The Fuse

As EV Costs Decline, Policy Aims to Accelerate Transition

by Nick Cunningham | April 26, 2021

The Biden administration announced a goal of slashing greenhouse gas emissions in half by 2030, a very ambitious goal that will require a dramatic overhaul of a large part of the American economy.

One of the hardest nuts to crack will be electrifying the transportation sector. But as costs decline and the acceleration of EV adoption becomes increasingly viable, governments at the state and national level are eyeing a phase out of the internal combustion engine (ICE).

ICE bans begin

Several European countries initially led on policies that require a phaseout of ICE vehicles. France and Spain have a deadline of 2040. The UK announced a ban on gasoline and diesel vehicle sales beginning in 2030. As Bloomberg Green notes, absent that ban, EVs would only account for roughly 42 percent of total sales in 2030. The ban will do away with ICE sales. Norway is phasing out gasoline and diesel car sales as soon as 2025, where EVs already capture more than half of the market.

Falling costs and the fact that the energy transition is accelerating are pushing policymakers to take a harder look at the internal-combustion engine.

This trend is only beginning to catch on in the U.S. Last year, California Governor Gavin Newsom signaled a phaseout of ICE vehicles by 2035, and medium- and heavy-duty vehicles by 2045, but the process would be one of regulatory action, which means that rulemaking still needs to be done.

California remains ahead of the rest of the country, with roughly 8 percent of total sales in 2020 captured by EVs. That trend accelerated in 2021 with sales picking up steam as evidenced by the state’s rebates, which are nearly exhausted.

Washington State recently passed a bill that would phaseout ICE vehicles beginning in 2030. If signed by the Governor, it would move Washington ahead of California to establish the most ambitious timeline in the country. However, the legislation has a large caveat – it is contingent upon 75 percent of the vehicles in the state being subject to a road usage charge, aimed at making EV owners pay for road upkeep as they don’t pay a gasoline tax. The idea would be to eventually replace the gasoline tax with a road usage tax as EVs take over, but that still requires a whole separate legislative process to enact, so a lot of uncertainty remains.

The efforts thus far remain modest. But in a letter to President Biden, a group of 12 Governors called on the federal government to establish “a clear regulatory path to ensuring that all vehicles sold in the United States are zero-emission” no later than 2035. Later this summer, the U.S. Department of Transportation is expected to roll out new fuel economy standards for vehicles manufactured years from now. And the Biden administration is reversing a Trump-era effort to take away California’s unique authority to set its own auto standards. Taken together, regulatory policy should provide a boost to EVs.

There is a long way to go. EVs are expected to only capture 3.5 percent of overall sales in the U.S. in 2021, which is nearly double the 2020 share of 1.8 percent, according to IHS Markit. “Consumer acceptance of [EVs] is increasing, though at a modest pace, and now is at record levels,” Tom Libby, associate director of industry analysis at IHS Markit said in February.

Policy and automakers showing signs of acceleration

Major shifts are underway at the corporate level. In January, GM announced plans to phaseout ICE sales by 2035, although there are questions about how ironclad this commitment is. The announcement was nevertheless seen as a watershed moment for the auto industry. Honda just announced a plan to go 100 percent electric by 2040. By 2025, global automakers are expected to add more than 100 new EV models. Automakers are still hedging their bets, keeping one foot in the old ICE world as they begin to take steps forward, but the pace of change is quickening.

Investors are also increasingly flocking to electrification efforts. Billions of dollars have flooded into EV companies as the transition becomes clearer. “The writing is on the wall with regard to the long-term EV versus internal combustion debate,” John Mitchell, a partner at Blue Horizon Capital, told MarketWatch in March.

A new report finds that switching the entire transportation fleet – cars and trucks – to 100 percent electric sales by 2035 is not only possible, but that it would save households an average of $1,000 per year. The University of California Berkeley study says that the falling cost for renewable energy and the falling cost of electric vehicles together means that “a cost-effective pathway to decarbonize the transportation sector is in reach.”

The study compared two scenarios through 2035 – a business-as-usual scenario that sees electrification proceed at a significant but incremental pace, and a much more ambitious full electrification scenario. In the former, a “No New Policy” scenario, EVs capture 45 percent of light-duty vehicle sales and 12 percent of heavy-duty vehicle sales by 2035. On the other hand, the so-called “DRIVE Clean” scenario would envision 100 percent electrification for light-, medium- and heavy-duty vehicles by the same year.

The difference? The more aggressive DRIVE Clean scenario yields $2.7 trillion in economic benefits through 2050 relative to the No New Policy scenario, or $1,000 per household per year for the next 30 years. There are obviously also enormous public health and climate benefits as well.

Of course, a lot of policy would be needed to build out the infrastructure, supply chains for the metals that go into batteries, upgrades to the electric grid, and more. But the report is illustrative of what is technically possible. And the economics are heading in one direction. A recent report from the National Academies of Sciences, Engineering, and Medicine predicts battery costs will fall by 7 percent annually through 2030.

Federal policy can accelerate the effort and lock in a fast-tracked trajectory. President Biden’s proposed $2.25 trillion infrastructure package would pump a lot of money into this effort, including $174 billion in EVs, including the construction of 500,000 chargers, the electrification of 20 percent of the U.S. school bus fleet, and other incentives to speed up electrification. But it still needs to pass through Congress.