Markets

City smog is flipping the switch to electric vehicles

Climate change isn’t just about the weather, air pollution poses immediate and serious health problems. We look at how cities are trying to clear the air.

28/02/2017

Sustainable Investment Team

The climate policy agenda is now moving from the high-level ambitions agreed in Paris to practical, on-the-ground change. More empowered cities and states are now becoming more influential, with climate change high on the agenda of the challenges that urbanisation creates.

 

Source: SIM; WHO: Urban Ambient Air Pollution database (May 2016)

Air pollution is a major global health problem. The World Health Organisation (WHO) estimates 6.5 million deaths (11.6% of all global deaths) were associated with air pollution in 20121 and 92% of the world’s population lives in places where air pollution exceeds WHO recommendations, as shown by the yellow line in figure 12.

Pollution is a bigger problem in developing countries (see figure 1). Two out of three pollution-related deaths occur in South-East Asia and Western Pacific regions, where 30% of the world’s population lives. However, developed economies still suffer too, with 10,000 deaths attributed to nitrogen oxide pollution in the UK in 2013, the second highest number in Europe after Italy.

A tale of seven cities: does policy control pollution?

Stronger regulation can mitigate the problem and has already proven successful. As table 1 (and figure 1) show, cities with policies limiting diesel cars tend to be less polluted than similar size cities without such a policy.

Source: Schroders, February 2017

Air pollution typically prompts action when it becomes acute. China’s 1.6 million annual deaths linked to air pollution prompted the government to emphasise environmental concerns in its current five-year plan. Beijing is phasing out 300,000 high-pollution vehicles and has pledged to reduce coal use by 30% this year3. This would mark the fourth consecutive drop and underline the strength of government policy.

The Chinese government is using greater environmental focus to reshape the transport sector that accounts for 10% of China’s emissions. The government has pledged to have 5 million electric vehicles on the road by 20204. Generous subsidies are being implemented, along with quotas forcing automakers to produce a percentage of electric vehicles.

We expect similar regulatory trends to accelerate in other cities with unsustainably high pollution levels. Diesel cars will bear the brunt of the effects. The cities in table 1 alone have an aggregate population of 119 million and represent two of the world’s ten largest cities. Many smaller cities have already introduced anti-diesel policies.

Although typically marketed for their efficiency and low carbon emissions5, diesel engines produce high levels of nitrogen oxide (NOx), making them liable to new anti-pollution regulation. As cities implement policies that penalise their use in central urban areas - or ban them from city centres - diesel sales are likely to fall, especially in Europe.

Europe is a key market for diesel engines. Just below 50% of auto sales are diesel, which Exane BNP Paribas expects to fall to 20% by 20306. We expect both manufacturers and consumers to use the decline of diesel to expand their production and purchases of electric vehicles. The industry’s electrification will be necessary to hit long-term fleet emission targets and the industry is more ready to transition to that power train than ever before.

Electric vehicle development is integral to the R&D programme of every major original equipment manufacturer. The growth of electric cars is well understood, but we don’t believe its magnitude or speed has been fully appreciated. The industry may look very different a decade or so from now.


1. http://www.who.int/mediacentre/news/releases/2016/air-pollution-estimates/en/

2. 20 µg/m³ of particulate matter

3. http://www.bbc.co.uk/news/world-asia-china-38545649

4. http://climatenewsnetwork.net/chinas-electric-vehicles-evs-bumpy-ride/

5. Typical estimates around 15-20% less carbon dioxide than equivalent gasoline engines (e.g. http://www.air-quality.org.uk/26.php) although we note that recent emissions testing scandals have shed doubt on those estimates

6. Exane BNP Paribas: European Autos, 2017: Encore Une Fois?

Important information

This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.

The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.