There are more than 2 million electric vehicles on the road around the world

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According to a recent report from the International Energy Agency (IEA), 2016 was a record year for electric vehicle (EV) sales. Over 750,000 EVs were sold worldwide last year, compared to 547,220 sold in 2015.

But the gains are overshadowed by the distance that electric cars still have to go—although more than 2 million EVs now travel the world’s roads, they only make up 0.2 percent of the total light-duty passenger vehicle share around the world. And the growth of the number of electric cars on the roads actually slowed in 2016 compared to 2015 (60 percent in 2016 versus 77 percent in 2015), leaving policy makers and sustainable growth advocates wondering how to continue to grow the global fleet to meet climate change mitigation goals.

Transportation makes up a significant portion of global greenhouse gas (GHG) emissions—14 percent globally according to a 2014 Intergovernmental Panel on Climate Change (IPCC) report. In the US, cars and trucks account for nearly one-fifth of greenhouse gas emissions.

The transportation sector is a stubborn one to clean up, too. An example can be found in California, where even as carbon-reducing policies have brought GHG emissions from the energy sector down to 20 percent, transportation still currently makes up 40 percent of the state’s emissions, according to recent statement from the state’s Public Utilities commissioner.

Alternative-fuel vehicles are important to hitting emissions goals, but the IEA report says that currently, there is not enough momentum behind plug-in cars without strong policies incentivizing adoption, like tax credits and zero-emissions vehicles lanes. Electric vehicles (including both battery electric and plug-in hybrid electric vehicles) “still have a long way to go before reaching deployment scales capable of making a significant dent in the development of global oil demand and greenhouse gas (GHG) emissions,” the IEA report states.

China is leading

The report (PDF) showed that China leapfrogged the US in 2016 to become the country with the most electric passenger vehicles. Although EVs only made up 1.5 percent of the country’s national fleet, more than 40 percent of the EVs sold in the world in 2016 were sold in China (twice as many as were sold in the US). The country also has 200 million electric two-wheelers, 3 million to 4 million low-speed electric vehicles, and more than 300,000 electric buses, none of which were counted in the IEA’s official EV numbers.

Scandinavian and northern European countries have the most EVs on the road when it comes to market share, however. “With a 29 percent market share, Norway has incontestably achieved the most successful deployment of electric cars in terms of market share, globally,” the IEA wrote. The Netherlands follows with 6.4 percent EV market share, and 3.4 of Sweden’s cars are electric.

EV adoption isn’t a given

All of those countries have policies to foster EV sales, and 2016 showed that if certain incentives are taken away, sales falter. Such a scenario played out in the Netherlands where tax incentives were gradually phased out for Plug In Hybrid Electric Vehicles (PHEV), which dropped PHEV sales by 50 percent. Battery electric vehicles (BEVs), however, weren’t affected by the tax and sales grew by 47 percent.

In Denmark, too, the country started reinstating registration taxes after years of exemptions for EVs and ended some government procurement programs. As a result, the country saw a 68 percent drop in electric car sales in 2016. New Danish incentives will be added this year, however—the country will begin offering a purchase tax rebate on EVs based on battery capacity—which ought to produce an interesting data point to next year’s report.

So if EVs can’t compete with internal combustion engines on price, then what’s the good of offering government incentives to buy them? The IEA argues that, with enough support, the technology to build EVs will become economical for auto manufacturers to build and car buyers to buy without support. “A supportive policy environment enables market growth by making vehicles appealing for consumers, reducing risks for investors and encouraging manufacturers willing to develop EV business streams on a large scale to start implementing them,” the agency wrote. The most effective incentives, according to recent research, minimize the premium associated with purchasing an EV, and show the buyer a total cost of ownership lower than that of an internal combustion engine.

The IEA recommends that as electric vehicles reach cost parity with ICE vehicles, “governments will need to gradually revise their approach to electric car support, phasing out incentives in cases where BEVs and PHEVs actually rival ICE costs,” although health-related taxes could remain in place for ICEs. The agency wrote that it expects this to happen around 2030 “where fuel taxes are estimated to be high and vehicle attributes (namely power) more favorable to electrification than in other regions.”

Scale is key

Governments that want to meet a 2° scenario (as described by the Paris Agreement, where global temperature doesn’t rise more than 2°) want to induce a virtuous cycle where manufacturers can drop the price of EVs because enough EVs are being purchased. The primary contributor to the higher cost of EVs over internal combustion engines is the car’s battery.

The report cites Department of Energy (DOE) estimates on how scale affects battery price. A 100 kWh battery pack will experience a drop in production costs by 13 percent when production volumes increase from 25,000 units to 100,000 units. Manufacturers making more than 200,000 battery backs per year are expected to be able to produce them for $200/kWh or less. Increasing a battery pack size from 60kWh to 100kWh would also similarly reduce costs by 17 percent per kWh. (For context, a recent McKinsey & Company survey found that 100kWh battery packs are now being produced by most manufacturers for $227/kWh and need to fall to $100/kWh to compete with internal combustion engines.)

This is part of the economics that made Tesla so eager to build its Gigafactory in Nevada and start producing car batteries as well as stationary storage batteries. The company has claimed that it produces batteries for $190/kWh. Other companies like Daimler are following suit, too.

The IEA looked at the various targets recently announced by EV manufacturers (Telsa aims for 1 million cars on the road by 2020, Ford has promised 13 new EV models by 2020, etc) and found that the total stock of EVs could fall anywhere between 9 million and 20 million by 2020. But it’s unclear that this will be enough to get us where we need to be in terms of reducing global emissions. In order to meet a 2° scenario, the IEA says, battery production will have to significantly increase out to 2025, and “would require the construction of roughly ten battery manufacturing facilities with the production capacity of the Tesla Gigafactory.”