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The Economist: The drive for low emissions

May 31st 2007
From The Economist print edition

Car and fuel companies are investing in clean transport

KEN LIVINGSTONE, the mayor of London, last year caused a mild panic among drivers who cruise the city’s narrow streets in “Chelsea tractors” (SUVs to the rest of the world). He announced that he was planning to charge cars emitting more than 225g of CO2 per kilometre £25 a day to go into the centre of London rather than the standard £8. “Red Ken” has always enjoyed stirring it among the rich, so he was probably quite happy at the stink he caused.

Worldwide car ownership is growing around 5% a year, so if emissions from cars are to be cut, engines will have to become dramatically more efficient, or there will have to be a technological breakthrough to replace petrol with a clean fuel. Now that governments seem to be getting serious about emissions, car and fuel companies are getting serious about finding less polluting alternatives.

Fuel-efficiency regulations of varying kinds already exist in all the countries that matter, but in America, where they were fairly tough during the oil crises of the 1970s and 1980s, they have lost their bite. Improvements in engine efficiency have been used not to reduce fuel consumption but to weigh cars down with gizmos. And car companies have carried the burden of those regulations. Fuel companies, so far, have got off scot-free.

That seems to be changing. Mr Livingstone’s initiative is only one of many new measures that have been proposed around the world to cut vehicle emissions. California is trying to impose greenhouse-gas emissions standards on cars, though the motor manufacturers have taken the state to court on the ground that this is federal-government business. In his most recent state-of-the-union address, George Bush’s big concession to the greens was to propose a 4% a year tightening in fuel-efficiency rules.

The EU has had a long-standing voluntary deal with the carmakers under which they would aim to reduce the average CO2 emissions of their fleets to 120g/km by 2012. But thanks to consumers’ growing enthusiasm for high-power, high-emissions cars, that seemed unlikely to happen, so this year the European Commission decided to impose a mandatory standard. There was a big row, but the commission got most of what it wanted.

And now governments are taking aim at fuel companies too. In January California announced that by 2020 it will require a 10% reduction in the carbon emissions that a fuel emits over its life cycle. That has implications for “unconventional oil”—petrol made from oil shale and tar sands. Although CO2 emissions from the resulting fuel are the same as those from conventional sources, producing it is a filthy business, so such rules will discourage its use. Europe is planning to follow California. That is not necessarily a coincidence. There is a lot of traffic between Brussels and Sacramento on green issues.

Tighter regulation will not hit all companies equally (see chart 9). German car firms are particularly vulnerable, which was why they made the most fuss about the commission turning the voluntary target into a mandatory one. The French and the Italians were smugly silent.

A corny idea

“This industry is 98% dependent on petroleum. GM has concluded that that’s not sustainable,” says Larry Burns, GM’s vice-president of R&D and strategic planning. “It’s all about displacing petroleum.”

The Prius’s success—390,000 Americans own one—is a testament to Toyota’s vision and marketing. But it is not clear how much potential there is in the hybrid market. Bill Ford announced in 2005 that his company would be building 250,000 hybrids by 2010, but it no longer seems to be aiming for that. Anyway, hybrids are not a solution to global warming. Their somewhat greater fuel efficiency will soon be offset by the increase in global car ownership. More radical technological changes are needed.

Ethanol is one possibility, because although burning it emits CO2, growing the crops needed to produce it absorbs the stuff, at least in theory. The farming lobby has been pushing it as a new source of revenue. The car industry is keen on it: if the fuel changes, then the cars don’t have to. GM has been running a “live green, go yellow” campaign to promote it.

Ethanol currently accounts for only 3.5% of American fuel consumption, but thanks to heavy subsidies its use is growing by 25% a year, says Matt Drinkwater of New Energy Finance. When oil prices were at their peak, the payback period on an ethanol plant was 11 months. Not surprisingly, they have sprung up all over the Midwest. Soaring demand for maize for ethanol caused the sharp rise in the corn price which led to “tortilla riots” in Mexico.

There are three problems with corn ethanol. First, the market is limited. At present, any car can take E10 fuel (10% ethanol) but only 6m out of America’s 237m cars and trucks are “flex-fuel” vehicles that can take E85 (85% ethanol). Converting a car costs only around $200, but invalidates the guarantee. Detroit has promised that half of its output will be “flex-fuel” by 2012.

Second, corn ethanol is expensive. At the pump it is competitive with gasoline; but according to the International Institute for Sustainable Development, America’s subsidy costs taxpayers somewhere between $5.5 billion and $7.3 billion a year. And high tariffs keep out imports of cheap Brazilian ethanol made from sugar cane.

Third, corn ethanol is not very green. Some people think that corn ethanol is responsible for more emissions than it saves, because so much energy is used in growing the corn. Dan Kammen and Alex Farrell of the University of California at Berkeley reviewed six studies on the issue and concluded that, gallon for gallon, ethanol is probably 10-15% better than petrol for emissions of greenhouse gases. That is a help, but no panacea.

A better bet may be cellulosic ethanol—ethanol that can be made out of straw, switchgrass, wood chips—pretty much anything with cellulose in it. Mr Bush, keen on a technological quick fix for global warming, has offered $385m in government subsidies to bring cellulosic ethanol to market.

A lot of people are trying. Vinod Khosla’s company, Range Fuels, is planning to build a commercial-scale ethanol plant in Georgia. Using woodchips as a feedstock, it employs heat and chemicals to break down the tough bonds in cellulose molecules. Up to $76m of subsidy will help it on its way. Many companies are working on suitable enzymes to break down those bonds. One such is Iogen, in which Goldman Sachs and Shell have taken stakes. It will be getting up to $80m from the government.

One further problem with ethanol is that it is less energy-intensive than petrol, so you get fewer miles per gallon. That is one reason why BP is putting its money into a different fuel, biobutanol, which is more energy-intensive than ethanol. BP is developing it in a joint venture with DuPont, for which biobutanol offers a possible way into the fuel business.

And then there is the electric car—not the hybrid car that uses electricity for pottering about in the city and switches to its combustion engine at speed, but the fully electric sort that uses either a hydrogen fuel cell to produce electricity or a battery to store it.

Hydrogen is an attractive way of powering a vehicle because it can be made from all the sources that electricity can. But hydrogen fuel cells have been just around the corner for a long time. GM has been working on them since the 1960s, and reckons that so far it has spent $1 billion. The technology’s appeal is obvious, for it could revolutionise not only the car: if the hydrogen fuel cell can produce electricity to power a vehicle, why not a house as well?

There was a bubble of excitement about fuel cells in the late 1990s, and shares in companies such as Ballard Power Systems rocketed. But hopes that a fuel-cell car would be on the market early this decade were disappointed. The fuel cell, says Shell’s Duncan Macleod, was “overpriced and over-promised at the front end”.

Still, fuel-cell vehicles are getting onto the roads. London ran three buses for a three-year trial and is now planning to buy ten. There are around 60-80 hydrogen buses and 200 cars on the road worldwide, and a few filling stations. Shell, which is taking hydrogen seriously, is about to open its first filling station in California. It has one already, in Washington, DC, to service ten cars, and another in Iceland, for three buses. It is an expensive business. London’s three-year, three-bus trial cost £4.5m. Hydrogen cars cost around $1m each to build, according to Mr Macleod. At the pump the hydrogen costs $5 a kilo—about the same, in terms of mileage, as current petrol prices. How much does it cost Shell to make? “A lot more than $5,” says Mr Macleod, laughing.

GM is also working on battery technology. At this year’s Detroit motor show it unveiled the Chevrolet Volt, which has both a battery and a combustion engine. The technology got generally good reviews, but GM has not said when it will start producing the car commercially.

Meanwhile, rushing up on the inside lane are those disruptive people from Silicon Valley. Last year Elon Musk, a South-African-born entrepreneur who started PayPal, an online payments system, unveiled the Tesla, an electric sports car. It plugs into the wall and stores the energy in a lithium-ion battery—the sort used in laptop computers, only with 6,831 cells. And it’s a pretty, and nippy, little car. “A Porsche can accelerate from 0-60 in 4.7 seconds,” says Mr Musk with understandable pride. “The Tesla can do it in four seconds.”

It has a few disadvantages. The first is cost. Mr Musk has pre-sold the first 350—the first 120 of those for $100,000 apiece. “The average net worth of the first 120 customers is over $1 billion,” he says. However, he plans to start work on a budget version next year. The second is range. The Tesla’s maximum is 250 miles. If there are other downsides, they may become clear in August or September this year, when the first production models should slip silently off the production lines and onto America’s roads.

Clean-energy entrepreneurs may find the transport business harder to crack than power generation, because the existing infrastructure of pipelines and service stations is dedicated to petrol. Yet Brazil, where sugar ethanol now accounts for 40% of fuel used by cars, shows that it can be done. Now that governments are beginning to lean on big oil as well as on the car companies, the drive towards cleaner transport is likely to pick up speed.

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