Truce or dare?

With every day that passes the economic case for Brexit crumbles before our eyes. Sensible politicians look on in horror as the zealots pursue a Brexit that satisfies “the will of the people” despite the fact that the Brexit they are proposing is nothing like the one promised almost three years ago. People were asked to vote on where they wanted to go, but not how they expected to get there. As we are now learning, the journey is likely to prove far more damaging than they were led to believe. I, for example, would very much like to climb Everest and would happily cast my vote for someone who could promise to get me there easily and safely. I am less keen on slogging up 8848 metres in the teeth of some of the worst weather on the planet whilst running the risk of hypoxia.

The events of today have made it clear just how the path towards the sunlight uplands of Brexit is crumbling beneath our feet. Let’s start with the politics and the news that seven MPs have resigned from the Labour Party to set up The Independent Group. This is a measure of the sheer helplessness felt by many Labour MPs who see their party drifting away on a sea of left-wing irrelevance following Jeremy Corbyn’s unwillingness to use his position to stand up to the damaging form of Brexit proposed by many on the opposition benches. Let us not forget that in summer 2016 Labour MPs called a vote of no confidence in leader Jeremy Corbyn following the EU referendum, which he lost by 172 votes to 40. However, he remained as party leader by a margin of 61% to 39% following a ballot of all party members in September 2016.

But we have been here before. In 1981 four MPs left the Labour Party as it drifted inexorably to the left, to form the Social Democratic Party. Whilst this was instrumental in forcing Labour to confront its internal issues, it was a multi-year process which succeeded in splitting political opposition to the Conservative Party which remained in office until 1997. As it is, current opinion polls suggest that the Conservatives are marginally ahead and unless the new political centre can rapidly gain significant momentum it is hard to see how this will change the political dynamics, unless it can gain support from Conservative dissidents (which currently looks unlikely).

It is far from sure that this will have much impact on the Brexit debate either. Seven MPs are hardly enough to change the world and there are just 39 days (936 hours) until the default option is triggered which will force the UK out of the EU unless something changes radically. Perhaps they will be able to put forward parliamentary amendments (e.g. attempts to postpone the Article 50 deadline) which will be easier to accept on a cross-party basis as they are seen to come from independent MPs and not those attached to any of the major political parties. But I will not be holding my breath. Nonetheless, as I noted in my previous post, today’s move is a belated recognition that the established political parties are more interested in appealing to the ideologues who form the core of party membership than the interests of centrist voters (something which is true of both parties).

However, it was the news that Honda is planning to shut its Swindon plant in 2022 that really should cause eyebrows to be raised. Local MP Justin Tomlinson noted in a tweet that Honda “are clear this is based on global trends and not Brexit, as all European market production will consolidate in Japan in 2021.” I refuse to accept that it has nothing to do with Brexit but there is a very good reason why Honda might want to consolidate production at home: Towards the end of last year Japan signed a trade deal with the EU that removes the 10% import tariff on Japanese cars and the 3% tariff on most car parts. So they don’t need the UK any more. And don’t say you weren’t warned. I pointed out in 2015 that “international companies already have to carefully balance the net benefits of operating in the UK given that business operating costs are higher than in the EU8 countries. Brexit may make this calculation more clear cut.”

Without wishing to compare the ideologies underlying the two processes or trivialise historical events, I have been struck in recent months by the logistical parallels between the progress of the Nazi invasion of Russia in 1941 and the Brexit process. Both were the product of an ideologically motivated desire to achieve bigger goals (the defeat of Communism/throwing off the yoke of the EU), which were preceded by intense planning but both were under-resourced campaigns (logistically in the Russia case; intellectually in the Brexit case). You can argue that both campaigns started well, achieving many of their initial goals, before becoming bogged down by harsher conditions (weather/economic reality) and the sheer weight of the opposition (Soviet troops/the EU’s economic heft). But the key point is that the military campaign ran out of steam following defeat at the Battle of Stalingrad when the magnitude of the task facing the Wehrmacht became startlingly clear.

I wonder whether the Brexit campaign has yet reached its Stalingrad moment. The Nazis clearly learned nothing from Napoleon’s attempt to invade Russia in the same way the Brexiteers appear not to have learned the lesson of those countries which tried to throw their weight around with the EU. Just to push the parallel further, both campaigns kicked off in June (almost to the day). Thirty two months after the start of the Russian campaign the tide had decisively turned in the Soviets favour, although it was to be another 15 months before the whole episode was concluded. After a similar period since the EU referendum, Brexiteers also appear to be fighting a losing battle and whilst they clearly will not give up, they cannot win. They might force the UK out of the EU without a deal, although I still maintain that they will be prevented from doing so, but they cannot deliver on their promise to deliver an economically brighter future.

Each decision by the likes of Honda or Nissan to scale back production or to abandon expansion plans represents potential jobs that will not be created. Each decision by politicians to abandon the ideological path which their leaders are trying to follow represents a step away from the cliff edge. Rather than fight Brexit battles which threaten to damage the economy, it is time to call a truce.

Electric vehicles: Still in need of economic support

One of the less publicised stories of recent days was last week’s decision by the UK Department for Transport (DfT) to cut the subsidies granted to buyers of electric vehicles (EVs). From 9 November, the grants for new plug-in hybrids will be scrapped, while discounts on all-electric cars will be cut from £4,500 to £3,500. Coming in the same week as the IPCC issued a report suggesting that we have until 2030 to limit the rise in global temperatures to 1.5^oC, beyond which irreparable damage will be done to the global environment, the timing of the decision looks truly abysmal – not to mention amateurish. It certainly does not make good economic sense.

According to the DfT, the grant for plug-in vehicles was designed to help establish a market for them and having succeeded in this aim it is time to focus support on zero-emission models such as pure electric and hydrogen fuel cell cars. I would suggest that this is wrong – and industry specialists were horrified by the decision. The market is far from established in the UK (and indeed in most other European countries bar Norway): Sales of plug-in hybrid vehicles accounted for just 1.2% of total sales last year – not exactly an established market. According to Mike Hawes, chief executive of the SMMT motor manufacturers body, “prematurely removing up-front purchase grants can have a devastating impact on demand.”

All the evidence suggests that carbon emissions measured over the full lifecycle of EVs are far lower than for vehicles powered by fossil fuels. This report by the International Council on Clean Transportation calculates that even after we factor in the costs of emissions generated during the production of the vehicle battery, which are pretty high, “a typical electric car today produces just half of the greenhouse gas emissions of an average European passenger car.”

It thus makes sense from an environmental perspective to encourage the switch to electric vehicles of one kind or another. But one of the biggest deterrents to buyers is that the purchase price of electric vehicles is higher than their conventional counterparts. However, the running costs of an EV are generally lower, so consumers have to figure out how many miles (or km) they must drive in order that the lower operating costs offset the higher purchase price. In order to do this, I calculated the costs of running a Ford Focus in the US using a petrol-driven version and the electric equivalent. It currently costs around USD10 to travel 100 miles in a 30 MPG Ford Focus (assuming petrol prices at USD3 per gallon) but with US electricity costs currently averaging around 12 cents per kWh, it costs just USD3.72 to cover 100 miles in a Ford Focus Electric. Given these inputs, we can calculate the breakeven mileage based upon a range of prices for the conventional car and the markup for the electric vehicle.

According to my calculations, if the petrol vehicle costs USD15k and the EV is sold at a 10% premium, the breakeven mileage is  around 24,000 (38,000 km) which is just less than two years of driving by the average US motorist (13,474 per year). But if the EV premium rises to 20%, the breakeven mileage increases to almost 48,000 (3.5 years of driving). As the EV premium rises, so does the breakeven mileage. Similarly if the conventional vehicle is more expensive in the first place this also drives up the breakeven point. We can plot the various breakeven points in chart 1.

But what happens when a subsidy is introduced? As you might expect, it lowers the initial purchase price and as a result the mileage at which the EV becomes an economic proposition (chart 2). For a conventional vehicle costing USD15k, a USD 4k subsidy always makes it worthwhile to choose an electric equivalent for any markup below 30%. Even a 35% markup implies that the breakeven point will be achieved after 18 months of driving for the average motorist. Clearly, the more costly are EVs, the higher are the breakeven points but they are considerably lower than in the no-subsidy case (chart 2).

Obviously these are only illustrative examples – they are based on US figures and will differ according to local petrol prices and electricity costs. Nor do they include factors such as repair and other maintenance costs. But the point is made: Subsidies do significantly enhance the attractiveness of EVs over the fossil fuel equivalent and it strikes me as a remarkably short-sighted policy to begin phasing out the subsidies already, particularly when battery-powered hybrids still account for such a small market share. Over time, we would hope that the costs of EVs will decline relative to their fossil fuel equivalent, which will make them more economically attractive. But the DfT appears to be relying on the moral argument for buying EVs, rather than the economics. Of course, it would not be the first time that the UK government has launched a policy that flies in the face of the economic evidence. I think there is one that begins with a “B” …

Automotive for the people

In 1979, Gary Numan had hits with two songs which topped the charts around the world: Are Friends Electric and Cars. Almost forty years later, societies are asking themselves whether electric cars are their new friends as policy makers in France and the UK propose a ban on the sale of petrol and diesel vehicles by 2040 in order to encourage the sale of electric vehicles.

According to the IEA around 17% of global CO₂ emissions derive from road transport – a figure which rises to 19% in non-G20 countries (see p35, here). It is thus understandable why governments want to take action. But there are lots of issues which need addressing before we accept that this is a “good” policy, and I do wonder how much of this policy has been thought through. For one thing, it will take action by more than just the UK and France to have much impact on global CO₂ emissions. When the US and China follow suit the policy will have a lot more resonance – or if it were an EU wide initiative, it would make more sense.

The big issue at the heart of the debate is that electric cars are simply not as green as many proponents would have us believe. Sure, they emit less CO₂ but the electricity to power them has to be generated somewhere and if all we do is build more coal-fired power stations it rather defeats the object. It is unlikely, of course, that the government would permit a return to coal, so how will we generate the additional power? Let us start by trying to understand the scale of the problem. The National Grid recently estimated that raising the number of electric vehicles could increase peak UK electricity demand by 8 gigawatts (GW). That is the equivalent of building three new power stations the size of the much-disputed Hinkley Point nuclear station. Admittedly, this does represent an extreme case, with greater use of off-peak charging likely to mitigate the scale of the problem, but it nonetheless makes the point that putting more electric cars on the road requires building more generating capacity.

Having determined that the UK will require up to an additional 8GW of electricity just to keep our cars on the road, how will we generate it? We could simply build another three Hinkley  Point-type nuclear stations, but given all the concerns regarding their cost – not to mention the perennial problem of how to get rid of the waste – this would be highly controversial. We could add more wind turbines but it would mean raising capacity by 50% and we all know how intermittent wind power can be. Solar is probably a non-starter in the UK. However, tidal may be an option with a barrage across the River Severn – which has the second largest tidal range in the word – potentially capable of generating 8GW at peak flow, which would be operational for 8 hours per day, according to a 1989 study. It would be costly (up to £34bn on one estimate, which is almost double the cost of one Hinkley Point) but potentially feasible.

So let us assume that we can generate the electricity. What about the technology – is it good enough to supersede the internal combustion engine?  Only this week, Tesla handed over its first Model 3 which costs $35,000 and has a range of 220 miles (350 km) – about one-third what a larger diesel-engine vehicle is capable of delivering. A longer range version will do 450km on one set of batteries but it costs a third more and is still more limited than cars can do today. In order to manage a 900 km journey across Europe, the standard model requires two charges which, given current battery technology, is not going to be a quick process. Perhaps we could swap over the battery rig, with fully-charged batteries replacing the old ones. This would mean making a couple of quick stops whilst the batteries are swapped but it is not dissimilar to the current process of refilling our cars at a filling station. So far, so possible (at least not too impossible).

But what happens during the transition process towards our 2040 cut-off point? Relatively few people will want to buy a new petrol or diesel car after 2030 given the lack of resale value, so we will need to see significant advances in electronic car technology by then in order to convince people that the transition will happen. That is just 13 years away. And will there be a scrapping scheme to help individuals make the switch (that will be costly)? Will car companies be able to ramp up production to meet likely demand – the likes of Ford argue that Tesla will struggle to increase production on the scale required?  Indeed it is possible that until many of these questions are answered, many Brits (and French) will act like the Cubans by keeping their old cars on the road for longer than they would otherwise do (assuming that petrol stations are not phased out). And how will the oil companies respond? How will governments fill the revenue gap left by the fall in fuel duty which they currently levy on the motorist?

One standard response to these objections is to cast your mind back to 1994 to a pre-internet age when many of the things we take for granted today seemed like science fiction. But the difference is that the technology evolved, and was not imposed upon us. We can still go down to the High Street rather than rely on Amazon deliveries, but the policy as currently portrayed is a bit like abolishing the practice of letter writing in favour of email. Clearly, there are more questions than answers.

Most people are prepared to do their bit to help save the planet but we need a properly thought out response to the questions raised. Announcing a plan then saying we will work out the details as we go along is not a sensible policy strategy. Let us not forget that in the UK, it was new environment minister Michael Gove who announced the death knell of vehicles fuelled by carbon. This was the same man who was fabulously short on detail as to how Brexit would work. There again, he can always go back to his team of experts to help him out – if he hasn’t had enough of them.