By Reda Cherif, Fuad Hasanov, and Min Zhu
BEIJING/WASHINGTON, DC – Four years ago, we argued that the rise of electric vehicles (EVs) would upend both the auto industry and the oil market. As with the rapid displacement of horses by motor vehicles in the United States a century ago, the exponential increase in EVs would result in their takeover of the global auto market by the early 2040s. Oil would become the new coal, with prices continuing to converge, in energy-equivalent terms, to about $15 a barrel. The economic and geopolitical consequences would be profound.
Since then, the transportation revolution has only intensified, consistently beating most expectations. There were more than ten million EVs in 2020, after growing by more than 40% in recent years. This is in line with the adoption of motor vehicles in the early twentieth century, and if this trajectory continues, EVs will account for about 60% of the global car market by 2040 and 90% by 2050. These estimates exceed figures by the International Energy Agency (IEA), which predicts there will be about 330 million EVs in 2040, and BloombergNEF, which expects a 30% global EV share, but are broadly consistent with the IEA’s Net-Zero by 2050 Scenario and Carbon Tracker/Imperial College London’s Paris climate agreement scenarios.
What we have seen recently in China should put to rest the assumption that EV adoption in emerging and developing economies will lag decades behind that of advanced countries, delaying a collapse in global oil demand. Indeed, the IEA and others forecast rising oil demand in most emerging markets, which would more than compensate for its decline in advanced economies.
In fact, Europe surpassed China in terms of new EV registrations only in 2020, while China has remained the largest EV market, with 4.5 million vehicles. Although the COVID-19 pandemic drastically reduced demand for cars, the EV market has continued to grow fast in many countries, including developing economies.
Emerging markets have shown that they can also be pioneers in the EV industry. The Chinese EV industry has further reduced costs down as many brands compete for market domination. More than 400 companies have entered the EV business in China, reminiscent of the early days of the auto industry in the US when hundreds of firms competed before giants such as Chrysler and Ford emerged. The lifetime cost of owning an EV has been steadily declining, as battery costs fall, and is already comparable to that of motor vehicles.
The cheapest EV on the market, made by China’s SAIC Motor, is already outselling Tesla’s Model 3, the most popular EV. More important, at a cost of only a few thousand dollars, the SAIC model makes EVs affordable in many developing countries, the way the Volkswagen Beetle and other models first popularized cars in these countries.
The auto industry’s vitality recalls its heyday a century ago. The fierce competition for the EV market will further reduce costs, increase quality, and advance the technology, not only benefits consumers but also accelerating the energy transition. The main barriers to adoption such as infrastructure, electricity generation, and short-range are being resolved. We are already seeing more charging stations, the rise of renewables, improved battery performance, and continuous innovation.
But reliance on market forces is not enough. New regulations will help to accelerate the transition. The EU emission rules coming into force in 2025 could completely alter market prospects, requiring motor vehicles to include expensive technologies that will make them much less competitive. Similarly, after California policymakers mandated stricter emission standards in their state (the most populous in the US), the auto industry had to follow suit, resulting in positive spillovers to the rest of the country. Such mandates could be a game-changer, triggering a virtuous cycle of economies of scale, innovation, and increased demand.
Developing countries that join the EV revolution stand to gain significant macroeconomic benefits. Refined oil products, mostly gasoline, represent the largest share of imports in most African countries, including major oil exporters such as Nigeria. Accelerated adoption of EVs, which require less maintenance and spare parts, coupled with a more reliable electricity network based on renewables, would save valuable hard currency resources at a time of increasing external debt. The expanding global EV market also creates opportunities to enter newly forming value chains.
Meanwhile, countries that fail to plan adequately face considerable risks. They may find themselves stranded with unused refineries and fleets of obsolete vehicles, incapable of importing critical parts because major auto manufacturers would have stopped producing them.
Given the enormous costs of global warming even today, encouraging developing countries to join the EV revolution can only bring huge benefits to the world. Developing countries cannot ignore the unfolding energy transition and transportation revolution, and they should see this as an opportunity to create new capabilities and diversify into new sectors.
The additional expenditures required for fast adoption are minuscule compared to the economic and human costs of heatwaves, wildfires, deforestation, pollution, reduced biodiversity, and potentially more severe future pandemics. Making our roads cleaner, quieter, and less congested would not only improve our quality of life, but also its sustainability.
Reda Cherif, Senior Economist at the International Monetary Fund, is an affiliated researcher at the Bennett Institute for Public Policy at the University of Cambridge. Fuad Hasanov, Senior Economist at the International Monetary Fund, is an Adjunct Professor of Economics at Georgetown University and an affiliated researcher at the Bennett Institute for Public Policy at the University of Cambridge. Min Zhu, a former deputy managing director of the International Monetary Fund, is Chair of the National Institute of Financial Research at Tsinghua University.