Date Published: November 19, 2020
Technological advancements have occurred rapidly over the last several decades, and perhaps one of the most notable areas of development has been the automotive sector. Electric vehicles and plug-in hybrids (EVs) have made significant inroads to the retail market in recent years and are expected to gain significantly more market share over the coming decade. Continued innovations in battery development alongside further model diversification will help to not only better align EV prices to comparable internal combustion engine (ICE) models, but also provide the consumer with an equivalent amount of model selection – helping to better level the playing field over the medium-term.
Electric vehicles have been around for over 20 years, but consumer uptake of these vehicles has been relatively slow. Global EV sales last year were 2.1 million units, up 3.8% from the year prior (Chart 1). While the gains were by no means a breakneck pace, EVs performed far better than the entire market, which was lower by 4.3% (Chart 2). Despite outpacing overall vehicle sales, EVs accounted for just 3% of total sales in Canada and 2% in the US. Even in China, which accounts for slightly more than half of the global EV market, sales only amount to 5% of the country’s total annual sales (Chart 3). One notable exception has been Norway, where EV popularity has been the highest among all other developed nations – accounting for 55% of annual sales in 2019 and continuing to grow through 2020. Much of Norway’s success in consumer uptake has been the result of favorable government incentive programs, including large reductions in the purchase price through subsidization as well as road tax reductions of up to 90%. Additional incentives include breaks on parking, toll fees and ferry charges. While Norway’s incentive programs are by far the most generous in the world, other European countries including Iceland (23%), Netherlands (15%), Sweden (11%) and Finland (7%) have followed a similar roadmap and have also seen a noticeable increase in EV demand in recent years.
Despite the recent gains, EVs still represent a very small piece of the overall pie, accounting for just 2.7% of global car sales. The relatively slow adoption reflects a host of factors, but perhaps the most obvious has been cost. Despite the many innovations, EVs still carry a high upfront price tag, with most models costing anywhere from $10,000-$20,000 USD more than the comparable ICE model. Indeed, the price differential is somewhat narrowed after factoring in government subsides and other costs of ownership, though in most cases, this alone does not close the price gap entirely. Moreover, government subsides differ substantially by country, making EV ownership far more cost effective in the countries offering the most generous subsides. This is exactly the case in Norway (and to a lesser extent other European countries), where after factoring in all the government incentives, purchasing an EV is sometimes cheaper than a comparable gasoline powered vehicle.
At the heart of the hefty EV price tag, lies the battery. Limited production capacity has meant that battery output has lagged, ultimately restricting the number of vehicles coming to market. Indeed, the scale of battery manufacturing plants has significantly increased in recent years and will be further helped along by the recent rollout of several new mega power plants. To give some context, traditional battery manufacturing facilities typically produce anywhere from 3 to 8 gigawatt-hours per year (GWh/year), whereas the mega facilities are expected to produce an output of nearly three times that upper bound, exceeding 20 GWh/year. Industry experts expect that five more of these facilities worldwide will be fully functional by 2023.
Outside of scale, battery prices have also been inflated due to material costs. Cobalt is a key mineral used in lithium-ion batteries and is by far the most expensive component – costing anywhere from $32,000-$35,000 a metric ton. However, here too, manufacturers have made significant advancements. Recent innovations in battery chemistry has shown that nickel-based cathodes could be a viable alternative, offering an even higher energy density, longer life cycle and costing a fraction of the price.
The combination of improving scale and design enhancements has already put significant downward pressure on battery prices over the last decade. According to data provided by BloombergNEF, battery pack prices have fallen from $1,160 KWh (USD) in 2010 to $156 KWh in 2019 (Chart 4). Industry experts expect this trend to continue over the coming years, such that price parity between EV and ICE models could be reached as early as 2022/23.
Achieving price parity (or at least more in the ballpark) will be a key factor required to propel the EV market forward, particularly in North America. As already mentioned, significant government subsidies have been largely responsible for the increased popularity of EVs across many European countries. While both Canada and the US have introduced similar rebate programs (at the federal and provincial/state level) in recent years, buyers still end up paying more upfront relative to purchasing a comparable gasoline model. In Canada, the maximum federal rebate available is $5,000, with only two provinces (Quebec & British Columbia) offering additional tax credits for its residents (Chart 5). This is slightly less than the maximum federal rebate offered in the US ($7,500), though the US program comes with a caveat. Each manufacturer has a sales cap of 200,000 units, once that is reached, the federal incentive is gradually reduced over the course of the next year, after which it is eliminated completely. Both Tesla and GM have already reached these sales caps, meaning any future buyers are no longer eligible for the federal tax credit. Depending on the buyer’s state of residence, additional state subsidies may still apply. Chart 6 highlights the 10 most generous state subsides.
As it currently stands, the fate of the Canadian federal subsidy remains somewhat in question. The Liberal government allocated $300 million for the purpose of consumer rebates (effective May 1st, 2019), to be used over a three-year period. Not even two years into the program, more than three-quarters of the allocated funds have already been used. It is unclear if the government will top up the program once the existing funds have been exhausted.
History has shown that Canadian’s decision to purchase an EV remains heavily dependent on the available government subsides. Up until 2018, Ontario had also offered provincial rebates (amounting to as much as $14,000). However, the Conservative government scrapped the program at the beginning of 2019 – citing it as an unnecessary tax break for wealthy Ontarians. EV sales dropped dramatically through the first half of last year – falling by over 50% – and have never recovered. In fact, despite Ontario accounting for 36% of the overall Canadian passenger vehicle stock, only 11% of the cumulative EV sales have so far occurred in the province. If the federal government is committed to reaching its 10% EV market share target by 2025, the existing federal subsidy program will likely need to be topped up sometime this year. Extending the current subsidy program for at least another two years will help buy the industry a bit more time to inch closer to price parity while also continuing to facilitate the gradual rotation towards electrification.
Range anxiety remains another key barrier for many consumers, as current charging infrastructure is simply not adequate across most provinces, particularly for long distance drivers. According to Natural Resources Canada, there are 5,316 public charging stations located across the country, estimated to have 12,558 plug-ins. Over 2,200 of those chargers are DC fast chargers, which can recharge some EVs to 80% capacity in 20-30 minutes. The US currently has roughly four-times the number of Canadian public charging stations, which are estimated to have over 69,000 connectors – nearly one-fifth of which are fast chargers (Chart 7 & 8). While many players including utilities, oil & gas companies and automakers are all actively investing in this space on both sides of the border, it is generally understood that charging capacity will need to grow exponentially to satisfy the EV targets set out by the federal government. At this point, it appears that the government is committed to further investing in its infrastructure in order to reach those goals. In a Throne Speech made by Justin Trudeau last December, the Prime Minister called for the installation of 5,000 additional charging stations – nearly doubling the number of existing charging points – along both the Trans-Canada Highway as well as rural and urban areas. While no timeline was given, it is generally understood that this would be a medium-term requirement in order to meet the expected increased demand over the coming years. And while these numbers may seem ambitious, similar estimates have been made for the US. The International Council of Clean Transportation estimates that by 2025, approximately 200,000 charging points will be required across the 100 most populous areas of the US.
Between January and April, global car sales were below year-ago levels by over 9-million units, as severe lockdown measures erased more than a third of expected sales through the first four months of the year. Unsurprisingly, the timing and extent of the declines were dictated by the timing and severity of the lockdown measures implemented by each region. In China, sales in February were over 80% below year-ago levels, whereas in the US (-50%), Germany (-45%), Canada (-75%) and France (-80%), sales didn’t trough until April (Chart 9). Across all regions, global sales have since rebounded strongly and as of September, are sitting slightly above year-ago levels.
Interestingly, EV sales have so far stood out as a bit of a bright spot, having generally been hit less hard than non-electric sales. This should perhaps not come as a surprise. The income shock resulting from the pandemic has been disproportionately felt by lower-income households. A recent study by the St. Louis Federal Reserve found that those who have either less than two-months of income in safe assets or debt payments exceeding 40% of their income are significantly more likely to become seriously delinquent on their debt during the pandemic. Meanwhile, higher-income earners have (so far) been far less financially impacted as many have been able to work-from-home and are also more likely to have some financial cushion saved. This is important from an EV standpoint, as US data has shown that sales in recent years have remained concentrated among higher-income earners. While a comparable cut in the data doesn’t exist for Canada, it’s hard to imagine why EV sales would be more evenly distributed across the income spectrum in Canada, especially given the existing parallels in price and government incentives.
That being said, even though EV sales have been relatively sheltered from the current economic slowdown, the recovery still remains somewhat in question, particularly given the recent surge in infections across both the US and Canada. While vaccine hopes look increasingly promising, the pandemic is likely to leave lasting scars on the labour market, which will almost certainly slow the pace of electrification over the coming years. As a result, public policy needs to play a proactive role in helping facilitate the continued rotation away from fossil fuel to more carbon-friendly vehicles. This has already been the case in China, where both the central and local governments quickly moved to implementing a range of new support measures which are intended to stimulate EV demand.1 Similar initiatives have been implemented in France (up to €7,000 tax credit) and Italy (€10,000) as part of targeted fiscal response packages intended to support the respective automotive sectors and facilitate the continued rotation towards electrification. France has also taken it a step further, offering additional subsides for lower-income households who trade-in a gasoline powered vehicle for an EV.
Such simulative measures have so far been absent in both Canada and the US. While a “Cash for Clunkers 2.0” program was floated in the US when the CARES Act was first negotiated, considerations quickly faded as no bipartisan agreement on appropriate reductions to emission standards could be reached between the House and Senate. Moreover, the program under consideration wasn’t intended to specifically target the sale of electric vehicles, but rather meant to support the overall automotive industry – similar to the 2008/09 Cash for Clunkers program.
However, with vehicle sales in both Canada and the US having largely recovered most of their respective pandemic losses, the associated cost of such a program far outweighs the benefits. More targeted approaches offering further tax credits, direct cash incentives for those trading-in for more efficient hybrids or pure electrics or even applying tax credits to the sale of used EVs are all likely to yield a more desirable outcome. Income testing recipients could be one approach for keeping program costs down, while also helping to facilitate the sale of EVs across the income spectrum.
While EV capital investment from the Big Three North American automakers has lagged European and Chinese manufactures, we have seen a big push more recently as EV popularity has grown. The recent announcement by GM is just the latest in a string of commitments, with the automaker investing $2.2B (a cumulative total of $4.5B invested since March 2019) in its US operations intended to increase EV production over the coming years. Chrysler has also made similar investments on both sides of the border, committing $4.5B to its US operations – intended to increase EV capacity at three of its production facilities – and more recently $1.2B to its Canadian production facility in Windsor, Ontario. Meanwhile, Ford has pledged to produce 40 hybrid and fully electric models by 2023 and has allocated $11B dollars in investments (to be used by 2022) to help achieve that goal. While the lion’s share will be directed towards enhancing US operations, Ford recently announced that it is committing over $1B to its Canadian facility, with the intended goal of producing purely electric vehicles by 2024. As part of the announcement, the federal and provincial governments jointly committed an additional $450M ($600M CAD) in subsidies to the automaker, in an attempt to incentivize further EV production in Canada.
The combined investments on both sides of the border will go a long way in improving not only North America’s competitiveness with producing electric vehicles but also the components. Currently, over 70% of battery production occurs in China. If recent year’s trade wars and the current pandemic have taught automakers anything, it’s having a globally integrated supply chain can leave manufacturers particularly vulnerable to any number of unforeseeable economic shocks. By devoting investment dollars to domestic battery production, North American automakers will not only help boost global supply but also help to minimize domestic production risk.
Much of the EV discussion to date has focused squarely on the passenger vehicle segment. However, thanks to battery advancements and tightening emission regulations, it is expected that electrification will soon extend into heavier applications. Perhaps the most obvious segue is to public transportation, particularly across urban centers. So far, most of the transition to electrifying public transport has been concentrated in China, though Europe has made decent progress in recent years (Chart 10). That being said, commitments from some of the larger North American metros (e.g. New York, Los Angeles, San Francisco, Toronto and Montreal) to migrate their fleets to 100% emission free buses by 2040 has shown that commercial electrification is gaining increasingly more staying power. In Canada, the federal government has also shown strong commitment to helping with the gradual transition to electrification over the coming years. Just last month, the Liberal government announced $1.5B in funding to purchase 5,000 zero-emission buses (both transit and school) and further buildout charging infrastructure over the next five years. The announced investment represents a replacement of approximately 5.5% of the existing Canadian bus fleet.
Commercial delivery vans are also likely to see increased demand for electrification in the years to come, as strict air quality standards are making it increasingly more expensive to run diesel operated vehicles. Moreover, as more urban centers adopt “emission free zones”, companies will be forced to embrace electrification in order to service these areas. Even putting the regulation aspects aside, falling upfront costs and increased battery range should make electrification a genuine alternative. This is particularly true across urban centers, where driving mileage is very predictable for most delivery routes, hence making daily usage times easily forecastable. Charging stations can also be easily installed at depots and warehouses, allowing for dependable recharging at the end of each shift. According to estimates by BloombergNEF, sales of electric light and medium commercial vehicles will account for nearly one-third of sales in this space by 2030 – well above its current share of just 2%.
To date, light & medium duty commercial vehicles have been noticeably absent from recent infrastructure spending announcements by the federal government, though it is expected that they’ll be included in future investment projects. Direct financial incentives for businesses transitioning to electric or further investing in infrastructure are the two most likely channels the government will provide support.
On the other end of the spectrum are heavy-duty trucks. Adoption in this space has been very small relative to other commercial segments, so far catering to very specific purposes such as urban delivery and port transportation. However, much like commercial vans, a gradual movement towards low and/or zero-emission urban zones over the coming decades will lead to a stronger market penetration.
The outlook for EVs looks bright, though that doesn’t mean it comes without obstacles. Key among them is consumer education. History has shown that even though EV prices have fallen drastically in recent years, consumers remain hesitant given the additional upfront costs. However, studies have shown that those upfront costs more than pay for themselves over the lifetime of the vehicle, through both lower maintenance and fuel costs. In fact, US Consumer Reports found that for both pure battery and plug-in hybrid vehicles, maintenance costs on average are 50% lower over the lifecycle of the vehicle. Depending on the specific model, fuel costs could be as much as 60% lower. The combined lifetime savings can amount to as much as $10,000 USD, which in most cases, more than offsets the upfront price differential (Chart 11). Educating the consumer of these benefits will hopefully assuage buyer fears that the upfront cost isn’t just lost dollars going towards paying the “new product premium”. Moreover, as prices continue to fall alongside further technological advancements, the lifetime savings should become even more enticing to buyers.
As we have already noted, range anxiety is perhaps the other key concern among consumers. While a lack of charging infrastructure is certainly to blame, EV owners have also complained of frustrating deficiencies across the existing public charging network. The most common issues include broken chargers and/or unreported downtime, tedious online registration forms that must be filled out before use, and longer than expected charge times. Outside of the infrastructure issues, battery life has also proven to be significantly reduced by cold weather – a major issue for those living in either Canada or the Northeast/Midwest regions of the US. At this point, automakers have largely shrugged of the issues, citing them as temporary setbacks that will gradually fade alongside further battery enhancements and increased infrastructure. However, until this occurs, EV popularity will remain somewhat uneven across Canada and the US.
The problem is somewhat of a catch-22. California has recently become the first state to announce that it will be banning the sale of all fossil fuel powered passenger vehicles by 2035. In Canada, British Columbia and Quebec are the only two provinces that have so far made similar commitments. Unsurprisingly, charging infrastructure is most heavily concentrated in the areas where EV sales have been the greatest. In Canada, over 90% of the current available public charging stations are located in either British Columbia (18%), Ontario (33%) or Quebec (40%) (Chart 12). A similar story has played out in the US, with California having nearly a third of all US charging stations, despite only accounting for 11% of annual vehicle sales. The disparity speaks to the broader issue that while investment in North American charging infrastructure has been significant, it hasn’t necessarily been even. Concentrating future investment projects across other populated areas will help diversify consumer interest more broadly, allowing both Canada and the US to reach their respective ZEV targets (See Text Box).
Electric vehicles have slowly been gaining global market share in recent years, and it is assumed that popularity will continue to grow as the price gap between comparable fossil fuel and electric models’ further narrows. Compared to other leading EV markets, uptake in both Canada and the US has been slower, owing to a host of factors. Relatively less generous government subsides, lack of charging infrastructure and limited vehicle selection have perhaps been the biggest headwinds. However, commitments from governments on both sides of the border as well as automakers to not only boost infrastructure but also produce vehicles and batteries in North America are notable steps in the right direction.
COVID-19 has taken a sizeable bite out of global 2020 auto sales, though the electric market has remained somewhat sheltered, owing largely to its consumer demographic. Moreover, we have seen governments in China, France and Italy include specific support measures in their respective fiscal packages offering targeted incentives for buyers purchasing EVs. To date, such measures have been absent in the respective fiscal packages released in both Canada and the US, though should be considered in future relief measures to support the continued rotation towards electrification. Under the right criteria (e.g. incentivize trade-ins of fossil fuel cars for ZEVs, providing tax credits for the purchase of used EVs, income test recipients), the government would be able to support the automotive industry while also helping to facilitate the sales of EVs across the income spectrum.
Under Joe Biden’s Plan for a Clean Energy Revolution and Environmental Justice, a number of “Day 1” orders have been proposed. Key among them are:
While Biden’s proposal stops short of setting a date by which all new vehicles sold in the US must be zero emission, it is generally agreed that it would likely be by 2035. The reasons are two-fold. First, it’s the date by which Biden’s climate plan calls for reaching 100% clean electricity. Second, it aligns to the timing of when California will ban the sale of all gasoline powered vehicles.
The Biden Administration would have two main channels through which it could establish a national policy on implementing a zero-emission vehicle: regulation or legislation. Legislation seems unlikely, particularly if the Republicans end up keeping control of the Senate.
This leaves regulation. Under the CAA, the Environmental Protection Agency (EPA) has the authority to set greenhouse gas emission standards. Therefore, President Elect Biden can direct the EPA to set a replacement rule whereby fuel efficiency standards become increasingly stringent over the next 15 years such that by 2035 the only vehicles that could comply would be zero-emission. This wouldn’t be the first time an incoming government directed the EPA to change existing standards. In fact, President Trump significantly rolled back emission standards put in place by the Obama Administration, as it was thought that the inherited standards were too punitive for automakers to achieve.
But it’s important to note that even the regulation channel could be met with opposition. The auto industry has a long history of challenging vehicle emission regulations in court, and the stringent measures required to eliminate the sale of fossil fuel passenger vehicles by 2035 would almost certainly be contested. Depending on the level of pushback, the Biden Administration may be willing to relax imposing a strict target date on imposing a ZEV standard, and rather make it a centerpiece of a clean vehicle initiative. Under such a plan, the government could provide additional subsidies for the purchase of EVs, grants for charging infrastructure as well as incentives for manufacturing EVs in the US.
Biden has also put forward other budget initiatives that would specifically target EVs, though these will require Senate approval, thus making them less likely should the Republicans maintain control of the Senate. Key among them is a commitment to permanently extending the $7,500 tax credit and eliminating the existing 200,000-unit manufacturer cap. This would mean that buyers of Tesla and GM electric cars would again be eligible to receive the $7,500 federal government subsidy. Tax credits would encourage the sale of US made electric vehicles, as imported EVs would not be eligible. Moreover, the scope of eligible recipients would also be somewhat narrowed, specifically targeting middle and low-income earners, with eligibility for those earning over $250,000 gradually phased-out.
Biden/Harris Campaign Platform: The Biden Plan to Build A Modern, Sustainable, Infrastructure & an Equitable Clean Energy Future.
Bloomberg: China is Trying to Salvage Its Bruised Electric Car Industry, May 31, 2020.
BloombergNEF: A Behind the Scenes Take on Lithium-ion Battery Prices, March 2019.
BloombergNEF: Electric Vehicle Outlook 2020, March 2020.
Congressional Research Report, The Plug-in Electric Vehicle Tax Credit, May 2019
Edmunds: Electric Vehicle Tax Credits: What You Need to Know, August 2020.
Geotab: Electric Vehicle Trends 20 Harto, C. Consumer Reports: Electric Vehicle Ownership Costs – Today’s Electric Vehicles Offer Big Savings for Consumers, October 2020.
International Energy Agency (IEA), Global EV Outlook, June 2020
International Energy Agency (IEA), Exploring the Impacts of the COVID-19 Pandemic on the Global Energy Markets, Energy Resilience, and Climate Change, July 2020
International Energy Agency (IEA), The COVID-19 Crisis and Clean Energy Progress, June 2020
Office of the Prime Minister --- Minister of Natural Resources Mandate Letter, December 2019.
Ricketts, L., & Boshara, R., Federal Reserve Bank of St. Louis: Which Families Are Most Vulnerable to an Income Shock Such as COVID-19?, May 2020
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