What impact will electric vehicles have on emission crisis – and risk management?

What impact will electric vehicles have on emission crisis – and risk management? | Insurance Business America

Risk Management News

What impact will electric vehicles have on emission crisis – and risk management?

“Many are reluctant” to make the switch despite understanding the issue

Risk Management News

By
Kenneth Araullo

The road transportation sector contributes significantly to global carbon emissions, accounting for 15% of worldwide emissions, according to the International Energy Agency (IEA).

Despite efforts in major markets like the United States, Germany, and China to roll out electric vehicles (EVs), 91% of the global passenger vehicle fleet continues to run on fossil fuels, highlighting the need for accelerated changes within the industry.

Benedikt Middendorf (pictured above), director of Deloitte Germany’s Automotive practice, addressed the limitations of current EV-focused strategies. He noted that while there is significant attention on ramping up EV production, the existing internal combustion engine (ICE) vehicles still on the roads remain a substantial challenge.

“Simply replacing old cars with new EVs won’t be enough to meet net-zero targets,” he said, pointing out that around half of Germany’s passenger vehicle fleet, or 23.3 million vehicles, will still be using ICE technology when the transition begins.

European cities are already implementing measures to reduce ICE vehicle emissions. From 2025, cities like Paris and Amsterdam will ban internal combustion vehicles entirely, while the European Union will prohibit the registration of non-zero-emission vehicles by 2035.

However, Middendorf cautioned that this will not sufficiently address emissions from existing vehicles.

“When the transition happens, the gas-powered cars already on the road will continue to pose a significant hurdle,” he said, stressing the need for broader solutions to reduce emissions from the current fleet.

In response to this challenge, Middendorf outlines the importance of a paradigm shift in the automotive sector. The solution, he suggests, requires a multifaceted approach that engages stakeholders, including car manufacturers, regulators, policymakers, and consumers.

“Vehicle owners may be aware of their carbon footprint, but many are reluctant to replace their paid-off cars with more expensive alternatives,” he explained. At the same time, regulators are focusing on the overall emissions of the passenger vehicle fleet, placing accountability on manufacturers for the entire life cycle of their products.

A challenge for vehicle manufacturers

Middendorf also highlighted the challenge for manufacturers, who are largely focused on growing their share of the EV market but have not yet addressed the environmental impact of ICE vehicles still in circulation and risk management issues. To bridge this gap, policymakers may need to offer cleaner alternatives and ensure that new regulations do not disproportionately impact vulnerable groups.

In a study of the German auto market, Middendorf highlighted that Deloitte developed a tool to assess the emissions and value of ICE vehicles remaining in the fleet until 2050. The analysis estimates the residual value of Germany’s ICE vehicle fleet in 2035 at approximately $135 billion.

The study also considered two primary decarbonisation strategies: recycling ICE vehicles or converting them to use synthetic e-fuels. Recycling could reduce emissions but would result in a loss of up to 90% of the residual value of the vehicles, amounting to around $125 billion in Germany.

The emission avoidance cost for recycling ranges from $120 to $2,700 per ton of CO2. Conversion to e-fuel, on the other hand, offers a lower emissions avoidance cost of $637 to $777 per ton of CO2 equivalent. However, the cost of producing e-fuels remains higher than fossil fuels, though it is expected to decrease from $3.72 today to $1.50 by 2050.

Middendorf suggested that car manufacturers have an opportunity to shift their business models, transitioning from product manufacturers to transportation service providers. This could involve automakers buying back ICE vehicles and leasing them to consumers, replacing them with zero-emission alternatives over time.

“Manufacturers could diversify revenue streams and accelerate decarbonisation by gaining control of the existing fleet,” he said.

Looking at markets like China and the United States, Middendorf believes that the transition will occur at varying speeds. China, with its many emerging electric car manufacturers, is leading the charge, particularly in its major cities. The European Union, meanwhile, has developed a robust legislative framework that differs from the US, where existing fuel standards play a significant role.

“Germany has focused heavily on alternative fuel investments to meet its emissions reduction targets,” he added, pointing to the differences in nationally determined contributions under the Paris Agreement.

As the global automotive sector works toward decarbonisation, Middendorf emphasised the need for a business model that balances regulation with opportunity.

“People’s relationship with car ownership may change, shifting towards car-sharing or leasing models,” he said. He noted that companies are already offering mobility budgets to employees, supporting the transition to more sustainable forms of transport.

While pure bans and regulations may not be enough, Middendorf concluded that the transformation can be successful if it is seen as a business opportunity that benefits customers, manufacturers, and regulators alike.

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