There's no shortage of articles that try to convince us about the heavy CO2 footprint of battery electric vehicles. John Petersen just wrote one recently, concluding that the Tesla (TSLA) Model 3 has a heavier CO2 footprint than Toyota’s (TM) Camry Hybrid. Although that might be true, I will show in my analysis that it does not matter much. Battery Electric vehicles have not only better driving characteristics and economics, but also a lot more favorable environmental footprints -hence they are destined to win over. And Tesla is leading the way in that segment.
It is true, every BEV comes with a heavy “baggage” - the carbon footprint of its battery production. For instance, it has been calculated that the Model 3 battery comes with a 12.75 metric ton CO2 footprint. However, if we look at the greenhouse gas emissions from passenger vehicles on the EPA site, we find that "a typical passenger vehicle emits about 4.6 metric tons of carbon dioxide per year.” A battery baggage of 12.75 metric tons does not seem so insurmountable now. But what about other cars/models in other countries?
In order to understand if BEVs are really helping the environment, I would frame the question a bit differently: How long does it take for an electric vehicle to “recover” the CO2 baggage of its battery production?
As it turns out, there are only four major factors that influence the answer if we want to calculate the mentioned distance:
- What size is the battery’s CO2 emission baggage?
- What's the energy consumption of the BEV per mile?
- In which country/grid is the energy produced and what is its CO2 footprint per kWh?
- What is the fuel economy and CO2 emission of the comparable gasoline car per mile?
Since it would be quite difficult (and convoluted) to present a four-dimensional table in this article, we can use the fact that:
- The size of the battery correlates with the performance of the car (BEVs with smaller batteries tend to have lower power output, while larger ones have higher output), and
- In a correct comparison there is correlation between the fuel efficiencies of BEVs and ICE vehicles (in other words, smaller BEVs compared against smaller gas cars, etc.).
Grouping of today's electric vehicles
In the following table, I collected the list of BEVs that were on sale in 2018 in the US, and added their various data, like power output, acceleration, battery size, energy consumption and price. (Source: Inside EVs, Energy consumptions are EPA figures.)
Categorization is very important, so we can ensure an apple to apple comparison. The categories may seem somewhat vague or even arbitrary, but given the limited number of EV offering, they seem to fall naturally into these three groups.
A) Smaller, more economical, often “city-friendly” cars. These are mostly the smaller first-generation EVs, often compliance cars. They typically have a battery size of 20-40 kWh, a power output of 100 kW (on average) 7-10 sec 0-to-60 time, and a range of 80 to 150 miles. Average energy consumption is 29.4 kWh per 100 miles. I found 10 of them on the InsideEV list for 2018. They are usually comparable (in size and performance) with economy gas cars in the 29-50 MPG range, like the Ford Focus (F), Honda Civic (HMC), Toyota Camry/Prius, VW Golf (VOW.DE), Hyundai Elantra (OTCPK:HYMTF), Chevy Cruze (GM), etc.
B) Premium or performance sedans. These are typically large-size batteries (55-100 kWh), with a larger power output (250 kW), 4-6 sec acceleration, and naturally longer range (300 miles). I could only locate Tesla vehicles in this category (Model 3/S), although Porsche Taycan and Volvo Polestar 2 will land in this group once they arrive. Comparable gas cars include the BMW 3/5-series (BMW.DE), Audi A4/6 (OTCPK:AUDVF), Mercedes C/E-series (DAI.DE), Maserati Ghibli (FCAU), Porsche Panamera, etc., consumptions are in the 21-26 MPG range. These are seriously fun cars to drive.
C) Premium SUV segment. It includes only three vehicles: Tesla Model X, Jaguar I-Pace (TTM) and Audi e-tron. Even higher power outputs (300 kW), rapid acceleration (4-6 sec) and a battery size of close to 100 kWh are considered normal here, although there's a bit of a range penalty for size, compared to the premium performance sedan segment. Gas equivalents includes 15-19 MPG vehicles like the Porsche Cayenne, Audi Q7, Land Rover Range Rover, Acura MDX, Maserati Levante, Infiniti QX80 (7201.T), Lincoln Navigator, Cadillac Escalade, etc.
The BIG picture about BEVs' carbon footprint
The following table shows how many miles need to be driven by a BEV to equalize its carbon footprint with a comparable gas (or hybrid) vehicle. Once that point reached, the BEV always will be greener, as the per-mile emission during driving is less than the one for the gas equivalent. If that is not the case, then the BEV never recuperates its CO2 baggage, and the table shows a negative value. That is a disappointingly “non-green” scenario. We would like to understand how often (and under what circumstances) that actually happens.
We would like to see how sensitive the value (drive distance) is to 1) the fuel economy of the comparable gas car (columns) and 2) the carbon intensity of the grid/country where the BEV is charged (rows). CO2 footprint of the grid by country could be found here.
The table has three segments: The left side shows the smaller, more economic vehicles (group A), the middle part shows the performance sedans (group B), and while the right part is the premium SUVs (group C).
The meaning of the colors:
- Green fields: less than 150K miles needed to recoup the battery carbon footprint (dark green: even less then 60K miles is needed);
- White: between 150K and 200K miles;
- Red: more than 200K miles, or the BEV never recoups the battery footprint (negative figures). Please note this is the only scenario in which a BEV pollutes more during its lifetime than a comparable gas vehicle, hence it cannot be considered green from an environmental perspective. This is only 5% of the cases.
So for instance, in Iceland, compared to a 50 MPG gas car, a smaller BEV (with a 5.5 ton CO2 baggage, 29.4 kWh/100mile energy consumption) needs to drive about 25,000 miles to recoup the carbon footprint of the battery production. That is about 2-3 years' worth of driving (certainly less than the life of the car), so it's considered green from an environmental perspective. This is the first figure in the table. And it goes on and on ... for 460 scenarios altogether (all possible combinations of 46 countries and 10 fuel economy scenarios).
The actual distance was calculated by the following equation.
- D: Distance traveled until battery production CO2 is recuperated by the BEV (miles)
- Abattery: CO2 emission (gr) of battery production (‘cradle-to-gate’) – Let’s use 170 gr/kWh
- Cgas: GHG or CO2 equivalent emission (gr) of gasoline car per mile including 20% loss on process of producing, refining and transporting petroleum products (11113 gr CO2 per gallon / MPG of the car)
- Cbev: GHG or CO2 equivalent emission (gr) of BEV per mile, it could be calculated as Cbev = Ebev x Pcountry
- Ebev: Energy (kWh) consumption of BEV per mile (its fuel economy figure)
- Pcountry: CO2 emission (gr) of kWh energy production including 5% T&D loss and 85% charging efficiency
What does the table tell us?
After careful review of the table's figures, we can conclude the following:
- The overwhelming majority of fields are green, only 24 out of 460 are red (5%), where the BEV is most likely not capable of recouping the full carbon footprint of its battery production (or it takes longer than 200K miles).
- In the context of OECD, the European Union, and the United States, all figures are green (and most are less than 60K), hence in these countries most BEVs pollute less during their life than an equivalent ICE vehicle. Noted, there could be regional differences even within those countries, but that does not change the overall trend.
- Most red cells are concentrated in the first two (40 and 50 MPG) columns, where mostly hybrid vehicles reside (even the best subcompacts rarely go beyond 35 MPG). And given the extremely low penetration of hybrids, which has stubbornly hovered around 2% in the last 10 years, these scenarios are extremely rare, low probability events. Disregarding them reduces the ratio of red cells to an inconsequentially low 1.3%. People just wouldn't buy hybrids in quantities that matter.
- In the premium segments (both sedans and SUVs) the portion of red cells is even smaller (under 1%), meaning that BEVs are almost always greener in these segments, no matter how “dirty” the grid is for recharging. No doubt that's mainly due to the dismal fuel economy of premium gas cars and SUVs.
- There are certainly scenarios where BEVs could not be considered green overall from an environmental perspective. However, this only happens in places where the gas vehicle fleet is very efficient and clean (>40 MPG) and the grid is extremely dirty (>600 gr/kWh). I suspect there aren't a lot of places in the world where these conditions co-exist.
Noted, not all countries of the world are included in the table, some potential edge cases could be missed, but I believe the table is reasonably complete (representing about 85% of the world’s car market), at least for us to draw the previously mentioned conclusions.
I think the above table visually demonstrates that driving BEVs does reduce carbon emission most of the time (compared to an equivalent ICE vehicle), even if it's possible to “cherry pick” scenarios where that is not the case. However, we cannot ignore the big picture: Although there do exist some unlikely red scenarios where a very clean ICE vehicle fleet meets an exceptionally dirty electric grid, the green scenarios still make up the overwhelming majority at 95%.
Investment conclusion and valuation
I was pleasantly surprised to see the overwhelming amount of green scenarios in the table above. There are so many articles around that try to convince us that battery electric vehicles have no or limited merit in reducing our carbon footprint (long tail-pipe myth, etc). That's just simply not true.
As shown above, unless a very clean ICE vehicle fleet meets an unusually dirty electric grid, BEVs are polluting so much less than equivalent ICE vehicles that the difference is enough to neutralize the carbon footprint of the battery production in most cases within 60K miles or within five years of driving. Since virtually all vehicles are used/driven way more than five years, the total carbon footprint of BEVs ends up lower (sometimes significantly lower) than the comparable ICE vehicles. Consequently, society benefits tremendously with the ever wider application of BEVs. And that's a compelling reason for investors, politicians or governments to support vehicle electrification.
Beyond the overall benefits of BEVs, Tesla has a few important advantages worth highlighting that could significantly impact the demand for its cars in the coming years.
As shown above, Tesla vehicles are not only a lot greener today than their ICE counterparts in the premium segment, but they also are priced very competitively and offer similar or better features. No wonder, last year both Model 3 and Model S attracted more luxury buyers than any of their competitors in their respective segments in the US. And sure, EV competition from legacy automakers is coming, but they seem to be years behind in technology, efficiency, software and even production capacity. (See possible battery shortages here, here and here.)
Tesla’s technological prowess becomes evident, however, if we compare their models to other EVs. Model 3 SR+ seems to have better fuel economy (0.27 kWh/mile) and range (240 miles) than most smaller electric cars in the above table. Also, the Model X is a lot more efficient than other smaller models (i-Pace, Audi e-tron) in the same segment. And finally, with the latest upgrade, Model S has a longer range (370 miles) than any other production EV in history. As a result, Tesla represented 80% of BEV sales in the US in 2018 (InsideEVs).
Based on all that, we can conclude that 1) electrification of passenger vehicles is a strong trend that is bound to continue, and 2) Tesla has a seemingly insurmountable technological advantage (as explained in detail here), with vehicles that are more efficient, have more advanced technology (OTA, sensor suite, driver assist, etc.) and provide better safety and a better driving experience. Additionally, the existence of the Tesla Supercharger network (now with 150 and 250 kW charging) makes Tesla cars the only truly highway capable EVs, and the only ones fit for a primary car in the family.
We believe that the demand for Tesla vehicles will stay strong, and with the introduction of Model Y, Semi, Roadster and Pickup, more than 50% annual delivery and production increase seems very likely in the coming years. The current value of the company is around $43 billion, which is a PS ratio of 1.68. Although that might seem high to other automotive companies which are in the range of 0.25 and 0.35, it might not be that unreasonable if we realize that is generally considered average for US companies overall across all industries. Please note companies in the Green & Renewable Energy sector have an average PS value of 3.73, while software companies are typically above 5. Considering that Tesla is growing over 50% annually, and starting to generate significant revenues from its Energy division and its software (which will only speed up with autonomy), assigning a higher PS ratio seems certainly justified.
As a result, we believe the company is somewhat undervalued, and will be repriced upward by the market when 2019 figures start to take shape by the second half of the year.
Disclosure: I am/we are long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.