Andrew Sheets: Welcome to Thoughts on the Market, I'm Andrew Sheets, chief cross asset strategist for Morgan Stanley Research.
Adam Jonas: And I'm Adam Jonas, head of Morgan Stanley's Space and Global and Shared Mobility Teams.
Andrew Sheets: And on part two of this special Earth Day edition of the podcast, we'll be continuing our discussion of the intersection between electric vehicles, climate change and policy. It's Friday, April 23rd at 3p.m. in London.
Adam Jonas: And 10 a.m. in New York.
Andrew Sheets: So, Adam, you mentioned our colleague, Stephen Byrd, who looks after power, utilities and renewable energy at Morgan Stanley. And I wanted to pick up on something you mentioned in terms of the work you do with his team on the grid. You know, as the number of electric vehicles pick up, you will effectively have a large fleet of rolling batteries kind of going around the country. How much could that influence making a smarter, more efficient electrical grid in the future?
Adam Jonas: There's a lot of potential there. We strongly suspect you'll see it in countries where there's really rapid EV adoption, like in Norway, for example, which is-- I'm not exaggerating when I say-- 20 years ahead of the United States in terms of EV adoption. They're about 50% right now, there'll be 100 percent in by middle of the decade EV adoption in terms of new sales and then shortly after that, their whole park turns over.
Adam Jonas: So maybe in the U.S. you'll see pockets of Norway and maybe in parts of Northern California or certain business districts of key cities where they outlaw the use of internal combustion vehicles. And I think in those pockets, certain nodes of the grid, you could really see some interesting pilot and progress of what you're describing. To do something like that rolled out nationally, wow. We're talking maybe realistically decades. But, you know, if Stephen were on this podcast, he'd say we have to start somewhere. So but for every adoption, there's a de-adoption too, which doesn't get a lot of attention, which is if we're going to push and incentivize aggressive EVs, what does this mean, you know, who's going to pay for this stuff? And what does it mean for the use of internal combustion and the value of internal combustion cars where maybe a poor family that doesn't have the resources to buy a new car, if they're left with something that's being devalued and repressed, what do they do? And so there's a lot of blind spots and a lot of unanswered policy questions, and a policy innovation that's going to have to keep up with all this technological battery and grid innovation, too.
Andrew Sheets: That actually leads me to the next question on policy that I was hoping to get your thoughts on. On the one hand, you have this huge infrastructure opportunity and challenge, you know, large investments that really could be unlike anything we've seen in a very long time in terms of how Americans and people all over the world get around. And at the same time, you know, those investments appear to be very expensive. And we're living in a world where politics in the U.S. are very divided. It's very hard to get things done. So how do you kind of see potential policy compromises happening going forward? Where do you think there might be more areas of agreement or disagreement? And then finally, how do you think we could pay for this? You know, what are some various things that you think could help raise the revenue necessary to drive this sort of transformation?
Adam Jonas: Let me back up. Climate change is a tragedy. You know, it's pretty horrific, some of the changes and how quickly they seem to be happening to our planet. But maybe a silver lining is that climate change is Mother Nature's innovation catalyst.
Adam Jonas: I think what you're going to see is a lot of the innovation happen in the cities. And I think a lot of our investors just look to Washington to say, hey, help us out or get along or reach across the aisle and agree on stuff. I'm a little skeptical about that. I mean, I don't want to rule that out, but I think there's room for the policymakers in D.C. at the federal level to learn a lot from the private sector and to see what's happening in our cities. Cities are crucibles of mobility, islands of mobility, where these local problems like traffic and traffic fatalities and pollution are concentrated. Right. And they have the ability to exert a lot of regulatory influence over that concentrated area. So we like to say cities account for about 2% of the Earth's landmass, but 70% of emissions. And so I think when it comes to climate change, particularly on transportation and decarbonizing that, look to Paris, London, L.A., Oslo, you know, Portland, and see what they're doing. And as they start to find ways to institute, let's say, carbon-free zones and then go to those ridesharing fleets, let's work together. If you want any incremental vehicle added to your fleet, has to be zero emission. If you go past this deadline then we will give that concession to somebody else. So it's a combination, again, a carrot and stick concentrated at city. And I think as that happens, we think that that can provide a nice guiding light for more cohesive and efficient federal policies over time.
Andrew Sheets: Right now we have a pretty global auto market. You have major auto manufacturers in Japan, in Europe, in the US, you know, all with large market share in the US and indeed in other regions. Do you think that's the same model that we'll see with larger EV adoption? And any thoughts you have on how manufacturers and other regions or other regions more generally might handle this outlook similar to the US or differently from the U.S.?
Adam Jonas: We think that over time, transportation resembles a utility where the marginal cost of the mile traveled is approaching zero. OK, not unlike water, electricity, telecom or sending data wirelessly. And so like other utilities, which are tend to be run, is almost a quasi-public good with a lot of state regulation, particularly ones that involve safety like, you know, electricity and water and stuff. We think transportation is like that. Think of the cyber security implications if someone were to hack the northeast corridor of an autonomous network. Right?
Adam Jonas: And so it's just the nature of the beast. We think that we're seeing the end of the global auto industry. That's not to say that there won't be parts made globally, but that a provision of such services will create national and regional champions with a national security overlay, not unlike other utilities where the GDP and the medical supplies and military equipment and children and everything in the economy runs on that network. And the thought of a U.S. private company operating that network in Bavaria or in Wuhan is absurd. That's just our opinion. And maybe we need to go out a couple of decades to see that through. But I find that when we have this conversation with more senior people, when we skew senior with that thought, they look at us and say, of course, of course. But when we get then we focus on the more active fund manager looking at the screen, they're thinking, does that affect my stock next week? And we're like, no, but the policies behind it could. So it's an interesting point.
Andrew Sheets: Adam, maybe one more question for me. If we think further out, if you think about you and your team's projections for what electric vehicles could look like down the road, can you give us a sense of how much of an impact that might make on overall global carbon emissions and then obviously how much work is left to do?
Adam Jonas: So out of the, you know, 50 or so gigatons of total CO2 emissions from humanity, not just energy emissions, but in land usage and others, autos are kind of order of magnitude around 5 gigatons.
Adam Jonas: OK, so you might say, well, that's only 10% of emissions. Yeah. But it's very, very concentrated in populated areas. Right. So if you did that math in developed nations and then where there's populations concentrated, you might get number's closer to 20 or 30% of emissions in a major city. And it tends to be growing and it creates matter that is, you know, builds on your windowsill and gets deep into your lungs, passes the blood brain barrier. So it's not just CO2, but it's the other particles and carcinogens, et cetera, that are emitted in that in that kind of hydrocarbon combustion process. It's ugly stuff, right. And aside from removing the tailpipe, there's just no other way around it.
Adam Jonas: And so even in our relatively aggressive EV adoption scenario, we still unfortunately have internal combustion emissions growing for the next five years as the population of internal combustion vehicles still grows. So it's kind of like moving a supertanker. You got to, like, slow it down. You bring it to a standstill and start turning around gradually middle of the decade. And then when we get into the 2030s, it starts turning around really rapidly. But maybe this can move faster if there's policies out there to go after the worst offenders. The average age of car in the United States is about 12 years. The average car on the road here has one hundred and forty thousand miles on odometer. And so, again, finding a way we can target those worst offenders without creating problems for the low income households that were probably driving those types of things. That's going to be the challenge of science, capital and policy innovation to make it all work together.
Andrew Sheets: Adam, thanks for taking the time to talk.
Adam Jonas: Andrew, thanks for having me.
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