Net Zero Readiness Report: Transport

Transport

The automotive industry continues its transition from internal combustion engines to electric vehicles, although the pace of adoption varies widely from country to country. The worldwide sales share of electric cars tripled from 4.2 percent of sales in 2020 to 14 percent in 2022 according to the International Energy Agency (IEA). Electric cars’ share of the EU market doubled over the same period to 21 percent and rose fivefold in China to 29 percent. In Norway, which has led the world in their adoption, 88 percent of car sales in 2022 were of electric models.¹

The IEA says that two and three-wheeler vehicles, popular in many emerging and developing economies, are already highly electrified with more than half of India’s three-wheeler registrations in 2022 being for electric vehicles. Sales of electric light commercial vehicles and buses are increasing rapidly and manufacturers are bringing more electric heavyduty models to market.²

However, growth in some countries may be constrained by the ability of charging infrastructure to keep up. Problems include incompatible charging systems between countries and within them and capacity limitations of electrical grids. Several European governments have reduced financial support for those buying electric vehicles and their price has not decreased to compensate for this. Research in December 2022 for KPMG with automotive executives in Europe shows that they had lower expectations of future growth than in 2021.³

Jonathon Peacock, Global Oil & Gas Leader, KPMG in Australia, says that better battery performance, improved recovery of energy from braking and use of solar panels on vehicles could increase battery ranges. Meanwhile, the introduction of inductive charging that does not need a cable could make it more convenient, with Sweden planning to equip thousands of kilometers of road with this technology over the next two decades.⁴ “In geographically large environments or where there is a culture of driving such as in the US, people need confidence in their ability to recharge their vehicles,” he says. “Technology can sort some of this out.”

However, he adds that electric vehicles rely on the availability of a wider range and greater quantity of critical minerals that are needed for internal combustion engine ones, with a typical electrical model requiring 53 kilograms of copper compared with 22 kilograms in a conventional one according to the IEA.⁵ Some of these minerals are mined in only a few locations globally and China has 90 percent of the current processing capacity.

As well as changing the technology of private vehicles, countries can cut emissions by encouraging people to use shared alternatives. Public transport services, which typically have much lower levels of emissions per passenger kilometer than cars, saw sharp drops in use during the COVID-19 pandemic and data indicates many systems have not yet recovered. Passenger rail kilometers traveled in the EU fell from 414 billion in 2019 to 224 billion in 2020 and recovered only slightly to 261 billion in 2021, a drop of more than a third between 2019 and 2021.⁶ Use of tram and light rail systems globally followed a similar pattern, falling from around 14.8 billion trips in 2019 to around 9 billion in 2020 then remaining below 10 billion in 2021.⁷ Journeys on Transport for London’s bus, Underground, tram and rail services were around 10 percent lower in the second quarter of 2023  than the same period in 2019.⁸

Aviation

As a sector, aviation has long timelines. For example, given a successful focus on safety, the sector is cautious on changing regulations and processes, while aircraft built now are still likely to be in service in the 2040s. “2050 as the net zero target is pretty much tomorrow for this sector,” says Christopher Brown, Partner, Aviation Strategy, KPMG in Ireland.

Airlines are mostly reliant on manufacturers, air traffic control and fuel producers in reducing their emissions. However, there are some options they can take. The biggest ‘quick win’ is to reduce the formation of condensation trails or contrails, which research suggests may contribute to comparable amounts of atmospheric warming as the carbon dioxide from fuel.⁹ UAE airline Etihad is introducing technology that advises pilots on route and altitude changes that avoid conditions where contrails are more likely to form.¹⁰

Manufacturers are developing electric-powered aircraft but the weight of batteries means these are likely to serve only on short flights for the foreseeable future. Aviation’s plans to reach net zero by 2050, adopted by the International Civil Aviation Organization (ICAO) in October 2022, rest primarily on adopting sustainable aviation fuel (SAF). The organization says SAF will contribute 65 percent of decarbonization by 2050 with new technologies including hydrogen and electric engines, offsets and carbon capture making up most of the rest.¹¹ However, this is likely to be challenging for a number of reasons, and an analysis of the energy sector’s ramp up of planned SAFproduction suggests this target is already at risk.

SAF, which is compatible with existing aircraft engines and airport infrastructure, is made either from biofuels or synthetic e-fuels, chemical clones of kerosene produced with low carbon electricity. E-fuels look easier to produce on a large scale, as unlike biofuels they are not constrained by cropland and organic waste availability, although they would require significant amounts of low carbon electricity that most grids do not have to spare at present.¹²

SAF is typically several times as expensive as the kerosene currently used by aircraft, meaning a total switch would significantly add to ticket prices. Recent market research for KPMG has found that customers, while not prioritizing a flight’s tolerate increases in fares if these are a fair reflection of the extra cost of SAF.¹³

Moving entirely to SAFs looks technically feasible but apart from the cost, doing so by 2050 would require huge increases in production: “It looks like a task that would be exceptionally difficult to deliver on,” says Malcolm Ramsay, Global Head of Aviation, KPMG in Singapore. He adds that governments could support this by providing incentives for fuel producers to allocate capital to SAF production.

Logistics

The movement of goods may be less visible than moving people but it has nearly as great an impact on climate change. In 2018 road freight vehicles emitted 2.4GtCO2 globally compared with passenger road vehicles that produced 3.6GtCO2 according to the International Energy Agency. The organization expected that annual road  reight emissions would decline by just 0.1GtCO2 by 2030, compared with 0.5GtCO2 less from passenger road vehicles as the latter shift to electricity.¹⁴ The weight of batteries and longer average journey distances make trucks harder to electrify than cars although some vehicle makers have developed electric models.¹⁵

Logistics is a low-margin sector where decisions are usually based on price, making it difficult for operators to invest in decarbonization unless governments require this. Some such legislation is coming in Europe, requiring companies to collect and publish data on their emissions under the Corporate Sustainability Reporting Directive that came into force in January, as well as a proposed directive on corporate sustainability due diligence. The latter would initially oblige companies turning over more than 300 million euros (EUR) (US$318 million) to ensure their business models and strategies are compatible with the Paris Agreement on climate change and would be phased in over three years.¹⁶ International logistics providers need to comply with EU directives to operate within Europe while other jurisdictions including the US are introducing their own standards for corporate reporting.¹⁷

Collecting emissions data will not be easy for many logistics providers given high levels of subcontracting in what is a highly fragmented industry. Dr Steffen Wagner, Global Head, Transport & Leisure, KPMG International, says that accurate information can help companies to reduce their emissions and costs, such as by making use of empty trucks. Around one-fifth of the EU’s road freight kilometers in 2020 were used by empty vehicles with further unused capacity in partially empty ones.¹⁸ “If trucking companies collaborate, they can better use their existing resources and reduce the carbon footprint of individual goods,” says Wagner, adding that there is a trend towards using online platforms to match companies that have spare capacity with those requiring it. Logistics  providers can also cut emissions by installing rooftop solar panels on warehouses and using electrically powered robots within them, as well as making greater use of road-to-rail facilities that transfer freight to railways for parts of journeys.

Shipping

Like aviation shipping is a sector that changes slowly, partly due to difficulties regulating an inherently international business and partly as vessels remain in service for several decades. There are regulatory changes taking place, including the EU phasing in the use of its emissions trading system in maritime transport between 2024 and 2027 for all large ships that use the bloc’s ports regardless of flag of registration. This will likely require vessel operators to buy EU ETS allowances covering all of the greenhouse gas emissions generated while in EU ports and on voyages between them, as well as half of the emissions from journeys that either start or end in the EU.¹⁹

Monique Giese, Global Head of Shipping, KPMG International, says that while EU ETS offers a regional solution, the International Maritime Organization (IMO) is likely to hold the key to a global one. The IMO 2020 rule to cut coastal air pollution from sulfur in fuel oil could provide a model for reducing the sector’s greenhouse gas emissions. It was introduced through an amendment to the International Convention for the Prevention of Pollution from Ships and has led to vessels adopting very low sulfur fuels or installing exhaust gas cleaning systems.²⁰

A July meeting of the IMO’s member states in London adopted a net zero strategy that includes development of a pricing mechanism for maritime emissions over the next few years.²¹ Giese adds that the IMO 2020 sulfur rule shows a challenge to this in that countries may introduce different levels of penalties, with Singapore threatening two-year prison sentences and fines of up to 10,000 Singapore dollars (SGD) (US$7,340) for using non-compliant fuel while other countries have much smaller fines.²²

Batteries can power vessels for short journeys making them suitable for some ferries, but long-distance shipping will require low carbon fuels. The world’s largest international shipping companies, known as liners, are making different choices over which fuels to introduce. Denmark-based Maersk has ordered 19 vessels that run on green methanol.²³ Swiss-headquartered MSC already uses biofuels as part of blended fuels and is interested in developing use of hydrogen.²⁴ In February 2023 Germany-based Hapag-Lloyd announced it will work with UK-headquartered energy group Shell on developing use of biomethane and liquified e-methane.²⁵ Countries in Asia  are ahead of the rest of the world in building infrastructure to supply ships with liquid natural gas (LNG), a lower emission fossil fuel. Giese says that liners are choosing different types of low carbon fuel as supplies of each are constrained, but this fragmentation could make it difficult for energy companies to supply all of them at large scales. “It is getting better, but there is still a disconnect between energy companies and the liners,” she says, adding that many in the shipping industry would welcome further regulation in this area.

It will take several decades for shipping to move to low carbon fuels as vessels are typically in service for 20 to 30 years and often cannot be refitted to use alternative fuels. Increasing efficiency through better collaboration and greater transparency offers quicker benefits. These were the aims of TradeLens, a digital platform designed to support data sharing between organizations involved in supply chains, but in November 2022 its founders Maersk and US-headquartered technology provider IBM announced its closure.²⁶ Giese says TradeLens suffered from a lack of trust between organizations and regulatory concerns over sharing data. “But the idea was brilliant and I would guess that we will see something similar in the near future,” she says.