Electric Vehicles May Fall Victim to Their Own Success

an abridged version of this article was published in the Financial Times: https://www.ft.com/content/bf083d92-e43e-11e9-b112-9624ec9edc59

September 2019

Anas F. Alhajji

Electric vehicles are catching on faster than even their most ardent supporters ever expected and have become a fact of life in most key markets. But they may become victims of their own success.

The same policy makers who see electric vehicles as a panacea for climate change may soon be forced to limit their growth as the sheer number of these cars on the road creates environmental, national security and financial problems, particularly in large, industrialized countries.

1. The environmental problem: Battery disposal

Imagine the United States with hundreds of millions of 600- to 1,200-pound toxic batteries that are no longer suitable for use in electric vehicles. It’s not a stretch.

Policy makers must decide how best to dispose of old batteries before they pile up – and figure out who will pay the bill. If taxpayers pick up the tab, the poor will be subsidizing the rich – those who can pay the hefty price for an electric vehicle. But if buyers pay the disposal charges, it will add to the cost of the vehicle, pricing some people out of the market.

Existing disposal options – from finding an environmentally friendly way to recycle the batteries to dumping them in a Yucca Mountain-like site – all have problems.

Lithium-ion battery recycling is in its infancy and remains uneconomic: Recycling the batteries generates about 33 cents on the dollar, and it costs three to five times more to extract lithium from batteries than to mine it. Closed-loop technology isn’t available yet. 

Any partial recycling or inappropriate disposal of batteries would mean water and soil contamination, with significant health implications for humans and animals. And many countries don’t have the appropriate legal framework to govern the disposal or the recycling of electric vehicle batteries.

In some European countries, battery manufacturers are required to finance collecting, storing and recycling them when they are no longer being used. So far, this has been manageable, but what happens when the number of batteries skyrockets? Will they be shipped to dumps in Third World countries or Africa?

Currently, companies are postponing the inevitable by repurposing old batteries. A battery that’s no longer suitable for a car can be used as stationary storage in homes or businesses as a backup during outages or to power things like streetlights. But repurposing doesn’t solve the problem: The life of these batteries will come to an end one day.

Many companies are conducting expensive research on how to recycle electric vehicle batteries, but the battery industry may be changing too rapidly for them to keep up. By the time researchers discover how to recycle today’s batteries in cheap and environmentally friendly ways, the ones being used in electric cars could be completely different! This may explain why investment in the area has been mediocre.

For now, just expect tens of millions of tons of batteries to pile up.

2. The security problem: Dependence on a handful of countries

Wars have been fought to secure the global oil supplies crucial to the operation of conventional cars. The shift to electric vehicles brings with it a new dependence – to supplies of lithium and cobalt, the key materials in the batteries that power electric vehicles. And lithium and cobalt aren’t produced in as many places as oil.

Oil has long been an integral part of U.S. national security and foreign policies. Securing crude supplies has cost thousands of lives and hundreds of billions of dollars in the past 50 years alone. Though historically a major oil producer, the United States has imported crude from more than 20 countries and can bring in shipments from more than 30. That dependence on oil imports has been a major political concern and extremely costly.

In the era of electric vehicles, will U.S. policy makers let their country’s transportation system, the backbone of its economy, be held hostage to even fewer players? Only a handful of countries produce lithium and cobalt, and they include traditional adversaries China, Russia and Cuba. Meanwhile, U.S. production of the materials is next to nil.

More than 99% of lithium reserves are located in only four countries: Chile, China, Argentina and Australia. And more than 80% of cobalt reserves are in five countries: the Democratic Republic of Congo, Australia, Cuba, the Philippines and Zambia.

In contrast, the top four oil producers hold only 52% of global reserves.  

The comparisons are also stark when it comes to output: The top four countries produce about 95% of global lithium, while, in oil, the top four produce about 44%.  In Cobalt production, China, Russia, and Cuba are among the world’s top producers, ranking 2ed, 4^th, and 6^th, respectively!

3. The financial problem: Replacement of gasoline and diesel taxes

As electric vehicles gain market share at the expense of conventional vehicles fueled by gasoline and diesel, many countries are faced with the prospect of a significant revenue crunch.

A large number of both developed and developing nations generate massive revenues from taxes on gasoline and diesel. In Europe, most gasoline taxes are between $2 and $4 a gallon and brought in about $550 billion in revenue in 2015. In some countries, taxes on motor fuel generate up to 15% of government revenue.

In the U.S., the federal government collected about $34 billion in motor fuel taxes in 2017, and states collected an additional $46 billion. About 60% of the federal revenue goes to road and bridge construction, while about 76% of state revenue goes to highways and local roads.

How will governments replace these taxes when most fleets of cars and buses become electric? Where will the money come from? Will policy makers move from subsidizing electric vehicles to taxing them? If they do, the economics of purchasing electric vehicles will change drastically.

Some U.S. states have already increased the registration fees for electric vehicles to compensate for the lost gasoline taxes. But even moving to taxing all cars on a per-mile basis will change the economics of electric vehicles.

Conclusion

Policy makers, both national and local, may soon be forced to address the environmental, security and financial problems created by the surge in electric vehicles. The likely policy changes have the potential to limit the growth of electric vehicles, and that would have a profound impact on several markets, especially energy markets.  U.S. shale would benefit the most as a domestic source of a particular crude quality known for producing a large amount of gasoline.