Vehicle technology costs: Estimates vs. reality
In Europe by now we have gained considerable experience with setting CO2 standards for light-duty vehicles: First, in 2009 a target of 130 g/km for 2015 was adopted, then 2014 the target of 95 g/km for 2020/21 was confirmed and now the European Commission is required to come forward with an assessment of a post-2020 standard by the end of 2015. The 2015 and 2020 targets benefited from substantial analyses of technology potential and costs; parallel underlying analysis for the Commission’s report on post-2020 CO2 targets is still underway. Meanwhile, this week in Brussels the IKA institute released a study looking at the technology potential and cost for 2025/30 on behalf of the German Ministry for Economics; a good point in time to look back and see what we can learn from all the previous studies that are already out there.
For this, I plotted the various cost curves into two charts – for passenger cars (Figure 1) and light-commercial vehicles (Figure 2). The baseline year for all studies is 2010 (in one case it is 2009, but the effect of this one year difference is only marginal), with the CO2 reduction in grams per kilometer (g/km) from that 2010 baseline plotted on the x-axis. On the y-axis the additional direct manufacturing costs are shown. As not all of the sources provide details on the actual shape of the cost curve, the ICCT curve for 2020 was used as the starting point and the curve was scaled percentage-wise based on the reduction and cost points given for each of the studies. This should allow for an accurate comparison of the different cost curves.
Starting with the passenger car side, and looking at 2015, it is obvious that there is a huge difference between the original cost estimate to achieve the 10 g/km reduction from the 2010 baseline of 140 g/km to the 2015 target level of 130 g/km and the actual cost today. The original study [TNO, 2006], which was also the baseline for the 2015 regulatory proposal, drew heavily on data input from vehicle manufacturers and concluded that on average the cost per vehicle to meet the target would be about €620. Preliminary results of an ex post assessment [AEA, 2015] show that the actual costs turned out to be only about €200. As a result, the benefits of the 2015 regulation for society are now estimated to total €37 billion and the abatement costs to be minus-€101 per ton of CO2 saved. In comparison, the European vehicle manufacturers’ association in 2007 stated that the expected abatement costs for meeting the 2015 target would be more than €400 per ton of CO2.
For the 2020 target, our own ICCT cost estimate [ICCT, 2013] of the required investment in technology was slightly below €1,000 per vehicle. The [TNO, 2011] study on behalf of the European Commission was only marginally higher. The study produced by IKA at that time [IKA, 2012], on the other hand, concluded that investments of €2,000 and higher would be required to meet the 95 g/km target by 2020. To understand this quite dramatic difference it is important to know that the ICCT study was based on extensive vehicle computer simulations (to determine the CO2 reduction potential) and detailed tear-down cost estimates (to independently assess future production costs of the respective technologies), while the IKA study – not surprisingly, given the limited budget for the study – had to rely on a review of existing literature and interviews with German vehicle manufacturers and suppliers.
These differences are even more pronounced on the light-commercial vehicle side. Here the original estimate for the 2017 target [AEA/TNO, 2009] anticipated costs of about €1,800 per vehicle to meet the 175 g/km target. An ex post assessment [AEA, 2015] now demonstrates that the real costs are likely about €114 per vehicle. This large difference is due in part to statistical errors in determining the original baseline emission level, but also to cost data provided by vehicle manufacturers that turned out to be unrealistically high.
For the 2020 light-commercial vehicle regulation, both the analysis for the Commission [TNO, 2012] as well as our own [ICCT, 2013] estimated the technology investments required to meet the 147 g/km target at around €600 per vehicle. Meanwhile another study by IKA [IKA, 2010]* came to the conclusion that a target of 147 g/km either would not be technologically feasible or could become so only by making use of full hybrids at an additional cost of around €9,000 per vehicle.
So what do we learn from looking back over these past analyses? One key finding is that cost curves tend to become flatter over time. This is because – even though we are “using up” technology potential when moving towards a lower CO2 emission level – existing technologies are constantly being improved and new technologies get added all the time. The flattening of the curves is simply the expression of this technological progress. And the rate of progress is actually increasing over time, in part because of improved computing possibilities and in part because we are seeing increasing CO2 regulation measures all around the world, helping to spread technology development costs across much higher volumes than in the past.
And what about the technology cost for a 2025/30 CO2 standard in the EU? The recently published IKA study suggests that a 68 g/km passenger car target for 2025 would require investment in technologies on the order of €3,700 per vehicle; it estimates the investment needed to meet a hypothetical 2025 target of 109 g/km for light-commercial vehicles at around €5,300 per vehicle. With both the Commission’s post-2020 study and an updated version of our detailed ICCT analysis still in progress, it is too early to seriously discuss the figures presented by IKA. Nevertheless, looking backwards at the accuracy of their previous estimates, some healthy skepticism would seem to be in order. What is interesting to note though is that the technical potential is out of question – the IKA-study considers a passenger car target of 60 g/km for 2025 and 50 g/km for 2030. It is the cost side of the assessment that needs to be closely looked at. Therefore, please stay tuned for an update sometime later this year, when we will have some hard facts on the table.
*Study not available online. Full title: Kurzstudie zum CO2-Reduzierungspotenzial bei leichten Nutzfahrzeugen (N1) bis 2020, IKA Aachen, April 2010.