Non-exhaust related atmospheric automobile pollution

Foreword

The question of non-exhaust related automotive air pollution is a good example to show the interest of Qivalio’s approach. The Qivalio group is composed of an independent research provider, Spread Research, founded in 2004, a credit rating agency, Qivalio, registered with ESMA since 2013 and a non-financial rating agency, Ethifinance, founded in 2004.

For several months, the regulatory and strategic evolution of socially responsible investment has been intertwined with a conceptual debate about the objective of sustainable finance measurement methodologies. Two terms are often used: financial materiality and double materiality. Financial materiality has the advantage of being able to envisage a homogenization of methods. Dual materiality adds impact materiality to financial materiality, which seems necessary to capture the specific character of sustainable development analysis. According to Munoz-Torres (2017) there are four conditions for this sustainability analysis: the integration of environmental, social and governance (ESG) dimensions, the intergenerational nature of the analysis, the consideration of the entire life cycle of a product, and the consideration of stakeholders.

In this two-part study, Qivalio is pleased to put in action the quintessence of its ‘raison d’être’, consisting in its ability to measure both:

• Impact materiality, i.e. information about impacts not on financial variables, but on the environmental and social conditions of life on Earth. Upon an as thorough as possible analysis/measurement of these impacts, negative as well as positive, it is then possible to articulate an informed opinion about their financial consequences.
• Financial materiality as commonly understood in the financial markets, including that of these environmental and social factors, i.e. their quantitative contribution, in plus or minus, to financial metrics in the next 12 months according to sufficiently solid, and therefore generally agreed, assumptions.

Credit analysts from Qivalio focus on credit materiality (e.g. financial materiality from a lender’s perspective seeking to gauge the creditworthiness of its borrower¹), whereas analysts from Ethifinance focus on impact materiality. In our view, this automobile pollution subject matter shows the value of a complementary approach, conducted in two different entities, but within the same group.

In the part of this study devoted to the materiality of the impact, we will first see that this subject is indeed a systemic and global environmental issue, that it involves the entire automotive value chain, that it also involves stakeholders, such as local authorities, and finally that the solution is not only a question of environmental technology, but includes social and governance issues. We will then assess the potential financial impacts for some of the players in the industry, even though there is little information disclosed on this subject.

This dual materiality analysis is based on the OECD survey on non-combustion related air pollution, available at the following link Non-exhaust Particulate Emissions from Road Transport: An Ignored Environmental Policy Challenge | en | OECD

The extra-financial part of the present study was carried out in partnership with the Master Defis of the University Sorbonne Paris Nord.

1 In credit materiality, only those elements that have a quantifiable impact on the ability to repay debts are factored in. The financial materiality, linked to the stock market valuation of future revenues, is not taken into account.

Executive Summary

Non-exhaust related atmospheric automobile pollution is a major contributor to one of the so-called 10 planet boundaries: atmospheric aerosol loading (Planetary boundaries – Stockholm Resilience Centre). As such, a complete policy overhaul is needed to solve this issue, as explained in the seminal survey published by the OECD in December 2020¹.

• The development of electric vehicles (EV) will not address all environmental issues related to the automobile industry.
• The question involves all the players of the car industry, from original equipment manufacturers (OEM) to brake makers going through chassis and tire makers, as well as road concessions potentially.
• The solutions require not only end-of-pipe technologies (filters) but also new technologies (tires, brakes, materials) or new business models (car sharing, tires renting) and new uses of cars.
• So far, throughout the value chain of the automobile industry, companies’ disclosure is rather poor and not substantive enough to provide financial impact estimates of this emerging issue.
• However, some players, at every layer of the industry, seem to have a higher exposure risk to this issue, and others have developed products or expertise that could make them the winners of this issue if they really transform their model to provide sustainable solutions for all. Table E1 : Risk exposure and solutions to this issue

1 Op.cit.

1) A sustainable development issue with a strong environmental and social impact

A) Non exhaust related pollutions are a global environmental issue

In its study released in 2020, the Organization for Economic Cooperation and Development (OECD) highlighted the topic of non-exhaust particulate matter (PM) emissions. These result from the wearing down of tires, brakes, and road surfaces as well as the resuspension of road dust. Atmospheric PM is divided into two categories: atmospheric particles with an aerodynamic diameter below 10 µm (PM10) and atmospheric particles with a diameter below 2.5µm (PM2.5). Too often, these pollutions are considered secondary pollutions, local pollutions, gathered in the air pollutions, with atmospheric ozone, nitrogen and sulfur oxides. But they actually contribute to one of the 10 global planet boundaries: aerosol pollution (Stockholm Centre on Resilience). These emissions of fine particles are generated by the combustion of fossil fuels from fixed sources (thermal power plants) or mobile sources (cars), as well as by the emissions of fine particles from brakes and tires.

The OECD study brings together the different scientific data and shows the importance of these sources of pollution among the total air pollution by particles (including larger particles).

Table 1: Importance of non-combustion related pollution in PM pollution (source: OECD, 2020)

B) It is an issue that has a strong economic impact … for the community and an important social impact in terms of public health

Air pollution, which also includes ozone pollution and the part of fine particles pollution linked to it, represents a total cost of nearly EUR 100 bn per year (according to an estimate of a French Senate report in 2015). As a comparison, this is twice the amount of external costs generated by tobacco. Air pollution is responsible for 45,000 deaths per year in France, according to the same Senate report.

C) This is an issue that concerns the entire automotive value chain and beyond

This is an issue that does not only concern manufacturers or suppliers of tires or braking systems. It is an issue for the entire industry: manufacturers, tire makers, brake system specialists, chassis producers, raw material suppliers (steel, aluminum, etc.). All these elements contribute directly to pollution or indirectly through the increase in vehicle weight. This relationship between pollution and weight is one of the factors transcending the entire automotive industry on this issue. This eco-systemic character extends even beyond the borders of the automobile, since road maintenance, and in particular road surfaces and their lack of wetting, play a secondary role in the return of these fine particles into suspension.

Table 2: The different sources of particulate matter pollution (Source: Emissions Analytics finds pollution from tire wear can be 1,000x worse than exhaust emissions – Green Car Congress)

The different analyses and measurement methods gathered in the OECD study lead to an estimate of 10% of fine particle pollution linked to these non-combustion emissions, with a stock effect and a possible multiplier effect (from 2 to 4) provided by the resuspension phenomenon.

This is an issue that calls for a certain radicalness in strategic choices

As shown in the following table, the exhaust related emissions of fine particles linked to combustion have been reduced by half from 2000 to 2014, for any kind or size of vehicle. On the other hand, other emissions remained stable from 2000 to 2014.

Table 3 : evolution of particulate matter pollution (OECD, 2020)

(LDV = light duty vehicles et HDV = heavy duty vehicles)

The forecasts of these emissions show that the progression of electric vehicles will not lead to a decrease in these emissions, as displayed in the next table (OECD, 2020).

Table 4: Trend estimates of exhaust and non-exhaust PM 2,5 and PM 10 pollution in California (2000-2035) (source: OECD, 2020)

In view of these findings, the OECD is calling for a radical change in policy, including the following three initiatives:

1. a combined reduction in particulate emissions from braking and tires,

2. regulatory changes to encourage manufacturers to build lighter vehicles,

3. reduction of traffic in cities.

The second and third points show that this issue is not to be reduced to an environmental or a technical problem. It is also a much broader social problem, given at least three reasons:

1.      PM pollution is not only a local problem; it is a global issue too (due to atmospheric transfers, such as winds). In an experiment carried out at different spots in Ile de France, PM from other regions represented on average 70% of total PM pollutions measured. However, on the spots close to the Paris beltway, local pollutions are concentrated and may represent up to 60% of total pollution (source Wikipedia).

2.      The shaky awareness of the population: more than 50% of French people when asked say they want cars which pollute less and yet SUVs (which are heavier and consume more oil) represented up to 40% of sales in 2020.

There is no ‘one-size-fits-all’ solution in the Urban Vehicle Access Regulation (UVAR), with a tax scheme, a low emission zone, or a labelling of the car, restricting the right to drive to newer cars. This technical solution appears to discriminate against poorer and suburban populations. There is a need for a deep reengineering of urban planning to build up a consensus around an understanding of urban life, its transport needs as well as its basic and more advanced social needs, and more practically to build P+R areas around cities.

2. A pollution growing despite the emergence of electric vehicles

While it is difficult to define a precise date when the automotive industry as a whole launched its transition toward a greener/decarbonated strategy, we believe the communication of the industry leaders on the subject has intensified over the past two years, and especially amid the pandemic. What is now obvious to the entire industry is that thermal engines are bound to be replaced by electric vehicles. But will this change solve all the issues associated with pollution? Not so fast!

A) The transition toward greener vehicles goes through the electrification of vehicles

Almost all original equipment manufacturers (OEMs) have either launched an EV model (full-electric model) over the past five years or have announced the release of such a model for the months/years ahead. Pioneers in the field even released their first model some ten years or so ago: Tesla (roadster in 2008), Nissan (Leaf in 2010), Opel (Ampera in 2011), Renault (Kangoo ZE in 2011 and more notably the Zoe in 2012). Even though Toyota is set to release its first-ever full-electric vehicle only in 2022, the Japanese manufacturer also deserves some credit – it was the first to launch a hybrid car (thermal engine associated with electric batteries), back in 1997 with the famous Prius.

Today, most manufacturers are on a gradual path toward the conversion to EVs, converting part of their range to full-electric or at least introducing hybrid models. Volvo for instance has the ambition of having 50% of its range made up of full-electric vehicles by 2025, the rest consisting of hybrids, and to be full-electric by 2030.

However, strategies also differ concerning which types of vehicles are expected to be full EVs first. While some OEMs, such as Peugeot or Mini, recently launched a full electric version of their iconic city-dweller models (208 and Cooper respectively), more premium manufacturers, such as Audi, Mercedes or Jaguar, have opted for a development of their full EV range starting with the top of their range, that is to say SUVs. If this seems logical, based on the range of these manufacturers, it is of significance with respect to the future of automotive, especially considering expectations regarding the autonomy of the batteries and the driving range.

Before we dig into the analysis of the financial impacts of this transition, it is necessary to clarify the different types of electrification technology in vehicles. The first technology was introduced through hybrid vehicles, which combine thermal engines with batteries. They can be of two types: hybrid electric vehicles (HEVs), the batteries of which can be charged while driving but not through a charging port, and plug-in hybrid electric vehicles (PHEVs), which can be charged through a charging port in addition to charging while driving. Battery electric vehicles (BEVs) are full-electric vehicles which no longer have thermal engines and rely solely on batteries which can be charged through a charging port. Tesla, which was the first full-electric manufacturer is notably the most advanced manufacturer in that field. Not only did the US manufacturer build several models of EVs, it also created an ecosystem with its own superchargers, the power of which enables a full charge in c.40 minutes. Fuel-cell electric vehicles (FCEVs) are still rare; and the first public model dates back to 2014 with the Toyota Mirai. But the technology is appealing and some famous manufacturers, such as Faurecia, Plastic Omnium or Michelin, believe this might be the technology of the future and are currently allocating a lot of their R&D budgets to make it work on a larger scale.

B) Electrification does not mean the end of pollution

There are different types of electrification, one of which still involves combustion engines: hybridation. As long as hybrid models exist, some exhaust emissions will still be carbonated. What is less known, however, is that the shift toward no-thermal engine vehicles does not mean the end of emissions and pollution. Over the past five years, there have been numerous debates about which of diesel and petrol engines were the most harmful with respect to global warming and health. Petrol engines are considered to be more damaging with respect to CO₂ emissions (global pollution) while diesel engines eject more fine particles (local pollution), responsible among other things for respiratory health problems.

While they do not involve exhaust emissions, electric vehicles are no strangers to non-exhaust emissions. And since the future of the automotive industry is being written through the development of electric vehicles, it is a fair assumption that going forward the vast majority of PM emissions will come from non-exhaust emissions. As evidenced by the OECD report, many factors can influence non-exhaust PM emissions such as the weight of the vehicle, the material composition of the brakes, of the tires, and of the roads, the driving style, and the amount of dust on the road. As such, electric vehicles are not going to bring solutions to this issue. Worse, they could even aggravate the issue. Why is that so?

Because of the weight of the batteries, electric vehicles are often heavier than similar internal combustion engine vehicles (ICEVs). This is especially true with larger vehicles with large batteries to increase the driving range. The OECD emphasized in its report that EVs are estimated to emit 5-19% less PM10 from non-exhaust sources per kilometre than similar ICEVs across all classes of vehicles. However, the results are much tighter with respect to PM2.5. While light EVs are estimated to emit 11-13% less PM2.5 than ICEVs, heavier EVs are estimated to emit 3-8% more PM2.5 than ICEVs. As a result, we do share the conclusion of the OECD that going forward, the attractiveness of long-range EVs as well as large vehicles (SUVs) could entail an increase in non-exhaust PM emissions. This would be aggravated in dense urban areas which already suffer from PM pollution, whether from exhaust pipes or non-exhaust processes. It would surely be counter-productive to have diesel cars banned from the most dense cities around the world only to see non-exhaust PM pollution increase due to heavy EVs.

Tire wear is a factor of non-exhaust PM emissions. The increase in the development of SUVs over the last ten years, combined with the emergence of a ‘trend’ for wider, larger tires, has increased non-exhaust pollution. Far from being over, we believe most OEMs have embraced the trend and now offer large rim sizes for vehicles which could easily support smaller sizes. There is also a link between the weight of the vehicle and tire wear. The weight of vehicles has increased over the past ten years on the back of technological development, comfort and safety. As evidenced with the increase in BEVs, the weight of vehicles is not expected to be reduced. Tire composition is also critical in non-exhaust PM emissions as particles derive from the components of tires. Despite significant efforts to reduce harmful materials in the composition of tires, such as polycyclic aromatic hydrocarbons (PAHs), which have been banned from tires in Europe since 2009, the composition of a tire is a very complex process which involves c.200 components such as natural rubber, synthetic rubber (deriving from oil), carbon black, chemicals, steel and textile, etc.

Brake wear is another factor contributing to non-exhaust emissions. There are two ways of reducing the speed of a moving vehicle: either by pinching the disc with the pads or by using engine brake, which in the case of EVs also allows regenerative braking, which means it enables charging the battery while braking. Brake wear emissions can be influenced by the driving style, the composition of brakes discs and pads, temperature, the intensity of friction between the disc and the pads, as well as the weight of the vehicle.

Road wear results from the friction between tires and roads. When the friction happens, minerals and components of bitumen and the road surface become airborne, therefore causing PM pollution.

Road dust resuspension describes the phenomenon of particles which accumulated on roads becoming airborne again. We are talking about particles emitted from tire wear, brake wear, road wear as well as other particles which derive from human activity. Road wear and road dust resuspension are significant contributors to non-exhaust PM emissions because their intensity is higher in urban areas where the population is dense and where weather conditions aggravate the issue. For instance, studies have found that road dust is responsible for 70% of urban PM10 emissions in Sweden, where cars drive a significant part of the year with studded tires.

3) Mix of environmental and social solutions to this pollution

One of the common denominators in non-exhaust PM emissions is weight. The heavier a vehicle, the more PM emissions there are. One of the main solutions is thus to reduce the overall weight of the vehicle. According to a study by Aranca (quoted below), 28% of the weight of a vehicle comes from the body, 28% from the powertrain, and 27% from the chassis (the remainder comes from other interior and exterior components such as seats or glass parts). In order to reduce the weight of a vehicle, manufacturers can reduce its size, use lighter materials, or limit the power of the engine and the top speed.

Table 5 : Automotive components weight statistics (Automotive Component Weight Statistics | Aranca)

Again, tires are very complex products and the trend is to go for bigger rims, which in return require larger tires. EVs also require stronger tires to support their torque. One possible solution would be to define standard sizes for vehicles and put an end to the trend of always designing larger wheels. Another possible course of action would be to limit the increase in the volumes of sales of SUVs and trucks (in the US). An overview of recent car launches shows that the trend for OEMs is to replace older models with new models designed as SUVs or crossover models. In other words, the old sedan and hatchback cars we used to see 20 years ago have now been replaced by bigger, heavier cars which were previously the prerogative of families. SUVs also have poorer drag coefficients Cx, which results in increased tire wear. The recent commercial launch of the Hummer EV by GMC is another example of a trend going the wrong way. The vehicle will weigh 4.1 tons and will be equipped with 35’ rims and 1,000hp, and will deliver 0 to 100km/h in 3.5 seconds, a performance similar to that of supercars such as Ferraris. GM is not the sole manufacturer to release high-duty EVs. Ford has just released an electric version of its iconic F-150 pickup as well. These examples could let to believe that the bad choices come mainly from car manufacturers, notably in the US. However this is a more widely shared problematic understanding. In France, the discussion of the legal implementation of the “convention citoyenne pour le climat” displayed a good example of these shaky awareness. The French Parliament stumbled to implement the relevant weight threshold of 1600 kg for a supplementary tax and agreed only on the 1800 kg threshold, which would concern less than 5% of new vehicles.

EVs are famous for their regenerative braking. Some Tesla owners have boasted that they rarely use the braking pedal as releasing the acceleration pedal combined with good anticipation is sufficient to control the braking of their cars. The best way to reduce the friction and brake wear would be to limit the weight of vehicles in general and to cap their maximum speed as brakes are designed to cope with the most extreme situations which can occur.

For example, technical solutions exist but they have not yet been commercially developed to become standards or have not yet found their economic model. Three examples can be cited:

– Ferrodo’s Eco-Friction brake pads, without metal compounds, developed in 2016 and which has not seen commercial development to match the promised innovation.

– The particulate filter created by Mann + Hummel installed on DHL’s fleet of vehicles in 2019.

– Michelin’s puncture-proof tire, which is scheduled to be fitted to General Motors’ vehicle fleets by 2024. This tire is made of natural materials only and therefore biodegradable. The question for Michelin is to move from a sales business model to a rental business model for companies buying these car fleets.

We note the case of Michelin, which communicates on these products, with respect to its technical performance, but not its strategy of reducing environmental impacts with these products.

Road composition and maintenance is another area where improvements can be made in the technics and materials used. In an interview, Vinci Autoroutes’s chairman Pierre Coppey replied to a question regarding the company’s responsibility for CO₂ emissions that even if the company was not part of the issue of CO₂ emissions, it was certainly part of the solution. But so far he has not mentioned the issue of non-exhaust related pollution or road resuspension.

Reducing the number of vehicles is undoubtedly the most radical solution. While some countries have tried to impose a ban on the most polluting cars in the most urban areas, the so-called urban vehicle access regulations (UVAR) areas, or have simply banned cars from certain streets or areas, some have also tried to incentivize people to drop their individual cars and to adopt more environmentally-friendly transportation, especially during the pandemic. That could open market opportunities for car-sharing solutions.

4. Who could be the winners and losers of the evolution of the industry as well as future environmental regulation?

A) An issue that is not well disclosed by companies

Before identifying potential financial impacts, we have tried to collect the relevant information to find the environmental and social impacts of these issues.

It is clear that this issue goes against the whole strategy of the automotive sector over the last 20 years, to go for ever more spacious vehicles and, as such, more bulky, heavier and more energy consuming vehicles.

Therefore, it is understandable that we do not find many information from the different actors of the chain. For the moment, we are reduced to identifying indicators of exposure to risk (weight, materials used, percentage of electrification of vehicles). Even this information seems difficult to obtain.

We can summarize the available information by sector in the following table:

Table 6: Disclosure of companies in the automotive sector

For the concession and road management companies, we have not found any relevant disclosure. As discussed in the previous section, the only issue raised by Vinci is about the carbon emissions related to the use of motorways.

This low level of information from companies is understandable for three reasons. First, scientific information, and in particular the development of commonly accepted measurement tools, is still recent. This is the sense of the OECD’s analysis of the various scientific measures on the subject. Secondly, tire producers have joined together in a sectoral initiative within the World Business Council for Sustainable Development precisely to measure these non-combustion-related pollutions. Finally, many European brake pad manufacturers are engaged in a European LOWBRASYS research program. This program was launched in 2015.

B) Identification of potential winners and losers in this context of incomplete information

We have highlighted the major impact of the weight of vehicles. If we took the very improbable assumption that governments worldwide will be willing to impose taxes or ban vehicles based on their weight, the most obvious losers would be US manufacturers. With an average of some hundreds more kilos than their European peers, US vehicles are among the heaviest in the world, which is also one of the reasons why they are very rare in Europe as not only do they not suit European roads, but European environmental rules make them too expensive to buy and to operate.

Other obvious losers in the industry would be manufacturers which have failed to upscale and diversify their products by targeting lighter products. Going forward, HSS and aluminium will be the most used materials for chassis, powertrain or body parts, and even some battery parts. To some extent, carbon fibre and magnesium could also be solid challengers, but they will probably remain niche products prioritized by premium and luxury car makers because of how expensive these are. Whether plastic, an oil-derived product, will remain an industry favourite for the manufacture of body parts such as bumpers remains to be determined. As emphasized by Plastic Omnium in its press releases, plastic is a good fit for the most advanced technologies used in most recent models, such as RADARS and cameras, as plastic does not interfere with the waves of such equipment. Most raw materials providers – such as SSAB, Arcelor Mittal, SGL Carbon, and Outokumpu – communicate on weight gain and their advantages for the reduction in CO₂ emissions. However, none has communicated specifically on the topic of non-exhaust emissions and the importance of weigh reduction as well. While Arcelor is the market leader with an estimated 17% market share, SGL Carbon’s composites and fibres material (CFM) business unit generates 46% of its revenue from the automotive market. Should composites become a regular component in the future, we believe the group could benefit from the trend for weight reduction in the automotive industry.

With respect to tire manufacturers, communication is intense regarding the creation of ‘green tires’, ‘fully recycled tires’. There is little doubt in our mind that the 5 largest tire manufacturers (Michelin, Bridgestone, Continental, Goodyear, Pirelli) will, at some point, manage to manufacture recycled, performing tires suited for EVs while limiting their impact on the environment. We believe the question is rather: should regulation evolve with respect to vehicle weight, would there be an impact on them? Pirelli made the strategic choice a few years ago to focus on the premium and prestige niche with tires ≥ 18’ designed for SUVs and sports cars. Similar to the assumption we made regarding US manufacturers, should the trend in favour of SUVs be put to rest in the next two decades, we would see generalist manufacturers such as Michelin or Bridgestone as better prepared for the change rather than a niche manufacturer such as Pirelli, which may seem odd given Pirelli’s current performance.

Very little communication is made as yet regarding non-exhaust PM emissions or brake composition by braking systems manufacturers, making it difficult to sort out potential winners and losers. However, it is worth noting that Brembo, a notorious brand among racers, communicates on its commitment to the European Modify Drivers’ behaviours to Adapt to Lower Emissions (MODALES) program, which aims to analyse the impact of drivers’ behaviour on the environment, in order to lower emissions in general.

Finally, we stand by the opinion of the OECD that, going forward, EVs should not be exempt from UVARs as they already are a major contributor to non-exhaust pollution – and could become an even greater one in the near future. Another option could be to introduce new regulation based on a coefficient, the calculation of which would be the weight of the vehicle divided by the number of passengers.

In conclusion, we are not implying that the switch of the automotive industry toward EVs is a mistake; it is part of the solution to CO₂ emissions, although car production and energy production will definitely have to be factored in if one wants to assess the true impact on emissions. However, we – along with the OECD – are pointing out that EVs are not a ‘miracle solution’ to all pollution issues deriving from the automotive world. The sooner they are factored into forthcoming regulations, the better it will be.

Appendix : List of companies surveyed

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