China's EV shift may cut a billion tons of CO2 emissions by 2040

This analysis is by Bloomberg Intelligence ESG Analyst Michelle Leung. It appeared first on the Bloomberg Terminal.

At least a billion tons of emissions, equivalent to Japan’s total in 2020, could be saved if battery electric vehicles make up 80% of China’s new car sales and 34% of its total fleet by 2040, up from 19% and 3% in 2022. We take into account BEVs’ extra emissions from manufacturing and emissions savings while operating the vehicles.

How much emissions can China’s EV shift save?

The aggregate reduction in CO2 emissions from China’s EV shift could be at least 1 billion tons during 2023-40, equivalent to Japan’s 2020 emissions. That is based on our model factoring in emissions during production and operations, with an average of 15 years lifespan for internal combustion engines and eight for BEVs. Running an EV in China could produce 40% less emissions than an IC-engine car, assuming that coal continues to make up 56% of power generation, though making an EV could emit 60% more. Based on BI’s forecasts for China’s battery EV and ICE car sales, the number of BEVs on the country’s roads could jump from 2022’s 9.5 million to 150 million by 2040, while ICE vehicles might drop from 260 million to 222 million.

The emissions savings from BEVs could be higher if China’s renewable-energy mix rises over time.

Spodumene produces 80% more emissions than brine

The mining of lithium, an important mineral for EV batteries, could cause significant harm to the environment — including soil, water and air — as the extraction process requires a large amount of water. With the two sources of lithium, extracting hard rock lithium (spodumene) can produce as much as 80% more greenhouse gas and more freshwater than lithium brine (salt) for certain cathode types, according to US Department of Energy’s research. Hard rock is the primary lithium source, with global market share jumping to 65% in 2020 from 36% in 2017, given a project lead time of only 3-5 years vs. seven for salt. Yet, spodumene typically contains higher lithium content than brine. It is mined mostly in Australia, then exported to China for processing.

Falling lithium prices could spur EV production

Lithium prices are set to fall in 2023 on higher supply and a gloomy demand outlook amid economic uncertainties, which will potentially lift the margins of global electric-car manufacturers including Tesla, BYD, General Motors, Nio and XPeng. A wave of new capacity from major lithium producers — such as Australia’s Albemarle, SQM, and Sayona Mining; Argentina’s Livent and Allkem, as well as China’s Tianqi and Ganfeng — is likely to be released in 2023. The Australian Government’s Department of Industry, Science, Energy and Resources expects the world’s lithium production to jump 52% in 2023 to 1.34 million tons and to more than 1.5 million tons by 2025. Australia should continue to dominate lithium supply with a 52% global share, followed by Chile with 25% and China with 13% in 2021.

Lithium pricing benchmarks appear ‘peaky’

Based on a study across 12 different price assessments, we believe lithium prices are “peaky” and that a cautious outlook is almost certainly warranted. Underlining that stance further, technical and battery-grade lithium carbonate pricing in China — often viewed by the market as leading indicators — has been softening since late 2022. Though we think there will rightfully be some near-term debate on price direction, it appears clear to us that the levels reached in 2022 aren’t sustainable over the medium to long term.

The latest round of monthly assessments from Benchmark Minerals reflect a pricing environment that remains 3x higher on average vs. the long-term average, even when including 2022’s elevated levels. Most current prices remain at or near record highs.