What's the Real Impact from ICEV Bans? Monthly Report to Future Fuels Outlook Members February 2018

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1 Key Points What's the Real Impact from ICEV Bans? Monthly Report to Future Fuels Outlook Members February 2018 In a highly anticipated decision, the German Federal Administrative Court (Bundesverwaltungsgericht) in Leipzig ruled that cities can ban highly polluting diesel cars if necessary to achieve NO2 emission limits. The crux of the ruling is that while German federal law does not permit zone- or distancerelated traffic bans specifically for diesel vehicles, in the light of the EU law obligation to comply with its NO2 limit as soon as possible, the national law can be disapplied and measures such as a ban can be taken to fully comply with EU law. Such a ruling could ultimately lead to a host of other bans in German cities and perhaps beyond. The same week of the court decision, Rome's mayor announced plans to ban diesel cars from the city's center beginning in 2024, while Milan officials announced it would make the city "diesel free" by Now, 19 cities and 5 countries have announced some kind of action to ban or limit the internal combustion engine vehicle. (See Table 1) There could be an impact on liquid fuel demand for passenger car transport from a global ICE ban by 2040, but overall oil demand will continue to increase and so will carbon emissions. I reviewed traffic congestion data against World Health Organization (WHO) PM2.5 data to see what other cities could potentially be "car ban targets" in the coming years. There were a number of cities in Latin America, one in Asia, and one in North America. That city was Los Angeles, which ranked number one as the most congested city in the world that also fails to meet WHO PM2.5 targets. Legislation is currently pending in the California legislature to phase out the ICEV. 1

2 Introduction This week, in a highly anticipated decision, the German Federal Administrative Court (Bundesverwaltungsgericht) in Leipzig ruled that cities can ban highly polluting diesel cars if necessary to achieve NO2 emission limits. The verdict of the Bundesverwaltungsgericht one of the five German federal supreme courts and the court of last resort for administrative law came in an appeal brought by two German states (North Rhine-Westphalia and Baden-Württemberg) against lower court decisions that supported bans for highly polluting diesel cars in Dusseldorf and Stuttgart. The ruling could ultimately lead to bans in a host of cities in Germany and perhaps even other parts of the world. As a matter of fact, in a separate action this week, Rome's mayor announced plans to ban diesel cars from the city's center by 2024 and Milan officials announced it would make the city "diesel free" by This report reviews the status of this case and car (internal combustion engine vehicles or ICEV) bans in general. It also brings in some analysis from BP's just-released 2018 energy outlook as it is one of the first organizations to not only acknowledge the potential impact on oil and vehicle demand, but also tries to chart that out. Concluding, I highlight world cities with both the worst traffic congestion and air pollution globally. Could these cities follow the ban wave? More on the German Court Decision Previously, the Administrative Court in Dusseldorf and the court in Stuttgart had ruled that diesel bans are legally permissible and necessary to achieve NO2 limit values as soon as possible in the two cities. The state of North Rhine-Westphalia and the state of Baden-Wuerttemberg had contested those two judgments. As background, the Düsseldorf Administrative Court had directed the State of North Rhine- Westphalia, following a complaint by the environmental organization Deutsche Umwelthilfe, to amend the clean air plan for Dusseldorf so that it could take the necessary measures to ensure that the NO2 limit value of 40 μg/m³ averaged over one year is met as soon as possible contains in the city of Düsseldorf. The state was directed to consider further measures to limit the emissions of diesel vehicles by amending the clean air plan. The Bundesverwaltungsgericht (Supreme Court) ruled that limited driving restrictions for certain diesel vehicles are legal and not excluded. The Stuttgart Administrative Court undertook to match the Stuttgart clean air plan to that of the state of Baden-Wuerttemberg in taking the necessary measures for the fastest possible compliance averaged over a calendar year emission limit for NO2 levels of 40 μg/m³ and the hourly limit value of 200 μg/m³ with a maximum of 18 authorized exceedances in the calendar year in the Stuttgart environmental zone. The Bundesverwaltungsgericht ruled that the administrative court judgments were largely unobjectionable in the light of EU law. Both EU law and German federal law require, through the 2

3 use of appropriate measures contained in clean air plans, to keep the period of emissions exceeding the limit values in place since January 1, 2010 as short as possible. It also ruled that while German federal law does not permit zone- or distance-related traffic bans specifically for diesel vehicles, in the light of the EU law obligation to comply with the NO2 limit as soon as possible, the national law can be disapplied and measures such as a ban can be taken to fully comply with EU law. With regard to the Stuttgart clean air plan, the Administrative Court had stated that only a ban on all motor vehicles with diesel engines below emission class Euro 6 and for all vehicles with gasoline engines below emission class Euro 3 in the Stuttgart environmental zone would constitute a suitable air pollution control measure. Proportionality needs to be considered, the court said, meaning that bans should be phased in, starting with Euro 3 and 4 vehicles. Euro 5 vehicles may not be subject to traffic bans before September 1, 2019 (four years after the introduction of the Euro 6 emission standard). Current Status of ICEV Bans Other cities and several countries have announced initiatives to ban, phase out or otherwise limit diesel ICEVs or the ICEV in general. Most of these cities/countries are in Europe where many cities are experiencing worsening air pollution, particularly PM2.5 and nitrogen dioxide, that is largely attributed to diesel vehicles. Air pollution and congestion mitigation are thus primary drivers, but so is the need to reduce GHGs and as an additional dimension in Europe, the Dieselgate scandal. The table below summarizes current car ban/limitation/phase out initiatives globally. Table 1: Cities/Countries that Have Taken Recent Action to Ban or Limit ICEVs City, Country Summary Athens, Greece Diesel cars and vans banned by 2025 Bangalore, India Barcelona, Spain China Copenhagen, Denmark Curitiba, Brazil Investing heavily in public transport and converted its 6,000 buses to CNG while discouraging car use All cars older than 20 years old banned from 2019; exploring the "superblock" concept (more green spaces and less street) to clean up its air and to reclaim space from road transportation Plans to ban ICEVs but has specified no timeline The city has prioritized bikes over cars and has closed to vehicles for decades, long before the car ban issues came to the fore. Copenhagen prioritizes bikes over cars and now has more cycles than people. Has invested heavily in public transport; currently nearly 70% of the city goes to work by public transport France Ending the sale of ICEVs by 2040 Germany Legislation banning permits for new ICEVs as of 2030 is currently under consideration. 3

4 City, Country Summary Hanoi, Vietnam Plans to ban motorbikes by 2030 Helsinki, Finland The Finnish capital plans to drastically reduce the number of cars on its streets by investing heavily in better public transport, imposing higher parking fees, encouraging bikes and walking and converting inner city ring roads into residential and walking areas. India Plans to replace all ICEVs with EVs by 2030 London, United Kingdom Has instituted policies to require cleaner buses, incentives to encourage taxi drivers to choose cleaner vehicles (i.e. ZEVs), added bike lanes and has started the ultra low emission zone (ULEZ) a year early, in Under the ULEZ program, all cars, motorcycles, vans, minibuses, buses, coaches and heavy goods vehicles (HGVs) will need to meet exhaust emission standards (ULEZ standards), or pay a daily charge, when travelling in central London. Considering restricting parking spaces in the city, pay-per-mile road pricing for some vehicles, car-free days and zones. Madrid, Spain Diesel cars and vans banned by 2025 Mexico City Diesel cars and vans banned by 2025; new regulations to eliminate parking requirements in buildings signed in June 2017 Milan, Italy Plans to make the city "diesel free" by 2030 Munich, Germany Considering legislation to ban all diesel ICEVs from the city center New Delhi, India Norway The Netherlands Oslo, Norway Paris, France Has banned all new large diesel cars and SUVs with engines of more than 2,000cc and is phasing out thousands of diesel taxis; vehicle registrations for diesel ICEVs made at least 10 years ago will be canceled or won't be renewed Has set a goal (not a ban) that all new cars sold by 2025 should be zero (electric or hydrogen) or low (plug-in hybrids) emission vehicles. This is a very ambitious but feasible goal with the right policy measures. By 2030, all new cars in the Netherlands must be zero emission. Initially created car-free zones, but citizen backlash caused city managers to rethink this policy and now the city is eliminating parking spaces. Diesel cars and vans banned by 2025; has already banned all diesel cars manufactured before 2000; bans cars in many historic central districts on weekends; imposes odd-even bans on vehicles; makes public transport free during major pollution events and encourages car and bike-sharing; a long section of the Right Bank of the river Seine is now car-free and a monthly ban on cars has come into force along the Champs-Elysées. Rome, Italy Diesel cars banned from the city's center by 2024 Stuttgart, Germany Plans in 2018 to ban diesel cars that do not emissions standards from entering the city on days when pollution is heavy United Kingdom Zurich, Switzerland Ending the sale of conventional ICEVs by 2040 (i.e., presumably hybrid vehicles will still be allowed) Has capped the number of parking spaces in the city, only allows a certain number of cars into the city at any one time, and is building more car-free areas, plazas, tram lines and 4

5 City, Country Summary pedestrianized streets. Source: Future Fuel Strategies, 2017 In addition, the U.S. state of California is now considering legislation that would ban or phase out the ICEV. The legislation would ban the sale of fossil fuel cars under 10,000 pounds in California after As I ve noted before, there have been car-free days around the world for many years and a strong interest in making cities more livable through encouraging more public transport, transitoriented development, walking and cycling. As I recently highlighted in the September 2017 report, even U.S. cities are also instituting parking restrictions as a way to limit cars. However, and as I have also said, car bans are a new phenomena. The figure below highlights some of the dynamics underpinning the push for car bans. Figure 2: Dynamics Underpinning the Car Ban Phenomena Air Pollution Country/Auto Industry Competitiveness Dieselgate Outrage Mitigation as We Urbanize Climate Change: Meeting 2 C ZEVs as the (Only) Answer Source: Future Fuel Strategies, 2017 Car bans started in 2016, first as a backlash against increasing car-related traffic pollution in Europe. Diesel NOx emissions in 2015 have been linked to 28,500 deaths annually with 11,500 of those deaths linked to excess emissions. Moreover, particulate matter pollution (PM10 and PM2.5) is also a major issue in Europe. Exposure to PM2.5 was responsible for about 467,000 premature deaths in 41 European countries in

6 Within the EU itself, premature deaths exceeded 430,000. Car bans took on a new sense of urgency and dimension following the eruption of the Dieselgate emissions cheating scandal. While U.S. regulators acted swiftly and decisively to punish Volkswagen civilly and criminally (and are now investigating other companies for similar emissions cheating), in Europe, member states have moved more slowly. This has raised the issue of impropriety between member states and their respective auto industries, most recently highlighted in Germany. What Car Bans Could Mean for Oil and Vehicle Demand: Not Much, According to BP So, will the mounting number of city (and country) ICEV bans significantly impact oil demand? According to BP's recently released annual outlook, the answer is probably not. This is illustrated in the figure below. Figure 3: Energy Consumption and Carbon Emissions by Fuel and Scenario BP says it depends on the extent to which emission standards are adjusted in light of the ban, shown in the figure below. 6

7 Figure 4: Passenger Car Liquids Demand and Carbon Emissions in the ICE Ban Scenario The company said: "If emission standards are unchanged...the impact of the ICE ban on liquid fuel demand would be negligible, since the impact of the greater number of EVs would be offset by less investment in other forms of vehicle efficiency. But assuming emission standards are tightened by a corresponding amount, such that there is no offset from smaller efficiency gains, the ICE ban reduces liquid fuel demand by around 10 Mb/d relative to the ET [baseline] scenario [shown in figure 4]. Even so, the level of oil demand in 2040 in the ICE ban scenario is higher than in 2016 [shown in figure 3]. The relatively small impact of the ICE ban on total oil demand means its impact on carbon emissions is also relatively limited. Even if the electricity used to power additional EVs is assumed to be generated entirely by renewable energy and so leads to no additional emissions, carbon emissions in the ICE ban scenario still increase by 7% over the Outlook, little different from the ET scenario, and far higher than in the even faster transition scenario......to gauge the significance of this uncertainty, consider an alternative scenario in which governments impose a worldwide ban on the sale of all ICE (and PHEVs) cars from 2040 onwards, with the regulations gradually increasing, such that around a third of all cars 7

8 sales in 2030 are BEVs, two thirds in 2035 and 100% in Under this alternative ICE ban scenario, electricity powers around 20% of total passenger car Vkm in 2030 and twothirds in This compares with nearly 15% and 30%, respectively, in the ET scenario." In summary, there could be an impact on liquid fuel demand for passenger car transport from a global ICE ban by 2040, but overall oil demand will continue to increase and so will carbon emissions. The demand will be coming from regions such as Asia and Africa, and from sectors such as buildings and industry. Within transport, the demand growth will come from aviation, shipping and trucking. However, BP expects the passenger car fleet to grow substantially, dominated by the ICEV (unless the shifts discussed above happen) though the fuel efficiency of the parc will substantially tighten and improve through Figure 5: BP's Outlook for the Passenger Car Parc Conclusion: Cities with the Worst Traffic & Air Pollution The firm INRIX, Inc. in February 2018 published its annual Global Traffic Scorecard in which it analyzed 1,360 in 38 countries. Tellingly and maybe surprisingly, the U.S. ranked as the most congested developed country in the world, with drivers spending an average of 41 hours a year in traffic during peak hours, costing them nearly US$305 billion in 2017, an average of US$1,445 per driver. According to INRIX, the U.S. had three of the top five most congested cities globally, with 8

9 Los Angeles (first), New York (tied for second with Moscow) and San Francisco (fifth) costing an economic drain upwards of US$2.5 billion caused by traffic. Los Angeles' drivers spent an average of 102 hours last year in traffic jams during peak congestion hours, costing drivers US$2,828 each and the city US$19.2 billion from direct and indirect costs. Direct costs relate to the value of fuel and time wasted, and indirect costs refer to freight and business fees from company vehicles idling in traffic, which are passed on to households through higher prices, according to INRIX. The table below shows the 25 most congested cities in the world in 2017, according to INRIX. I then pulled data from the World Health Organization (WHO) and other sources to highlight in red those cities with air pollution issues, in particular, those that do not meet WHO standards for particulate matter (PM2.5 and/or PM10) or ozone and its precursors (such as nitrogen oxides and/or volatile organic compounds). Ten cities are in the U.S. alone. The prevailing thought by some in the industry in the U.S. is that car bans will never be implemented there. That could be true. Some cities, such as New York and Washington, DC are implementing congestion pricing schemes, similar to what is in place in London, that are meant to address congestion and raise revenue that could be applied to other initiatives, such as improving public transport. On the other hand, congestion pricing has been controversial because of, among other issues, the disproportionate economic impact to the poor. Moreover, most of these cities are "climate cities." Their mayors have committed to implementing the Paris Agreement. They may find that congestion, increasing air pollution and the desire to meet 2 C may push them into uncharted territory -- restricting, limiting or banning cars from their cities. Meantime, the California legislature is considering legislation that would phase out the ICEV by Table 2: 25 Most Congested Cities in the World in Rank Global City Country Continent 2017 Hours Spent in Percentage of Total Drive Time in 1 Los Angeles U.S. North America % 2 Moscow Russia Europe 91 26% 2 New York City U.S. North America 91 13% 4 Sao Paulo Brazil South America 86 22% 5 San Francisco U.S. North America 79 12% 6 Bogota Colombia South America 75 30% 7 London* U.K. Europe 74 13% 8 Atlanta U.S. North America 70 10% 9

10 2017 Rank Global City Country Continent 2017 Hours Spent in Percentage of Total Drive Time in 9 Paris* France Europe 69 13% 10 Miami U.S. North America 64 9% 11 Bangkok Thailand Asia 64 23% 12 Jakarta Indonesia Asia 63 20% 13 Washington, DC U.S. North America 63 11% 14 Boston U.S. North America 60 14% 15 Istanbul Turkey Europe 59 19% 16 Mexico City Mexico South America 58 13% 17 Chicago U.S. North America 57 10% 18 Medellin Colombia South America 57 21% 19 Krasnodar Russia Europe 57 25% 20 Seattle U.S. North America 55 12% 21 Saint Russia Europe 54 21% Petersburg 22 Dallas U.S. North America 54 6% 23 Zurich Switzerland Europe 51 17% 24 Rio de Janeiro Brazil South America 51 15% 25 Munich* Germany Europe 51 16% Source: INRIX, 2017 Note: Starred cities are those that already have or will have a car restriction or ban in place. See Table 1. What about countries? Of the 38 countries covered by the INRIX 2017 Traffic Scorecard, Thailand leads with the highest average hours spent in peak congestion (56 hours), outranking Indonesia (51 hours) and Columbia (49 hours), followed by Venezuela (42), and the U.S. and Russia both with 41 hours. Among developed nations, U.S. and Russia shared top of the most congested countries in the world. 10

11 Table 3: 15 Most Congested Countries in the World in Rank (2016 Rank) Country Continent 2017 Peak Hours Spent in 1 (1) Thailand Asia 56 2 (2) Indonesia Asia 51 3 (2) Colombia South America 49 4 (6) Venezuela South America 42 5 (4) Russia Europe 41 5 (5) U.S. North America 41 7 (8) Brazil South America 36 7 (7) South Africa Africa 36 9 (10) Turkey Europe (11) U.K. Europe 31 Source: INRIX, 2017 Are any of these countries likely to announce a nationwide ICEV ban beyond the U.K.? I think it's unlikely at this time, especially as a number are lower income or emerging economies. They will most likely take other routes to managing congestion and air pollution first that don't jeopardize or potentially impact their citizens' mobility. That will include cleaner conventional fuels, more stringent emission and fuel economy standards, improved and expanded public transport, among other measures. 11