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Show me what you drive and I’ll tell who you are

Clim8 Investment Team

11 November 2021 Cop26

Transport has seen huge technological advances in the fight against climate change. From chic Teslas to heavy duty electric buses, electric vehicles have become widely available and it is clear that the transition away from combustion engines is well underway. But is it moving fast enough?

Transport is responsible for one quarter of global CO2 emissions, roughly 45% of which comes from passenger vehicles, from tiny 2-wheelers to fuel-intensive Hummers. According to the IPCC, “transport demand per capita in developing and emerging economies is far lower than in Organisation for Economic Co-operation and Development (OECD) countries but is expected to increase at a much faster rate in the next decades due to rising incomes and development of infrastructure”. In plain English, this means that rising living standards in emerging countries is driving unprecedented demand for transport services. If nothing changes, based on 1990 levels this would result in a 70% rise in transport-related CO2 emissions by 2050.

This is why a growing number of mainly OECD countries are banning petrol and diesel cars, part of a broader set of measures that are supported and tracked by the forecasting document Inevitable Policy Response. It examines current policy commitments and uses modelling to understand not only what policies are needed to achieve net zero, but also to predict what is likely to be implemented in the medium to far term. Importantly, this helps to show investors and industry that there are incoming regulatory packages that are likely to affect their earnings. 

Of their top ten policy forecasts, regulating to support Zero Emission Vehicles (ZEV) is high up on the list, with predictions that policies will include internal combustion engine (ICE) vehicles sale bans coming into force in major economies by the mid 2030s to 2040. The UK, for instance, has banned the sale of pure ICE vehicles from 2030 and diesel or petrol hybrids from 2035. ZEV subsidies and obligations on car manufacturers are also coming into force. Importantly, the 2035 bans on fossil fuel vehicles are likely to stimulate the electric vehicle market further and precipitate further policy action globally. 

We are puzzled however not to see the ban on helicopters, private jets or super yachts higher on the agenda. Indeed, Oxfam has found that the wealthiest 1% were responsible for 15% of CO2 emissions over the last 25 years. Many self-proclaimed ‘climate-friendly’ billionaires’ carbon footprints are unsurprisingly high, with the vast majority coming from their transport habits, which staggeringly account for over 95% of their total CO2 emissions. And given that the number of billionaires has increased at an impressive pace in the last few years, this means more private jets, super yachts and… carbon offsets too. Yet more evidence perhaps of “do as I say, not as I do”. 

But let’s park the cynicism for a moment. There are many reasons to be optimistic about a very low carbon future for transportation as technologies are maturing: 

  • Passenger cars: The technology is mostly there for electric vehicles, while rapidly declining costs and smaller batteries are allowing more EVs to be sold cheaper and with much higher range, making them more attractive to consumers (IEA 2020). EVs are already cheaper to run than ICE vehicles, particularly for short range daily driving of 50-80 miles, which is more than enough for most people. You really don’t need a 500 mile EV! 
  • Two and three wheelers: While they’re not that common in the UK (let’s blame the weather), small passenger vehicles are an important and low-carbon mobility solution in many emerging economies – and one of the easiest to electrify. Given that 40% of global car sales in the next ten years will happen in emerging economies, it’s significant that 750 million electric two and three wheelers are currently on the world’s roads, and that this continues to grow. 
  • Road freight: Heavy goods vehicles are a challenge to electrify, but solutions are developing and being deployed relatively fast. Battery Electric Vehicles (BEVs) are likely to be an important solution, particularly for light and medium goods vehicles. They’re even viable with existing charging infrastructure, although this still needs to be scaled up. BloombergNEF predicts that BEVs will become economically attractive in urban cycles by the mid-2020s, particularly where there are low battery costs and modest driving ranges. For heavy duty vehicles operating over longer distances, hydrogen and biofuels are currently the main viable commercial alternative to diesel. Electric Highways have also been considered to assist in the electrification of heavy vehicles. 
  • Shipping: Green maritime transport could take a number of routes. Adding wings on container ships or tankers is a very elegant (and visually attractive) short-term solution, but the more promising long-term option would be the use of green ammonia fuel.  
  • Air: While we can praise Bertrand Picard’s historical performance with Solar Impulse, maybe on a par with the likes of Louis Bleriot (English Channel) and Charles Lindbergh (North Atlantic), the future of air transportation most likely lies with green fuels. Hybrid concepts using hydrogen as a fuel for propulsion and with fuel cells for electricity are beyond the drawing board. Renewable biofuels can be used as an alternative to jet kerosene in order to lower CO2 emissions. 

In our view, the technological solutions to decarbonise transport are here. Bringing them to cost parity and scale with traditional fossil fuels is where the challenge is. This would need significant capital to finance R&D budgets and build manufacturing plants, but also incentives to accelerate the transition in the transport sector. Some private initiatives such as John Kerry’s First Movers Initiative will support sectors such as aviation and freight in getting purchase agreements for technologies that are not yet affordable on the wider scale. 

As Michel de Montaigne once wrote, “travel shapes the youth”. We would humbly add “Let the young shape how they want to travel”.