You don't need to be a Tesla (NASDAQ: TSLA) fan to know that lithium-ion batteries will play an essential role in turning electric vehicles (EVs) into mainstream transportation options. They've also become important in certain niche applications for stationary energy storage, such as helping utilities smooth out unusual demand on the grid a handful of times each year, or for early home energy-storage systems, in which they're often coupled with solar panels. So it wouldn't be a stretch to say that lithium-ion batteries have become synonymous with green and clean energy.
That's what makes a Swedish study that went viral earlier this week so surprising. Researchers found that manufacturing lithium-ion batteries releases an enormous amount of carbon dioxide into the atmosphere -- so much CO2, in fact, that an article accompanying the study estimated that an EV boasting a 100 kilowatt-hour battery would take 8.2 years of driving before it became greener than a gasoline-powered car.
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Numbers from the study and article swept through social media like a wildfire in the middle of a dry summer. They seem to throw a wrench in the environmental value proposition of EVs and stationary energy storage -- directly related to Tesla's business model and story stock aura -- but the good news is that investors need not worry. Here's why.
About that carbon budget...
In the first quarter of 2017, Tesla reported energy generation and storage revenue of $213 million. That includes $209 million in revenue from SolarCity, meaning stationary energy storage systems recorded revenue of just $4 million during the quarter. While that represents a $17 million decrease for lithium-ion battery sales from the year-ago period, mostly because of the timing of large sales to utilities customers, any Tesla shareholder knows that energy storage represents amazing growth potential.
The Swedish study and accompanying media coverage -- or the way it was perceived, at least -- put a large cloud over that growth potential. Why? First, it named a Tesla vehicles as a major culprit. Second, the study estimated that lithium-ion battery manufacturing resulted in between 150 to 200 kilograms of CO2 emissions per kilowatt hour of battery capacity. Included in that life-cycle analysis is everything that goes into battery manufacturing, from mining the metals (a relatively small amount of emissions) to the energy needed to fabricate the most widely used battery chemistries at commercial scale (most of the emissions). And, of course, the mid-range of 175 kg of CO2 per kWh of battery capacity is an enormous amount of emissions! That means a 100 kWh battery is slapped into an EV after having already emitted 17.5 metric tons of CO2.
But the numbers being circulated in the media don't add up. Consider that many are stating that a Tesla Model S with a 100 kWh battery pack will take 8.2 years of driving to pay off that carbon debt, or to begin eclipsing a gasoline-powered car in terms of emissions. A little bit of nuance is necessary to dig into this claim.
First, the Swedish study compared its figures to cars in the European Union, which are smaller than, and have smaller engines than, cars in the United States. That means they're more fuel efficient, which means it will take more time for an EV to pay off its carbon debt in the EU than in the United States. Second, the correct metric to evaluate this claim is not years, but rather miles driven, since everyone has different driving habits. And third, the first Tesla Gigafactory is being built to not directly consume any fossil fuels. A 70-megawatt solar array on the factory's rooftop -- 7 times as large as the second-biggest rooftop array -- attests to that point. Meanwhile, the company plans to reuse power stored during pre-market battery cycling processes.
Digging deeper, the U.S. Environmental Protection Agency states that burning one gallon of gasoline emits roughly 8.9 kg of CO2. Therefore, a gasoline-powered car would need to burn 1,970 gallons of fuel to emit 17.5 metric tons (MT) of CO2 -- the same amount released during the manufacturing process for a 100 kWh battery, according to the study. Therefore, depending on fuel economy, we can calculate the miles driven to equal that amount.
It makes the most sense to replace less efficient gasoline-powered cars with EVs. (For reference, the average fuel economy in the U.S. in 2015 was about 25 miles per gallon.) Every 5 mpg improvement in fuel economy adds about another year to the climate-change felony sentence of paying off a carbon debt for an EV with a 100 kWh battery for those who drive about 10,000 miles each year. While the numbers in the paper amount to a surprising amount of time, it's not really close to 8.2 years for most American drivers. In addition, once Tesla completes the first Gigafactory with renewable-energy inputs, you won't be able to find an EV with a better carbon footprint.
What does it mean for investors?
I'm not a fan of Tesla's hyped-up story, but the numbers being thrown around from the Swedish study paint too simple a narrative that doesn't hold up against further investigation. Tesla is planning on obtaining more energy than it needs from renewables. Meanwhile, there's future potential to drive down the carbon intensity of lithium-ion battery manufacturing by recycling batteries for materials content and through overall process improvements. If you're a shareholder worried about the implications from the Swedish paper, or the way it's being portrayed in the media, take it from a Tesla bear like me: You shouldn't be.
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