Beyond Trillions on the Road: Tesla (II)

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Word count: 3,638

Expected reading time: 13 minutes

This article is published by an investment firm called Holon Global Investments. The original author, Tim Davies, wrote the article in English, which is 144 pages long. I finished reading it over two weekends and found the systematic thinking logic and content presentation of the article to be comprehensive and objective, which has been very helpful to me. Therefore, I plan to translate it for myself to read again and share it at the same time.

This translation will follow the principle of staying as close to the original text as possible. However, since I have my own related but not necessarily mature thoughts and not necessarily scientific mathematical modeling, my personal opinions will be supplemented with italicized font as a multi-angle reference for comparison. This is not an investment suggestion.

If you are interested in reading the original text, the link is provided here: https://holon.investments/tesla-on-the-road-to-a-us-10-trillion-company-and-beyond/

It is necessary to mention again that the original intention of translating this article is purely for my own iteration. I believe that learning how to combine rationality and sensibility and mastering the method of systematically understanding a company and the era it is in is more important than the conclusion. More importantly, trying to combine common sense to understand the logic behind the numbers and its rationality is more important than the numbers. And this article is a very good learning material.

Except for the abstract and conclusion, the entire article is divided into ten chapters.

(1) The Global Trend of Electric Vehicles (EVs)

(2) How the Electrification of Automobiles Will Solve the Greenhouse Gas Issue (this article)

(3) The Opportunity of Tesla’s EV Business

(4) Leading Electric Vehicle Design and Manufacturing

(5) The Arrival of Autonomous Driving in 2025

(6) World-Class Energy Infrastructure and Storage Solutions

(7) The Rapidly Increasing Demand for Raw Materials

(8) The Essential Components of Disruptive Innovation

(9) Surpassing Competitors

(10) Tesla’s Financial and Value Predictions

How the Electrification of Automobiles Will Solve the Greenhouse Gas Issue

The global climate change and its destructive effects on the environment have led governments around the world to continuously implement the consensus reached in the Paris Agreement. The widespread promotion of electric vehicles is the key to achieving the agreement’s goals.

  • Henry Ford’s Legend: the Largest Contributor to Global Climate ChangeSince Ford first released the Model T in 1908, the basic working principle of gasoline-powered cars has remained unchanged: the engine, fueled by gasoline or diesel, transmits power to the four wheels through the transmission shaft. Fast forward to the present day, we see that Ford’s design has been used in 1.4 billion cars, resulting in the consumption of 8 billion barrels of fossil fuels every year.

The main reason why electric cars are being vigorously promoted worldwide today is that evidence shows that gasoline-powered cars are the largest cause of global warming. Despite improvement in internal combustion engine technology over the years, which has improved combustion efficiency and reduced emissions of pollutants, gasoline-powered cars still produce 75% of global carbon monoxide and 29% of greenhouse gases.

Most governments around the world have reached a consensus that our planet’s environment is at a critical turning point, and policies must be formulated quickly to mitigate and repair the enormous damage caused by past greenhouse gas emissions. The accumulating pressure is driving governments and businesses worldwide to transition to renewable energy and zero-emission transportation.

Leading this change is Europe, where many European Union countries (including the United Kingdom) are determined to ban the sale of gasoline-powered cars by 2025 or 2035. Larger countries such as China, Japan, Germany, and the United States are also continuously replacing their government fleets with electric cars, and it can be expected that they will announce targets to ban the sale of gasoline-powered cars in the near future.

Figure 7 shows an overview of the target dates for banning the sale of gasoline-powered cars in various countries (data as of November 2020). Recently, Europe officially announced that it is determined to achieve a ban on gasoline-powered cars across the EU by 2035.

  • Paris Agreement

The Paris Agreement is a framework governing greenhouse gas emissions and is a legally-binding agreement treaty on climate change. On December 12, 2015, it was negotiated and confirmed by 196 countries and officially became effective on November 4, 2016.

To date, 190 countries have recognized the agreement. The main content of the agreement is to limit the increase of global warming to within 2.0 degrees Celsius. The ideal value is within 1.5 degrees Celsius, based on temperature levels before industrialization (19th century).

The specific formulation of the agreement content revolves around a core, where every signatory country will need to set a higher emission reduction target every 5 years. These emission reduction targets are usually the result of nationwide efforts, and participating countries provided their first-round targets in 2020.# The Paris Agreement and Global Carbon Reduction

In 2017, the United States announced its intention to withdraw from the Paris Agreement. Former President Trump officially withdrew from the agreement in November 2020. This departure had significant implications for a global emissions agreement. The last global emissions agreement, the “Tokyo Protocol,” was rejected by the US Senate in 1997.

President Biden, who pays close attention to global environmental issues, took office in January 2021 and, as his first order of business, re-joined the Paris Agreement and established solid US emissions reduction targets.

To achieve the Paris Agreement, scientists led by European scientists identified three key goals in 2017:

  1. Carbon dioxide emissions from global energy and industrial production must be reduced by 50% per decade, resulting in a 50% reduction in emissions by 2020, followed by another 50% reduction by 2030, and another 50% reduction by 2040. Scientists refer to this as the “carbon law.”

  2. The net emissions from land use, such as agriculture and deforestation, must be gradually reduced to zero before 2050. We need to shift our eating habits, eat more vegetables and fruits and less meat, to reduce the impact of agricultural production on emissions, even if the global population may reach 9 billion by 2050 and more people need to be fed.

  3. Use technology to significantly reduce carbon dioxide in the atmosphere. Before 2050, we need to find a way to artificially reduce atmospheric carbon dioxide by 1 billion tons per year, about double the amount currently absorbed by trees and soil on earth.

Figure 8 shows the greenhouse gas contribution by industry and the specific types of greenhouse gases emitted.

Several industries will be a priority for long-term emission reduction policies. The transportation sector, which contributes 14% of emissions today, is a policy focus, with incentives being provided to encourage fuel vehicle owners to purchase electric vehicles.

The government is also changing the energy supply mix and accelerating the transition from coal to renewable energy. This trend should also accelerate the application of energy storage solutions in the national grid.

If the government can establish a policy that leans toward electric vehicle and power generation companies, which is responsible for 39% of carbon emissions from transportation and power generation, to accelerate capital accumulation in these fields, it should achieve a good emission reduction effect and help shift the electric vehicle fleet from fossil fuel-generated electricity.

The Paris Agreement did not set any specific targets for reducing greenhouse gas emissions. Each country can set its own emissions reduction targets based on its ability to reduce emissions, economic situation, emission history, and determination to achieve the Paris Agreement goals.

China, the most populous country in the world, has begun its transition to a low-carbon economy. China has set a goal to reach the peak of carbon emissions by 2030 and achieve carbon neutrality by 2060. India has pledged to reduce emissions by 35% from 2005 levels by 2030, with a key focus on shifting 40% of its electricity supply to non-fossil fuels (they have already reached 37%).

Some more developed countries such as the EU, Canada, South Korea, Japan, South Africa, and the UK have committed to reducing greenhouse gas emissions to net zero by 2050. After rejoining the Paris Agreement, the US set a target to reduce carbon emissions by 50% from 2020 levels by 2030.

Over the next 20 to 30 years, governments and businesses will need significant financial resources to achieve these ambitious goals. The electricity and non-carbon-based transportation industries will be the key beneficiaries of government subsidies, which will enable consumers to buy electric vehicles that are cheaper than petrol-powered cars of the same class.

  • Carbon Tax

A carbon tax allows the government to tax extra carbon emissions to address environmental and air quality issues and some factors that may cause long-term global warming, such as increasing droughts, forest fires and rising sea levels. Carbon taxes shift the burden to polluters, linking the amount of pollution generated by each activity to a fair carbon price.

The widespread adoption of carbon taxes will help countries achieve their Paris Agreement targets and reduce their greenhouse gas emissions. A federal global organization would require each country and business to reduce the risk and legal action caused by over-emission as much as possible.

However, carbon taxes allow governments to set their own carbon prices (to fund environmentally friendly investments) or set prices through a carbon offset trading market. This shifts the burden to polluters, forcing them to continually reduce carbon emissions or purchase carbon credits to offset their actions.

Today, there are two principles governing carbon emissions:

  • The first is the emissions trading system (ETS), which requires the government to set the total annual emissions allowance for each industry. Companies that reduce emissions can sell their carbon credits in the carbon trading system to other companies that need them to comply with policy requirements.- The second is carbon pricing, which allows the government to set a tax rate on greenhouse gas emissions. The difference between the two is that ETS is truly striving towards reducing carbon emissions, while carbon pricing is actually setting a cost percentage for carbon-based fuels.

Tesla has earned nearly $4 billion in carbon credits with its zero-emission electric vehicles, 40% of which have been contributed in 2020, according to Tesla’s 2020 financial report. Tesla’s operation of zero emission vehicles, greenhouse gas, fuel economy, and clean energy-related businesses in accordance with national policies has brought tradable carbon credit revenue.

With electric vehicle production expected to exceed 5.5 million units per year, plus more than 30% of energy storage and renewable energy infrastructure annually, we expect Tesla to continue to earn carbon credit revenue of over $56.6 billion between 2021 and 2032. We believe this is a conservative estimate, assuming carbon credit revenue per vehicle will drop to $0 starting in 2032.

  • Where are we now?

Not very optimistic. The only country in the world that has achieved the goals of the Paris Agreement is The Gambia, a country located in West Africa on the Atlantic coast.

Most countries’ tracking data is still increasing by 3-4 degrees Celsius, a temperature that will make a large part of the world no longer suitable for human habitation, including Australia and some islands in the Asia-Pacific region. The transition to electric vehicles and renewable energy is a critical step in reducing greenhouse gas emissions and slowing global temperature rise.

  • The lifecycle cost of electric vehicles will soon be lower than that of gasoline vehicles.

A 2019 study in the UK showed that driving a Nissan Leaf electric vehicle emitted 1/3 of the emissions per kilometer over the course of its lifecycle compared to a regular gasoline vehicle. The UK is also continuing to increase the proportion of non-fossil fuel energy in the energy supply network, from 45% in 2016 to 56% in June 2021.

Carbon pricing is expected to be widely adopted globally to help the grid transition to renewable energy. A Yale University research calculated that $73 trillion would be needed globally by 2050 to achieve 100% renewable energy supply.

Using renewable energy to produce vehicles and mine/process raw materials can also significantly reduce carbon emissions during the lifecycle of electric vehicles from manufacturing to end-of-life. Many studies in Germany have shown that the benefits of switching from a fuel-driven transportation network to an electric power-driven transportation network are real in terms of reducing carbon emissions. One study found that electric vehicles reduce carbon monoxide emissions by 43% compared to gasoline vehicles.

electric-car-plugAn extensive study initiated by several European universities in 2019 shows that switching to electric cars during their lifecycle can reduce carbon emissions by 70% in Sweden and France (where the share of renewable or nuclear energy in the grid is higher) and by 30% in the UK. The study assumes a 50% penetration rate of electric cars by 2050, significantly lower than the 100% in our global demand model. The difference lies in our assumption that car companies will stop producing fuel vehicles before 2035 due to high carbon taxes and the sharp drop in resale value due to being phased out, making it difficult for them to sell fuel vehicles at a reasonable price.

(to be continued)

This article is a translation by ChatGPT of a Chinese report from 42HOW. If you have any questions about it, please email bd@42how.com.