At the July G20 meeting in Hamburg, Germany, the conflict between the US and the other participants over support for the Paris climate change accord garnered most of the attention while a broader phenomenon was overlooked: the fact that the energy economy is changing faster than the world’s leaders recognize. In fact, one technology commentator maintained after the meeting that renewable energy is becoming so cheap that the US will likely meet its commitments under the Paris Agreement regardless of whether the President formally withdraws his country from it.
While this prediction may seem fanciful, it rests on the looming end to a carbon-based energy paradigm and to the central role played by the internal combustion engine (ICE). With the costs for renewable energy sources (especially wind and solar) plummeting, improvements in battery technology and storage capacity occurring at a furious pace, the technology to make autonomous vehicles (AVs) both feasible and desirable advancing rapidly, and the transportation preferences of the next generation changing significantly, the end to the prevailing energy and transportation paradigm is in sight.
Since the Industrial Revolution in the 1700s, the world economy has been powered by a carbon-intensive energy paradigm that has led to unprecedented improvements in the standard of living for most of the global population. That prosperity has largely been driven by the use of carbon-intensive resources — coal, petroleum and natural gas — to power steam, electric and internal combustion power sources, for almost three centuries.
Our dependence on these energy sources is so extensive that it is hard to imagine an end to the carbon era. Nonetheless, evidence from a wide range of sources is growing that the transition to a post-carbon energy economy is gaining momentum. While governments around the world focus their policy efforts on creating a framework to regulate or entice producers and consumers off their reliance on carbon-based energy, relatively few seem prepared for a world in which both the supply of alternative energy sources and the demand for them are driving this change at a faster pace than their regulatory frameworks can.
According to a growing number of forecasts, this transition is precisely what is under way. The Boston Consulting Group recently predicted that a quarter of all travel by individuals in the US could be electric and driverless by 2030. The BCG study maintains that private ownership of cars with internal combustion engines will be replaced by shared, electric-powered and autonomous vehicles. For millions of drivers, their next vehicle purchase may be their last.
Other authoritative sources have the switch coming even sooner. Bloomberg’s July 2017 Electric Vehicle Outlook predicts a quicker rate of electric vehicle (EV) adoption due to the rapid reduction in the cost of batteries and rising commitments from automakers to shift to electric-powered vehicles. It forecasts that by 2040, 54 percent of new car sales will be electric and 33 percent of the global car fleet will be electric. This accelerating transition will be driven primarily by the drop in the cost of battery technology. Going even farther, Bloomberg suggests that EVs will become price competitive with those powered by carbon-based ICEs by 2025, on an unsubsidized basis, and that this trend will have a major impact on the demand for fossil fuels.
The evidence to support these forecasts is coming fast and furious from a number of leading automakers. Volvo (owned by Geeley Motors in China) recently made headlines around the world by announcing that all of the vehicles in its fleet would be powered by electric or hybrid engines by 2019, and that it will introduce five new all-electric-powered models between 2019 and 2021. In commenting on the announcement, a leading automotive expert at Bristol University in the UK forecast that by the mid-2020s, we will reach a “tipping point” where EVs will out-compete ICE-powered vehicles.
Toyota is reportedly in the “production engineering” stage of building an EV battery with solid electrolyte: it is intended for a vehicle with an all-new model platform that will debut in Japan in 2022. Renault-Nissan recently announced plans for a joint venture with Dongfeng Motors to build electric cars in China. And Tesla has finally brought its mid-priced Model 3 into production and aims to be rolling 20,000 a month off its assembly line by the end of 2017. Even more telling is the high rate of growth in demand for Tesla models in China, the world’s largest automotive market and the one that may have the greatest future impact on automotive design and technology. Fortune recently reported that Tesla tripled its sales in China in 2016 to 10,400 vehicles, representing 13 percent of its worldwide sales, and that based on sales in the first three months of 2017, it is on target to double its sales level this year. Pre-orders for the Model 3 in China are second only to those in the US.
However, the deeper significance of the Chinese market for the future of the ICE paradigm does not lie in the prospects for the various auto assemblers; rather, it lies in the concerted effort by the Chinese government to lead the development of battery technology on a global scale. Global auto manufacturers are up in arms over a plan by the Chinese authorities to require that 20 percent of all vehicles sold in China be electric or hybrid by 2025. The objective is to help reduce air pollution in Chinese cities, but also to help the Chinese car industry compete more effectively with overseas producers by accelerating the transition away from ICE-based automobiles. This policy thrust is consistent with recent research by Joseph Wong, who has documented recent policy initiatives by the Chinese government to establish its leadership in the production of lithium-ion batteries.
As dramatic as some of these recent forecasts may be, they are far from the most aggressive. Pride of place in that respect belongs to Tony Seba, a Silicon Valley energy analyst, who forecasts that the transition to EVs, AVs and “transport-as-a-service” (dubbed TaaS) will decimate the current auto industry and the global oil industry by 2030. In a major report entitled Rethinking Transportation 2020-2030, released in May 2017, he predicts the end of the ICE paradigm and a fundamental change in the way consumers view the cost and convenience of alternative transportation modes.
The report predicts that by 2030, 95 percent of passenger miles travelled in the US will be in fleets of on-demand EVs and AVs not owned by individuals. This transition, which will occur at an accelerating rate in the next decade, will disrupt significant portions of the existing automotive value chains, as well as a host of ancillary industries, from automotive repair to insurance, that service and support privately owned vehicles. The transition will be driven fundamentally by cost savings —in the order of $5,600 a year for the average family — not by regulation. These savings will pour a massive infusion of consumer spending into the economy, but this spending will not go into the automotive and energy industries as they currently exist.
Higher vehicle utilization rates by these fleets may result in a dramatic reduction in the number of vehicles on the road in major cities (by up to 80 percent, Seba predicts), but ease of access to AVs could increase demand from segments of the population that don’t now have access to automobiles. Either way, the switch to EVs and AVs will have far-reaching implications for urban planning and space utilization that have been analyzed in a major report for the City of Toronto. As a corollary, demand for oil will peak in 2020 and tumble by 2030, leading to a further decline in oil prices but, more significantly, the stranding of existing oil reserves in places like the Bakken shale, offshore sites in the UK, Norway and Nigeria, and heavy oil reserves in Venezuela and Alberta.
While Seba’s forecast may seem far-fetched, his analysis is based on a model of transitions that have occurred in previous technology regimes, in both the energy sector and the broader economy. The coming energy transition is comparable to the one that occurred in the third decade of the 20th century with the rapid growth in privately owned automobiles. In 1918, only 7 percent of US households owned automobiles; by 1930, the share had risen to 48 percent. While most accounts of this transition suggest that it was driven by the adoption of the Ford Motor Company’s system for assembly line mass production, Seba argues that the real driver behind mass automobile ownership was the revolution in consumer finance engineered when General Motors partnered with DuPont to form the General Motors Acceptance Corporation (GMAC), which was able to offer affordable loans to consumers for the purchase of automobiles. The lesson to be drawn from this transition is that when the consumer economics for a new technology reaches a critical tipping point, the pace of change can accelerate dramatically.
Skeptics doubt whether the transition will occur at the pace now being predicted; there are many obstacles to surmount, not least the need to upgrade and transform the electric utility infrastructure to accommodate the coming demand for increased capacity to charge EVs. However, the critical policy issue is not how soon the transition will occur but which countries will have adopted policy regimes that are ready for the post-carbon era when it arrives. The odds are growing stronger that it will happen sooner than most existing policy regimes anticipate.
If national policies are to be prepared for this possibility, we need to begin to plan the institutional and regulatory frameworks that will be required for a post-carbon, post-ICE economy. The shift in policy frameworks will be extensive and comparable to that which occurred in the first half of the 20th century as the ICE paradigm was diffused throughout the industrial economy. What is urgently required is a shift in the complex of social, political and regulatory institutions to support the emerging green and energy and transportation paradigm based on information and communications technologies. The accelerating pace of technological change today suggests that we will have a much shorter time frame to prepare for this transition than our predecessors did a century ago.
The implications of this transition are staggering for an economy like Canada’s. The industrial base of central Canada has been heavily invested in the auto and related industries for the past century, and the economy of western Canada is heavily dependent on carbon-based energy production. The coming transition poses a massive challenge for Canada on both the production and the consumption sides of the energy ledger. The extent of this challenge is increasingly being acknowledged by the heads of some of the automotive companies, who have recently begun to incorporate the transport-as-a-service concept into their own business models. But the question of whether policy-makers at all levels of government are seized with a strong enough sense of urgency to prepare for a post-carbon, post-ICE economy remains an open one.
Moreover, if we think that the effects of this energy transition will be limited to the manufacturing and energy sectors of the economy, we are in for another surprise. In 2015, Mark Carney, former governor of the Bank of Canada and currently governor of the Bank of England, gave a number of speeches warning of the financial risks inherent in proven oil reserves that would never be extracted. He argued that the stranding of these assets — if the world is to meet its climate change goals — could have a massive disruptive effect on the financial system of the industrial countries, affecting investment vehicles, including pension funds, that have substantial holdings in carbon-based energy companies. The financial impact will be just as severe if the demise of the ICE paradigm is driven by emerging demand for new technologies rather than climate change regulations.
Whether this shift to a post-carbon, post-ICE paradigm occurs by 2030 or by 2040, we have precious little time to prepare for the massive adjustment it will occasion in energy infrastructures, transportation support, urban design and planning, and the way these investments are valued by the wealth management, insurance and other parts of the financial services sector. Public policy transitions move at a much slower pace than technology transitions. There will be even less time to rethink our energy and transportation policies if we wait until the tipping point is reached. Now is the time to begin to adjust our conceptual frameworks: policy-makers must recognize that they alone will not control the pace of this transition, and they need to anticipate the massive economic, financial and institutional disruption it will entail. We must adopt a more proactive, forward-looking approach to transform our policies and institutions to ensure that Canada is creating a strategic advantage in this emerging energy paradigm.
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