What’s the issue?
The Biden administration issued an executive order that established a goal of getting to the point where fifty percent of all new passenger cars and light trucks sold in 2030 would be zero-emission vehicles. However, the European Commission and California have gone much further than that and have proposed that all new vehicles be zero-emission vehicles starting in 2035, effectively banning the sale of new internal combustion engine vehicles.
Why does it matter?
There are significant implications across many energy sectors if these policies are not implemented with great coordination and care. One of the most pressing issues is proper planning for the incremental electricity load, especially since California is already experiencing rolling blackouts due primarily to the increase in intermittent renewable resources.
What’s our view?
These are very optimistic goals, unlikely to pass in their current form, which will require significant coordinated efforts by the government, the private sector, and changes in end-user behavior to succeed. The actions taken in an effort to achieve these goals will undoubtedly shape markets for all sources of energy from crude to renewables.
The Biden administration issued an executive order that established a goal of having fifty percent of all new passenger cars and light trucks sold in 2030 be zero-emission vehicles (ZEV). However, the European Commission and California have gone much further than that. Both have proposed that all new vehicles be ZEV starting in 2035, effectively banning the sale of new internal combustion engine vehicles after that date within the European Union and the state of California. There are significant implications across many energy sectors if these policies are not implemented with great coordination and care. One of the most pressing implications is proper planning for the incremental electricity load, especially since California is already experiencing rolling blackouts due primarily to the increase in intermittent renewable resources. California’s importance in leading on this issue was highlighted in President Biden’s executive order where he directed his administration to coordinate with California because of the state’s “significant expertise and historical leadership.”
These proposed regulations are very aspirational -- and likely to change during the rulemaking process. But if implemented in their current form, they will require significant coordinated efforts by the government and the private sector, with major changes in end-user behavior, to succeed. The actions taken in an effort to achieve these goals will undoubtedly shape markets for all sources of energy, from crude to renewables.
On July 14, 2021, the European Commission adopted a package of proposals to make the European Union's climate, energy, land use, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. Achieving these emission reductions is crucial to the European Commission’s ambition to make Europe the first climate-neutral continent by 2050. As part of this package, called “Fit for 55,” a combination of measures was proposed to tackle rising emissions in road transport. These proposals include stronger CO2 emissions standards for cars and vans, accelerating the transition to zero-emission mobility by requiring the average emissions of new cars to decrease by 55% by 2030 and 100% by 2035 compared to 2021 levels. As a result, all new cars registered as of 2035 will be zero-emission, effectively banning the sale of new internal combustion engine vehicles. Zero-emission vehicles include battery-electric, plug-in hybrids, and those powered by hydrogen fuel cells.
A similar goal had previously been adopted by California on September 23, 2020, when Governor Newsom signed an executive order setting the following targets for ZEVs:
By 2035, 100 percent ZEV sales for new passenger vehicles, 100 percent ZEV operations for drayage trucks (used to transport containers to and from ports), and 100 percent ZEV operations for off-road vehicles and equipment, where feasible.
By 2045, 100 percent ZEV operations for medium- and heavy-duty vehicles, where feasible.
In California, the transportation sector is the largest emitter of greenhouse gases (GHG), directly accounting for 40% of GHG in 2019 according to the California Air Resources Board’s 2021 report, and half of all emissions if the emissions from oil and gas production and refinery operations are included.
Passenger vehicles alone account for 71% of the GHG emissions within the transportation sector, and 29% of total GHG emissions for the state of California.
Similarly, in the European Union, transport is the only sector where GHG emissions have been on the rise, and GHG emissions from road transport are no exception. They represent almost 20% of total EU GHG emissions and have significantly increased since 1990.
Like in many other areas involving decarbonization of the economy, setting these goals is the easy part; actually implementing them will be far more difficult. In California, to ensure needed infrastructure is built to support zero-emission vehicles, the governor’s executive order requires state agencies, in partnership with the private sector, to accelerate the deployment of affordable fueling and charging options. It also requires the support of new and used zero-emission vehicle markets to provide broad access to zero-emission vehicles for all Californians.
An analysis by the California Air Resources Board estimates that 8 million light-duty ZEVs and 180,000 medium- and heavy-duty ZEVs will be needed in 2030 to meet the goals. For passenger vehicles alone, nearly 1.2 million public and shared private chargers are needed to support the 8 million ZEVs needed by 2030. For medium- and heavy-duty vehicles, modeling analysis suggests that 157,000 chargers are needed to support 180,000 ZEVs. Currently, there are just 73,000 public and shared private chargers across the state.
In the European Union, to ensure that drivers are able to charge or fuel their vehicles at a reliable network across Europe, the revised Alternative Fuels Infrastructure Regulation will require EU member states to expand charging capacity in line with zero-emission car sales and to install charging and fueling points at regular intervals on major highways, including every 60 kilometers for electric charging and every 150 kilometers for hydrogen refueling.
Assuming that the governments can develop an entirely new infrastructure to support these vehicles, carmakers will have a tremendous opportunity to sell new vehicles into the market. For instance, in California, as of April 30, 2021, there were just 635,602 light-duty ZEVs on the road, compared to 28,030,332 non-ZEV light-duty vehicles. To reach the 2030 goal of 8 million light-duty ZEVs, the car industry will need, on average, to sell more ZEVs than are currently on the road each and every year between now and 2030. In the first quarter of 2021, new light-duty ZEV sales were just 59,058. That number would need to triple, on average, for every quarter from now to 2030.
Several car manufacturers have plans to support zero-emission vehicle proposals. Volvo plans to become a fully electric premium carmaker by 2030 and aims to have phased out cars with an internal combustion engine, including hybrids, by that date. General Motors aspires to eliminate tailpipe emissions from new light-duty vehicles by 2035 with an all-electric future. Mercedes recently made a similar announcement to go all-electric by the end of the decade (2030), where market conditions allow, and the list goes on to include announcements by Nissan, Jaguar, Ford and Bentley.
Timing and coordination are going to be critical for these proposals to succeed. Infrastructure to charge and fuel vehicles has to be built out in conjunction with the increase in production of new vehicles. Vehicle price and limited driving range will also be important barriers to the transition. The power grid has to be enhanced, technology developed and end-users educated for the increased electricity load to not overwhelm the system on an hourly or longer duration basis.
However, even the movement toward these goals will have a significant impact on the energy markets. We will discuss in subsequent articles two key impacts, one on the renewable energy and electric transmission sector, and one on the crude and refinery sectors.
Just last summer, the California Independent System Operator Corporation was forced to institute rotating electricity outages in California in the midst of an extreme heatwave. A study following those outages identified, as one of three key factors, the failure of the planning process to keep pace with the transition to a reliable, clean and affordable resource mix to ensure that the available resources can be relied upon to meet demand in the early evening hours. Adding even more load while increasing intermittent renewable energy resources will undoubtedly exacerbate this challenge in the future.
Similarly, if Europe and California are even mildly successful in driving the adoption of ZEV cars, that will likely result in a substantial reduction in demand for refined products, which will also reduce overall demand for crude. As of January 2021, California had 14 operating refineries, with 1.75 million barrels per calendar day of atmospheric crude oil distillation capacity. Those refineries produced 920 Mb/d of reformulated gasoline and 220 Mb/d of CARB – Diesel that can be consumed in California, all of which will be under pressure as demand decreases.