The economic case for Net Zero - EVs

The transition to a Net Zero global economy is an industrial revolution on a grand scale and at an accelerated pace. Developing new technologies, building the manufacturing capacity to build them at scale, driving customer preferences and behaviours, building the supporting infrastructure and phasing out current assets all require time and investment. However, I have been challenging the narrative that moving to Net Zero inevitably means more cost and more government spending, and is making the case that a future Net Zero world will be economically as well as environmentally superior to the fossil-fuel driven world. Earlier in the year we talked about renewable energy, and this blog will pick on perhaps the best good news story in the transition, which is the move to electric vehicles in the automotive industry.

To put this into context, road transport accounted for 45% of total oil demand in 2023, by far the largest contribution of any sector[1]. Moving to electric alternatives to the internal combustion engine is thus critical to reducing aggregate oil consumption in the world economy. The IEA’s 2021 Net Zero Emissions by 2050 scenario, which plots the most plausible path for the world to stay below 1.5C warming, suggested that we needed 60% of all car sales in 2030 to be electric. At the time, this looked massively ambitious – only 4.1% of 2020 sales had been electric. Since then, however, the sector has seen exponential growth – in 2023, 18% of all car sales were electric.

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The key reasons for this exponential growth provides encouragement for the other sectors, because the success of EVs is now driven by the economic advantage they offer to customers of ICE (internal combustion engine) vehicles. EVs are now a better and cheaper option in nearly all categories and nearly all markets. Yet it’s also true that EV adoption is wildly different by market – 95% of all EV sales come from China (especially), Europe and the US. This blog will unpick the economics – what causes EVs to be cheaper than ICE, what are the key factors in that, what set of conditions result in the opposite being the case, and what’s the likely direction of travel.

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Comparing economics – Total Cost of Ownership

Just as in Power, we need first of all to work out the right metric for comparing cost, because the cost elements change between ICE and Electric vehicles. For vehicles, we therefore compare the “Total Cost of Ownership”. This takes into account elements such as:

1.?????? The cost to purchase the vehicle

2.?????? The interest cost of the financing

3.?????? The fuel/energy cost over the lifetime of the vehicle

4.?????? Maintenance and repairs

5.?????? Insurance costs

6.?????? Other costs, including taxes and subsidies

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Here’s a simple comparison of what this comparison looks like. I compared three categories, and picked models to compare in each: For compact cars I’m comparing the BYD Dolphin (EV) with the Toyota Yaris (ICE); for Mid-size I’m comparing the Nissan Leaf (EV) with the Toyota Camry (ICE); and in the Luxury class the Tesla Model S (EV) with the BMW 5-Series (ICE). I’ve assumed each car travels 200,000km, and for simplicity assumed the car is owned for the whole of its life (so have not accounted for residual value).

Here’s what that looks like:

Total Cost of Ownership – ICE vs. EV (US comparison)

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The answer is clear – although initial purchase prices are higher for EVs than for ICE vehicles in all classes, for two out of the three comparisons this is outweighed by substantially lower fuel/ energy costs and lower energy costs, such that the EV option is cheaper than the ICE option. That doesn’t hold for the luxury class, where the purchase price is a much bigger component of the total cost of ownership, creating extra costs both up-front and in financing.

This dynamic is, of course, precisely the reason that sales of EVs have been on an exponential rising curve in recent years – consumers are no longer making a purely moral choice to buy an EV, but are making a rational economic choice that aligns with their preferences for making a difference on climate change.

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Why it’s not (quite) that simple

Versions of this analysis are easy to find on the internet, and they all recreate the same results – that in most conditions, EVs are now an economically superior option to ICE. Despite that, when I discuss this in South East Asia in particular I am often with the objection that this analysis doesn’t hold everywhere. The IEA notes that 95% of EV sales are in Europe, the US and China. Why?

This is not all about economics, but let us first of all interrogate the sensitivities in the cost analysis. Here there are several variables that differ across countries and change the picture. I’ve looked at 5 countries for this analysis – the US, the UK, Singapore, Malaysia and China. Here’s how the picture changes:

The cost of fuel

• The cost of fuel differs widely across countries, driven largely by the level of taxes levied or subsidies provided. The cost of .95 petrol in the US is roughly $0.90 per litre, whereas in the UK it is $1.80 (and $2.20 in Singapore); by contrast in Malaysia, where fuel is heavily subsidised, the cost is only c. $0.45. This makes the lifetime fuel cost of owning an ICE vehicle about 4 times cheaper in Malaysia than in the UK (whilst having no impact on the cost of owning an EV)

The cost of power

• The simplest way to look at the cost of power is by comparing the wholesale price of power in different countries. Here there is again a range – the UK in particular is an outlier in the analysis, where power costs $0.32 per kWh, vs. roughly $0.10 in Malaysia (where power is also subsidised) and China
• However, this misses an important detail around where EVs are charged. If all charging is at home, this comparison is fair. But that relies on ready supply of EV charging points in homes, and requires the majority of journeys to be short enough to be completed within one battery charge. If not, then customers need to use commercial charging points, which are both less convenient and often materially more expensive
• This effect is most important in Singapore and Malaysia, where the prevalence of home charging is lower due to a lower weight for landed housing vs. blocks of flats. But the difference is also lowest there – commercial charging is 3x the price of home charging in the UK, but only about 10% more in Malaysia (comparing to the highest home charging tariff that is most likely for an EV user)

The purchase cost of the car – subsidies, import duties and taxes

• Car prices differ primarily due to government policies, but these can materially alter the picture. Government schemes include direct car taxes, subsidies and import restrictions. These materially alter the cost – the BYD Dolphin is currently available for as little as $14,000 in China and the US, but costs as much as $122,000 in Singapore. The shape of the subsidies also matters. In the US, Singapore and China, subsidies are materially in favour of EVs. The Inflation Reduction Act in the US provides a $7,500 subsidy for qualifying EVs (though this only applies to those produced domestically so would not apply to the BYD cars), whilst Singapore offers incentives of up to SGD$20,000 through a tax rebate on EV purchases. By contrast, Malaysia provides no subsidies for EVs, but instead has a price floor on imported EVs at RM100,000 (about $23,000). This policy (which is due to expire at the end of 2025 as Malaysia’s domestic car manufacturers release EVs) means Malaysian customers pay almost twice as much for a BYD Dolphin as US or Chinese customers
• Car manufacturers have realised this effect and are increasingly focused on producing cheaper cars. Whilst early EV releases were aimed at a niche luxury market, EV specialist OEMs like Tesla have since increasingly focused on the mass market; whilst the success of large scale Chinese brands like BYD have been built from the start on providing affordable alternatives at all price points
• Both of these effects matter – policies that change the relative economics of EVs and ICE cars obviously change the comparative economics. But so do policies that increase the purchase price of all cars, because this is the point where EVs are disadvantaged vs. ICE – increasing the purchase cost makes this a more material element in the calculation vs. energy costs. This is exactly the same reason that the luxury car comparison was the only category in the US to give an advantage to the ICE car

Financing costs

• The final aspect here is financing – both in the cost of financing of the car, and the cost of insurance. Most of the countries here provide similar insurance costs for the two cars, and the financing cost range is also quite narrow and low – between 3% and 5%. Malaysia is again an outlier, with materially higher insurance costs for the electric car compared to the ICE vehicle (more than 2x) – reflecting the current immaturity of EV maintenance in Malaysia.

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We can see how this plays out by then recreating the analysis above for the comparison between the BYD Dolphin and the Toyota Yaris across countries:

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Total Cost of Ownership EV vs. ICE across 5 countries

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This comparison then is revealing as to the shape of the EV market today:

• In four out of five countries, the EV option is still cheaper than the ICE option. But the magnitude matters – in China and the US, the comparison is strongly in favour of the EV, whilst in the Singapore it’s a much more marginal decision due to the very high weight of the purchase price in the overall calculation
• Malaysia is the exception, because it is the only country that has policies that strongly favour ICE – most materially the policy flooring imported EVs at RM100,000, but also the large fuel subsidies put in place. Malaysia has indicated that it will remove the first policy at the end of 2025, and indicated a desire to reduce or remove fuel subsidies in the near future (it has recently removed them for the more pollutive RON97 petrol). Removing the first policy alone would flip the economics, and removing both would put a sizeable advantage on the EV
• Whilst here we look only at the compact comparison, it should be clear that the case for EVs will weaken as we look up the size and price scale – because at higher prices the price differential outweighs the energy cost advantage. For Singapore, that means buyers of larger cars still face an economic incentive to purchase ICE vehicles in today’s market
• Financing was not a major factor in this comparison. But it would be if we looked further afield – developing countries can see car loan interest rates as high as 25-30%, materially increasing the importance of the up-front purchase price difference

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Conclusion – reasons for optimism

All of this should provide significant reason for optimism, because the trends are all in favour of further adoption of EVs. EV purchase prices have been steadily decreasing over time, and should continue to do so as car producers ramp up manufacturing capacity – getting this to scale will lower costs and should over time remove the one area of cost disadvantage for EVs. Some of this will undoubtedly disappear for the customer in higher profitability for EV OEMs, who currently subsidise consumers through lower profitability than ICE manufacturers. But not all – the more scale, the lower the cost of production. Current limitations on infrastructure are being quickly addressed, and this will remove the hassle barrier to buying EVs and improve the economic case by allowing more home charging.

The policy landscape is a little more complicated, but still broadly positive. Firstly, because of China’s pre-eminence in the EV manufacturing industry and the level of subsidies applied in China, Western markets are moving to impose tariffs on imported cars of limit their import altogether. This will undoubtedly act as a break on EV adoption globally, but should in the long run also encourage domestic EV manufacturing in those countries whilst speeding the export of cheap Chinese EVs to other countries more willing to take advantage of cheap import costs.

Secondly, we note the relevance of both fuel subsidies and EV subsidies. Here a more challenging environment is possible. EV subsidies are coming under fiscal pressure in the West, and under pressure from competitive import tariffs in China. Fuel subsidies have proven stubbornly difficult to remove politically, though here we are likely eventually to see a positive convergence – as more and more people drive EVs, fewer benefit from the fuel subsidy and the ease of removing improves.

And finally, the comparative economics of energy will also skew more in favour of EVs as we move towards a more renewable driven, cheaper, energy supply. The analysis above assumes that all electricity is sourced either from the grid or commercial chargers, but householders with both rooftop solar and an EV can see the combination reduce the cost of EV ownership still further (especially in sunnier climes or seasons).

In short – EVs are one of the key success stories of the climate transition so far, and the cost analysis suggests this is a trend already past its tipping point and with the majority of trends continuing in its favour. Nothing else in the world comes close to having the same likely impact on oil demand, and that is to be welcomed by anyone who cares about the future climate of the world.

[1] Source: IEA World Energy Outlook 2023

Other analysis is my own, and taken from a wide variety of sources. There's no easy source for all of this data, so it's highly likely you can find different prices for almost all the data points. But after testing multiple sources I'm convinced the overall conclusions are correct!