Carbon Tracker’s recent report Slipped Gear analysed 20 passenger vehicle manufacturers’ alignment to the Paris Agreement and their position relative to the automotive energy transition. To start off, these 20 OEMs produce about 85% of global auto production:
- European (5) — Volkswagen, Mercedes-Benz, BMW, Stellantis, Renault
- US (2) — Ford, GM
- Japanese (7) — Toyota, Nissan, Suzuki, Honda, Mazda, Subaru, Mitsubishi
- Korean (2) — Hyundai, Kia
- Chinese (4) — Geely, BYD, SAIC, Great Wall Motors.
The Carbon Tracker analysis found that “the overall quality of automotive OEM emissions goals is [only] weakly aligned to meeting the Paris Agreement.” In pursuing a net zero emission goal, the manufacturers need “an orderly transition to e-mobility, reducing Scope 3 emissions (75% of a vehicle’s emissions arise in the use phase). In general, considering i) interim and 2050 net zero goals, ii) strategy implementation to meet these goals, and iii) financial climate-risk disclosures.”
It appears that either these manufacturers do not have highly visible plans for the necessary transition or do not have plans at all.
In summary, the Japanese carmakers appear to be in the worst position by far, and the Europeans the best. The Chinese carmakers appear to be transitioning well, but their plans are not obvious — see the chart on page 4. My reading of the field would indicate that this could just be down to poor signposting, rather than poor planning.
When considering BEV production as a percentage of global vehicle production, the Chinese and the Europeans far outclass the Japanese carmakers, with the US in the middle.
“Most automakers have targets to reach net zero greenhouse gas emissions by 2050 … [but] quantifying their GHG emissions reduction strategy is lacking. Broadly, OEM interim emissions reductions are weak with either no mention of short to mid-term targets or how they align with a 1.50C warming scenario, therefore lacking credibility. In addition, there is an incompatibility between OEMs who pledged at COP26 to only sell zero emission vehicles globally by 2035/2040 and weak or average interim GHG reducing emissions targets.”
Can we believe that these OEMs will achieve their long-term targets of zero emissions without a detailed roadmap of how they get there? Without transparency, can we trust them?
“Transparent financial disclosure and recognising climate risks in financial statements is critical to enable an orderly automotive energy transition. Continuing with ‘business as usual’ and not taking climate-related matters into account could lead to overstated assets, understated liabilities, and overstated profits. Only three companies disclosed their ‘green revenues’ and disclosed their share in overall sales. Of the companies assessed, there is limited transparency on decarbonising capital expenditure on assets. Two companies disclosed capital expenditure for low or zero carbon technology/vehicles as a percentage or absolute value. However, none of the companies assessed disclosed how they will align capital expenditure plans with GHG targets or to phase out expenditure in ICE assets. There was also no information about retiring of ICE assets i.e., PP&E, which is a major asset stranding risk in the mid-term as the automotive energy transition ramps up.”
Carmakers in the European Union chart well in the Carbon Tracker analysis. Compliance with EU’s strict CO2 emissions policy should align an OEM with the Paris agreement.
However, due to the EU’s willingness to allow noncompliant automakers to “pool” fleet emissions with the more compliant to lower fleet emissions, there is a tendency to waste capital and to allow laggards to delay the inevitable. “Companies buying emissions credits are ill-prepared for the automotive energy transition. In addition, often OEMs core brands are non-compliant and instead rely on a sub/non-core brand to meet emissions compliance.”
The cliff is still there. It is just a little further away, and in the meantime, capital that could have been used for electrification research and development is being paid in fines and the purchase of credits. For example, FCA (now part of Stellantis) paid Tesla 2 billion euros in 2019 and 2020 for emissions credits — it looks like, in essence, the company paid for Tesla’s Berlin gigafactory. In Switzerland, automakers paid fines of 126 million dollars (USD) for noncompliance.
Can the profits from ICE vehicle sales fund the transition to electric? “Some incumbent OEMs are using the cashflow generated from their ICE vehicle operations to fund the transition to e-mobility. At present, producing and selling ICE vehicles is typically more profitable than for BEVs. The incumbent OEMs are therefore dependent on ICE profits to maximise returns for shareholders; but need this cashflow to fund their energy transition. An immediate shift to 100% electrification cannot be expected, but an accelerated transition should be urged.” How will they satisfy shareholder desires for dividends and fund electrification at the same time?
It appears that many OEMs are transitioning their luxury brands to BEV first in an effort to maximise profit, and are producing PHEVs to appear compliant. We should note that there is no data on how many kilometers are driven in electric-only mode in a PHEV.
The good news is that almost every OEM was able to be compliant with the 2020/2021 EU fleet average emissions targets. “Concerns that these targets were too aggressive were unfounded. These emissions targets become stricter by 2025, with a 15% improvement in emissions reduction across the industry.”
However, Carbon Tracker points out that: “Between 2020 and the end of 2024, there is no incentive for OEMs to go beyond the minimum fleet average emissions compliance requirement and deploy more BEVs (from 2025 OEMs are incentivised to exceed a low/zero-emission vehicles EU sales market share benchmark). As OEMs have already met their emissions targets, through investment in electrification or through the pooling mechanism, they can continue with a sales mix which is weighted towards ICE vehicles out to the end of 2024. OEMs are hooked on the profits from ICE vehicles and are not incentivised to improve emissions reduction further until 2025.”
Another concern is lack of planning for the impending redundancy of much of the plant used to make ICE vehicles. I have observed that many OEMs have started their electric journey by using retrofitted bodies originally designed for ICE cars. A move to “ground up” EV design will require different body panels. “There was also no information about retiring of ICE assets i.e., Property, Plant and Equipment (PP&E), which is a major asset stranding risk in the mid-term as the automotive energy transition ramps up. Some elements of the vehicle production process, like paint shops and body stamping, will still be relevant to produce electric cars, but the production lines that build ICEs/ ICE vehicles and the associated R&D facilities, will soon become obsolete, turning into stranded assets.”
“Automakers will either need to convert, sell or shutdown factories producing ICE vehicles. Most OEMs are doing the former and converting PP&E from ICE assets to EV assets. However, as a result of the automotive energy transition, in many cases ICE asset useful lives will be much shorter than originally anticipated due to PP&E obsolescence, likely leading to asset stranding and write-downs.”
As global demand for electric vehicles soars and production ramps up, it is an exciting time to be watching the response of the auto manufacturing industry. Many thanks to Carbon Tracker for this informative analysis.