailpipe side. So, electrification does do a big favor for that part.

Sam Humphreys:

Well, you've touched on geographies there somewhat. And the question I had is you've mentioned regulations in those three big markets. Are they progressing at the same rate? Are we seeing regulations on full value chain emission accounting for EVs being the same in the US as they are in China and EU? And is there a difference with where parts are manufactured, say the everything's manufactured in China and exported over to the US? Are companies driving, excuse the pun, change to make sure that they're tracking all of those emissions at the moment? Or is that something that's still in development? Are we still waiting for the full regulations on this globally? Where do we sit?

Xi Wang:

I think as complicated as this topic can be, it means that it might take time to set the equal and reasonable scientific ground for those regulations. But I think what we're seeing, I think EU is a pioneer in this field so far, because we're not seeing only regulations on car manufacturers per se. We're also seeing that now there are these texts on different materials and then there are these so far what they call the battery directive that includes, not only the battery recycling, recyclability, but also the battery carbon footprint information to be disclosed and then incorporated in those supply chain manufacturing decisions. And I mean, a lot of batteries are now from mainland China or Asian areas. So, those are putting challenges or putting apart there to make sure that all the batteries coming to the EU, used in the EU, are going to have a label with carbon on that. And that's going to satisfy the standards that's required.

Hill Vaden:

So, I want to push on that for a second. So, if I am an OEM and I'm reporting my emissions, what do I get to exclude? That if I've got a battery, that battery uses metals that come out of potentially a high emitting mining operation. If I've got an ICE, I've got fuel that potentially comes from... well, doesn't potentially come from, that absolutely comes from oil industry. Do I get to exclude those parts in my emission calculations as an OEM? And if so, do you see some of these car manufacturers trying to focusing on the shell only rather than focusing on the whole piece? Because that's an easy way for me to push my emissions to somebody else to report.

Xi Wang:

Yeah, I think that's the core of why those GHG, the greenhouse gas emission protocol, was established includes that scope one, two, three. I think in general, one of the other relevant question that was always asked to us is whether the scope series are over counting or double counting, because those are not the emissions that a company directly emits. I think the overall idea is that when we take those into consideration for the value chain plan for the competitive strategy, that will mean that even if as an OEM and not directly charge or penalize for whatever it means upstream right now, I need to take that into consideration.

So, if we strictly follow the protocol or the OEMs, we need to report whatever is associated with the materials and the energy uses upstream. So, there is no way to explore that. But that will be said. It's not getting in the stage that if I happen to have a big member that associated with upstream, I will be fined for that. It is not getting into the regulation. So far, the regulation is not based on the value chain. The regulation is based on the vehicle uses so far. But the reporting itself does have the upstream included.

Sam Humphreys:

So, I'm just looking at the clock now. One thing we just want to know is, in the near term, what projects, what regulations or policies should we be looking out for which will either improve the life cycle emissions for certain OEMs or impact the way that emissions and where EVs are going? So, what are your things? What are your highlights for us to be watching out for?

Xi Wang:

Yeah, I think it's still a comprehensive solution. So, we'll see that we usually differentiate the vehicle use carbon impacts by what we call the wheel-to-tank, which is the energy associated emissions. And the tank-to-wheel, which is a tailpipe. So, I would say we have an analysis showing that up until 2030s, the tailpipe, the tank-to-wheel part is still the majority of the whole global vehicle fleet. So, that means we need to take care of those tailpipe. And I think that's still so far, even before 2035, that's still the focus, the majority of the regulations where it can help promote the decarbonisation of the vehicle fleet. But of course, as we get into 2030s when the EVs are hitting 50% being the majority of the market, I think energy transitions and then the upstream materials are going to be kicked in more significantly in the regulation part so that it shifts the direction.

It gets more on the supply chain part because we'll see that the tail pack is going to get lower and lower shares in the future before it gets to the actual zero. And then I think there are a lot of associated things. We need a comprehensive system and framework to evaluate the whole life cycle because it might depends on market. If a market doesn't have the potential to significantly reduce the electricity of great carbon footprint, then maybe some hybrid cars could kick in the specific market. Or maybe some market have a specific type of energy inputs. Or maybe biofuel can be the future for that market as well. To me, I would say we would keep an open mind on the policy focus in that case.

And we need a comprehensive mind because if we only focus on the EV shares, that doesn't tell us the whole story because tailpipe is still the majority. If we do not increase the efficiencies of the traditional ISEs, then that might mean we are still missing a bigger picture here. So, that's still part of the story. And then we would need to look at the materials, like batteries one side. On the other side, there are other things. We talk about the light weighting earlier. When we talk about light weighting, it means sometimes it can be steel, versus aluminum, versus some fiber, some fiber and plastic, things like those. But we need to keep in mind that in most areas of the world, maybe aluminum does have a much, much higher carbon intensity than steel. So, it is now saying which one is better or not. It's just we need to actually quantify what are the shares? Where are the sourcings? And what are the exact energy inputs upstream to those material productions?

Hill Vaden:

Quick question before we wrap up, Sam. I don't want to take us in a rabbit hole because I know we're at the top of the call. Hybrids, you just mentioned. I've been thinking about that as we speak. Are hybrids somewhere in the middle where if it's a 60% improvement, the hybrids are 30%?

Xi Wang:

Yeah, I think so far in general like in the EU market, we see hybrids, especially the platinum hybrid is somewhere in between. So, maybe 30% also reduction lifetime. But still that depends on several things. That depends on the grade, that depends on other field types. That also depends on the actual driving conditions. So, it depends on what actually is the share of electricity based driving ranges of a hybrid. So, it's all different in different products. All right.

Sam Humphreys:

Well, thank you very much, Xi, for joining us. And as a reminder to our listener, if you like the podcast, please like and subscribe. And a reminder that nothing we've been said should be considered financial or investment advice. But if you're looking for further information, you can reach us at spglobal.com/commodityinsights. Thank you both. I'll speak to you all soon.

Hill Vaden:

Thank you.