A detour to EVs
Switching from an internal combustion engine (ICE) vehicle to a fully electric vehicle (EV) seems to be all the rage lately. But we believe automakers have more to do.
The trend is understandable – from increased environmental consciousness to volatile fuel prices, several factors have increased demand for EVs. Switching to a full EV is a leap of faith at present, though, as the global charging infrastructure remains patchy and unreliable, contributing to ‘range anxiety’. Theoretically, plug-in hybrid electric vehicles (PHEVs) could address these concerns.
By combining ICE and EV powertrains in one vehicle, PHEVs can help consumers enjoy some of the benefits of clean, electrified transport without undue concerns about finding their next charging location. This proposition has driven PHEV penetration in Europe to over 10%.[i]
In our view, though, if PHEVs are adequately to fulfil their role as a ‘bridging technology’ to full electrification, more needs to be done to address transparency concerns. This is particularly relevant to automakers’ claims around emissions savings, which can potentially mislead consumers and other stakeholders.
Emissions… not saved
According to a white paper published by the International Council of Clean Transportation (ICCT), average PHEV fuel consumption and tail-pipe CO2 emissions in real-world driving are roughly two to four times higher than claimed.[ii]
Part of this is due to the ‘utility factor’, or the percentage of overall driving that is done in electric mode. Spoiler: it’s low. It varies from region to region, based on the availability of charging infrastructure, but typically falls anywhere between 26% and 54%, with the US at the high end of that range.
Transport & Environment, a clean-transport campaign group, has criticised PHEVs for being poorly made and failing to meet pollution standards even under optimal conditions.[iii] Even some of the automakers that LGIM has engaged on this topic have acknowledged the shortcomings of PHEVs.
Unsurprisingly, governments are moving to address these concerns. The EU could stop labelling PHEVs as sustainable investments beyond 2025[iv], President Biden has signalled the possibility of new federal PHEV standards, and the California Air Resources Board (CARB) has set a price cap on PHEVs and a minimum electric range.[v] These steps are likely to influence future offerings by automakers, who will now have to pivot sooner than expected or incur costs to bring their planned models up to standard.
While we can reasonably assume forthcoming regulation, more can be done. The ICCT report highlights several policy recommendations, such as improved access to charging options, incentivising frequent charging, limiting conventional-fuel driving, and revisiting current government incentive schemes. The US Environmental Protection Agency continues to provide generous tax incentives for car models that provide little in terms of emissions savings. More importantly, consumers need to be made aware of the real-world data rather than hypothetical data so that they can make informed decisions.
Ultimately, the onus will primarily fall on the automakers. LGIM will continue to engage them, as well as public-policy officials, on this topic. Specifically, we would encourage the following:
- Public-policy officials should adopt an interim utility factor to base policy decisions on until more data are available, as detailed by ICCT.[vi]
- Both automakers and regulators should set a minimum range to qualify as a zero-emission vehicle (ZEV). Automakers have historically been too liberal in how they label EVs, bucketing anything from PHEVs to fuel-cell electric vehicles (FCEV) as a ZEV.
- Automakers need to provide transparency and disclosures proactively to all policymakers and consumers to facilitate better decision-making. They should not wait until regulation takes hold.
In light of the industry’s recent chequered history with regard to vehicle emissions regulations, we believe that automakers risk reputational harm and strategic missteps if they are unable to get ahead of this issue.
While PHEVs appear great on paper, without the aforementioned changes, we think that they could risk becoming less of a pitstop en route to full electrification, and more of a detour.
[i] Source: Bloomberg, as of December 2021, based on the ‘Big 5’ European markets of Italy, Germany, Spain, UK, and France.