Reducing Cars’ Climate Change Impact With a ‘Life Cycle’ Approach

Published on21 JAN 2020

The article below is from our BRIEFINGS newsletter of 21 January 2020

European regulators are exploring a new, more rigorous method of evaluating a vehicle’s environmental impact. The so-called Life Cycle Assessment approach would broaden the scope of evaluation to include the entire life cycle of a car – not just its on-road emissions. We sit down with Kota Yuzawa of Goldman Sachs Research to discuss the shift’s implications for the future of electric vehicles, as well as investors who have a stake in the space. 

How do we currently evaluate a vehicle’s environmental impact? Why and how are regulators looking to change the existing approach?

Kota Yuzawa: The current method considers only the CO2 emitted while the vehicle’s engine is running. But that’s just one part of a bigger picture and may not be a fair representation of a car’s full impact on the environment. With this in mind, European regulators are encouraging life cycle assessment, or what they call LCA standards, to be adopted no later than 2023. Under LCA, a car’s environmental footprint would consist of the emissions produced across the entire lifespan of the vehicle, including the manufacturing, fuel sourcing and scrapping processes.

What’s the difference in the numbers when we compare the two methods?

KY: There is a greater difference than most would expect. With the current method, an EV is a zero-CO2 emissions vehicle—as good as it gets. But if we use LCA standards, that number rises to 100-120 grams of CO2 emitted per kilometer. For context, the average sedan powered by an internal combustion engine generates 120g/km of CO2 emissions under current evaluation standards. Under LCA standards, that number increases to 170-180g/km—an increase of just 50-60g versus the more significant rise of 100-120g/km for an EV. 
Which part of the EV life cycle is driving this increase in emissions?

KY: It’s the production phase. In fact, the amount of CO2 emitted during the production of an electric vehicle is twice the amount emitted during the production of a vehicle with an internal combustion engine. The disparity stems from CO2 emissions related to battery production. If battery performance improves—which it should in the long run—EVs will become clearly superior to traditional vehicles, even on an LCA basis.

Under LCA standards, how does the environmental impact of EVs vary across regions?

KY: The total CO2 emissions of an EV over its full life cycle vary significantly depending on the sources of power used in the region where the vehicle is manufactured and driven. For instance, batteries made in Asia have a greater CO2 footprint than ones made in the US and Europe. In Europe, where clean energy sources are relatively widespread, EVs still compare favorably with other types of vehicles if CO2 emissions are measured using the LCA method. In Japan, China and other markets outside Europe where fossil fuels are still widely used, they compare less favorably.

The LCA is a European initiative. Should global investors care?

KY:Most countries with major automotive markets have signed the Paris Agreement on climate change, so the LCA proposal will have global reach. LCA could constrain automakers’ ability to address customer demand for longer-haul EVs given the environmental impact of the larger batteries needed to produce them, barring advances in battery technology. Suppliers with energy sources in regions that derive a higher percentage of electricity from renewables will have an advantage over those in regions more dependent on fossil fuels. Finally, the new method may drive consolidation in the auto industry as larger, global players will be better positioned in an LCA era.

Goldman Sachs Equity Research

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