The Internal Combustion Engine Bubble

The internal combustion engine (ICE) needs to be phased out, and the vehicle fleet needs to be electrified to make road transport compatible with the Paris Agreement’s goal of limiting warming to 1.5°C. However, just how fast this transition must happen, what it means for the auto industry and whether the companies’ planning delivers what is needed to comply with the 1.5°C goal remains unclear. This report aims to shed light on these questions. It defines the number of ICE vehicles that could still be sold within a 1.5°C carbon trajectory and projects the auto industry’s ICE sales based on the assessment of four major manufacturers’ plans – Toyota, Volkswagen, Hyundai/Kia and General Motors – and quantifies the overshoot. To do so, this report draws on the concept of the “carbon bubble” – fossil fuel reserves in the books of energy companies that need to remain in the ground if we are not to exceed 1.5°C of warming.1 These unburnable reserves result in stranded assets and pose significant other financial risks for companies and their investors. This study applies the bubble concept and examines the extent to which these risks exist in the transport sector. The body of this report consists of three key chapters: Chapter 2 lays out how many light-duty vehicles (LDV) – cars and vans – with internal combustion engines can still be sold worldwide before the global CO₂ budget for limiting a temperature increase to a maximum of 1.5˚C is exhausted. Current and future trajectories for car sales are broken down into five drive-train technologies with four different engine sizes. The aim of this analysis is not to forecast the possible market development of the global LDV market but to develop a 1.5°C-compliant benchmark for sales trends in the auto sector. The analysis concludes in a quantified amount of ICE vehicles which can be sold before the manufacturing of internal combustion engines needs to cease globally. Chapter 3 projects future ICE sales of Toyota, Volkswagen, Hyundai/Kia and General Motors based on the companies’ announced sales targets for electric vehicles. Chapter 4 identifies the gap between the manufacturers’ projected future sales and the number of ICE vehicle sales compatible with a 1.5°C carbon trajectory. As governments are expected to increase legislative and regulatory efforts to comply with the 1.5°C target of the Paris Agreement, this gap – an ICE bubble – is expected to become an increasing business and financial risk.