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The Globalization of the EV Revolution

By Fuad Hasanov, Reda Cherif and Min Zhu
Min Zhu ist Vorsitzender des National Institute of Financial Research an der Tsinghua Universität in Peking, EV
Min Zhu is Chairman of the National Institute of Financial Research at Tsinghua University in Beijing.

Four years ago, we argued that the rise of electric vehicles (EVs) would upend both the auto industry and the oil market. As with the rapid displacement of horses by automobiles in the United States a century ago, the exponential rise of EVs would lead to their dominance of the global auto market in the early 2040s. Oil would become the new coal and its price would drop to $15 per barrel. The economic and geopolitical consequences would be profound.

Since then, the transportation revolution has only intensified, consistently exceeding most expectations. By 2020, there were more than ten million electric vehicles, following growth of more than 40 percent in recent years. This is in line with the introduction of motor vehicles in the early 20th century, and if this trajectory continues, electric vehicles will account for around 60 percent of the global car market by 2040 and around 90 percent by 2050. These estimates exceed the figures from the International Energy Agency (IEA), which forecasts around 330 million electric vehicles by 2040.

China drives developments

What we have observed in China refutes the original assumption that the introduction of electric vehicles in emerging and developing countries would take many decades longer than in industrialized countries. According to this assumption, the continued high demand for gasoline there should delay a collapse in global oil demand.

In fact, Europe did not overtake China in new electric vehicle registrations until 2020, while China continues to have the largest electric vehicle population at 4.5 million vehicles. Although the Covid 19 pandemic has drastically reduced demand for cars, the electric vehicle market has continued to grow rapidly in many countries, including developing countries.

Emerging markets have proven that they can also be pioneers in the EV industry. The Chinese electric vehicle industry has continued to drive down costs as many brands compete for market dominance. More than 400 companies have entered the EV business in China, reminiscent of the early days of the auto industry in the U.S. when hundreds of companies competed against each other before giants like Chrysler and Ford emerged. The lifetime cost of owning an electric vehicle has steadily declined due to falling battery costs and is already comparable to that of cars.

The cheapest electric vehicle on the market, made by China’s SAIC Motor, is already surpassing Tesla’s Model 3 as the most popular electric vehicle. More importantly, the SAIC model, priced at just a few thousand dollars, is making EVs affordable in many developing countries, just as the Volkswagen Beetle and other models made early cars popular in those countries.

The vitality of the auto industry is reminiscent of its heyday a century ago, andfierce competition for the EV market will continue to drivedown costs, increase quality and advance technology, not only benefiting consumers butalso accelerating the energy transition.The main barriers to the necessary infrastructure, power generation and short ranges are being removed, and we are already seeing more charging stations, the rise of renewables, improved battery performance and continued innovation.

Regulation supports the EV market

But it is not enough to rely on market forces. New regulations will help accelerate the transition. EU emissions regulations coming into force in 2025 could completely change the market outlook, as cars will have to incorporate expensive technologies that will make them much less competitive. Similarly, after California policymakers mandated stricter emissions standards in their state (the most populous in the U.S.), the auto industry had to follow suit, leading to positive impacts on the rest of the country. Such mandates could be groundbreaking, triggering a virtuous cycle of economies of scale, innovation, and rising demand.

Developing countries joining the EV revolution canreap significant macroeconomic benefits. Refined oil products, especially gasoline, account for the largest share of imports in most African countries, including major oil exporters like Nigeria.Accelerated adoption of EVs, which require less maintenance and spare parts, coupled with a more reliable renewable energy-based power grid wouldsave valuable hard currency resources at a time of rising external debt. The expanding global EV market also offers opportunities to enter newly forming value chains.

Opportunities for developing countries

Countries that fail to plan adequately, on the other hand, facesignificant risks, potentially being stuck with idle refineries and fleets of obsolete vehicles, and unable to import critical parts should major automakers cease production.

Given the huge costs of global warming,encouraging developing countries to join the EV revolution can only bring huge benefits to the world. Developing countries cannot ignore the emerging energy transition and transport revolution and should see this as an opportunity to create new capabilities and diversify into new sectors.

The additional expenditure required for rapid deployment is tiny compared to the economic and human costs of heatwaves, forest fires, deforestation, pollution, reduced biodiversity and potentially more serious future pandemics. Making our roads cleaner, quieter and less congested would not only improve our quality of life but also their sustainability.

Reda Cherif, Senior Economist beim Internationalen Währungsfonds, ist assoziierte Forscherin am Bennett Institute for Public Policy der University of Cambridge. Fuad Hasanov, Senior Economist beim Internationalen Währungsfonds, ist außerordentlicher Professor für Wirtschaftswissenschaften an der Georgetown University und assoziierter Forscher am Bennett Institute for Public Policy der University of Cambridge. Min Zhu, ein ehemaliger stellvertretender Geschäftsführer des Internationalen Währungsfonds, ist Vorsitzender des National Institute of Financial Research an der Tsinghua University. Aus dem Englischen von Sandra Pontow.

Copyright: Project Syndicate, 2021.


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