Electric vehicles are key to the energy transition – but the switch must be sustainable. Here’s why

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Lisa Donahue, Co-Head, Americas and Asia, AlixPartners, Vance Scott, Partner & Managing Director, AlixPartners

• Demand for electric vehicles is cooling in many markets, despite ambitious government targets.
• EVs are key in the switch to sustainable transportation, but changing too fast to EVs worldwide has implications for energy security and the economy.
• A steady and sustainable switch to EVs is preferable and would protect the myriad industries and jobs that rely on the status quo in the global auto trade.

There is ample evidence suggesting electric vehicle (EV) market demand is cooling off in many critical markets, raising questions about how big a role car buyers can play in immediately addressing climate change.

Governments, under increasing pressure to accelerate decarbonization, may be tempted to keep the pedal to the metal on regulations and incentives designed to juice EV sales.

The US Environmental Protection Agency, for instance, proposes two-thirds of new vehicles sold in the US be EVs by 2035, up from the current 7.6% US new vehicle market share. Canada, the UK and the EU want all passenger vehicle sales to be zero-emissions by 2035.

Although the intention is laudable, many in the industry view targets like these, particularly those imposed on light and commercial vehicles, as overly aggressive.

Moving too fast has ramifications for automakers struggling to profit from EVs. It also affects consumers who routinely see insufficient charging infrastructure, limited selection, range anxiety and cost as reasons to hold off on purchasing these vehicles.

If these caution flags aren’t enough to get regulators to tap the brakes on potentially unrealistic mandates, they should consider the unintended consequences that such an abrupt shift would mean for industries beyond transportation.

Consumers concerns

Exhibit A is the petroleum refining industry, which converts crude oil into myriad inputs and applications made possible by petrochemical production — from pharmaceuticals to medical devices to wall paint, and Kleenex boxes to smartphones. Modern life depends on the immediate availability of thousands of these petroleum derived products.

If EVs become the dominant form of highway transportation over the next decade, demand for diesel and gasoline will dry up, leaving refiners, chemical producers, untold consumer and industrial products makers and — ultimately — consumers in a serious bind.

Consensus on the urgency for government intervention to address climate change continues to grow. And to be sure, passenger vehicles and commercial trucks are major contributors to the planet’s overall carbon footprint. However, in the scramble to address the issue, we must figure out if we are ignoring the downside of moving too fast too soon. It is imperative that we consider adjacencies such as petroleum by products and electric power grid stress and distribution as we navigate through the next several decades of energy transition.

These are the types of questions that the World Economic Forum’s Special Meeting on Global Collaboration, Growth and Energy for Development set to convene in Riyadh this month is designed to consider.

It is clear that fossil fuels are a necessary resource needed to ensure both near-term demand and a smoother transition to a day when low-carbon energy is ubiquitous. Moving too aggressively could create an unintentionally devastating domino effect; just sitting on our hands, however, impacts future generations and defers a sustainable planet.

Innovating in the energy industry

Oil and gas industry players, including hundreds of crude oil refineries around the world, know the energy transition is underway. Because refiners will depend heavily on transportation demand for fuels and the oil that enables them for years to come, we should not disqualify the oil companies from having an influential seat at the table. In fact, it makes their presence all the more vital. These organizations have enormous impact on the global economy as a provider of goods, services, emerging green technology and jobs. They also possess the best technical insight and capabilities to resolve the energy transition’s challenges.

Innovation is on the horizon but will take time to mature. Companies are creating bio-based alternatives to petroleum products, for instance, but solutions like these are far from achieving scale. Many of the alternatives will take more time, capital, innovation and a groundswell of support to develop.

Another example of the complexity involved in the energy transition is the move to biobased materials, which could eventually reduce the need for petroleum-based products and lessen the impact of lower gasoline and diesel demand. Again, a good idea that needs time and resources to be a reasonable solution.

Recognizing that a few limited sites exist where bio-based plastics are made at industrial scale, there are virtually no companies currently doing this at the scale underpinned by petroleum. When scale is achieved, a key conflict must be considered. While helping reduce carbon emissions, these biobased materials are composed of items that people eat, including corn, soybeans and sugar. So, with current technology, the industry cannot make the medicines, plastics and other materials society depends on without competing with food, therefore driving up food costs. High food costs and potential scarcity impacts the poor the most.

Protecting energy security

As mentioned, another consideration for rapid energy transition mandates are implications from driving increased costs and volume throughout an energy system that has developed over 150 years. Grids are not currently designed to accommodate technological advances from forcing EV penetration. At the same time, consumers are driving demand for AI-enabled smartphone and computing technologies.

Both EVs and AI are forcing tremendous changes in power generation and electricity transport and distribution. These changes require new capital and innovation that demand a risk-weighted return. Making these investments will likely drive higher energy costs in developed markets, and, given the interconnected global energy system, could translate across the globe.

Now is not the time to shy away from these challenges. We must trust that world leaders are committed to accelerating the energy transition not only have the urgency to meet the challenge but also the foresight to make sure that transition is economically and socially viable.