Knowledge@Australian School of Business Sustainability Research Article

Knowledge@Australian School of Business

For a carbon-constrained world, alternative fuel vehicles make sense. However, the initial excitement over cleaner, greener cars seems to have fizzled due to a classic chicken-and-egg problem, John Sterman, a professor from MIT Sloan School of Management tells Julian Lorkin of Knowledge@Australian School of Business. Motorists want readily available fuel supplies before they will opt en masse to buy electric, hydrogen or biofuelled vehicles. Energy companies want to be sure a market exists before they invest billions in the infrastructure. Is it a stalemate or is the solution a simple flick of a switch? An embrace of lower-carbon cars – along with many other transport options – must come, emphasises Sterman, currently the Michael J Crouch Visiting Professor at the Australian School of Business.

An edited transcript of the interview follows.

Knowledge@Australian School of Business: A decade or so ago, it was thought that we would have run out of oil and everybody would be driving either an electric car or some other alternative fuel vehicle by now, but that hasn't happened. So John, let's look first at why we get an initial burst of enthusiasm when there's a new technology?

John Sterman: There are many reasons for this. Let's look at alternative fuel vehicles, which is an area of particular importance for our society, given the risks of climate change, limitations and national security issues around the availability of oil, rising prices and so on. This is something that we've been studying for some time now. In the case of vehicles, you have plenty of wonderful new technologies for alternatives to the dominant internal combustion engine (ICE) gasoline-powered vehicle; there's electric, bio-diesel, and potentially hydrogen. But there's a long history of attempts to introduce these alternatives that have gone through this pattern of sizzle and fizzle. In Argentina, Canada, the US and New Zealand, compressed natural gas vehicles all started out with great promise. There was uptake, people were buying these vehicles, but then the market would fizzle out.

What's going on there? In the case of vehicles, a major problem is the infrastructure chicken-and-egg problem. Nobody is going to buy an alternative vehicle if they can't be sure that they can get fuel for it anytime and anywhere. Even if they don't drive anytime anywhere, they feel that they must have ubiquitous fuel availability. Of course, the energy supply companies are not going to be willing to invest the hundreds of billions of dollars that it takes to articulate that infrastructure until they're sure there's a market. So, there's no infrastructure, no attractiveness for the vehicles, no purchases of those vehicles, no investment in infrastructure. You have a reinforcing feedback that's acting as a vicious cycle that damps down innovation.

That's just the start though. Today these alternative vehicles are more expensive than conventional vehicles and you can't get the variety of makes and models and options and so forth that you can get with conventional vehicles. Through learning curve effects we know that if the industry develops through scale economies, the price and performance and variety of these vehicles will all improve dramatically. There's no question that that's going to happen.

But, how do you get the scale without the market? It's a situation where you can't get going without a push.

Unfortunately a push – in the form of subsidies or tax incentives, marketing programs and guarantees for the fuel providers – tends to be too little and for too short a time to push that market over the tipping point to become self-sustaining. (We know) this from programs that have been put in place in many countries that have experienced the sizzle and fizzle.

Knowledge@Australian School of Business: How have you researched this?

John Sterman: We've been developing a set of computer simulation models that mimic the way people drive: where they need to go; the length of their trips and so on; whether they get range anxiety about how much fuel or electricity is left in their vehicle. (We've also looked at) how they make the purchase decision about a vehicle. The model has a very broad boundary, so it also includes the behaviour of the automakers. How do they allocate R&D between different kinds of vehicles? How fast do those vehicles improve with skill and learning? There's also the supply chain for the critical components and the fuel infrastructure, so it's a multi-actor simulation and behavioural model that captures: how people buy cars; how they choose to drive; how the autos are developed and sold; pricing; features; performance; and the behaviour of the fuel providers that create the infrastructure to fill up your vehicle.

Knowledge@Australian School of Business: But, the sizzle and fizzle factor is natural, isn't it? Many people are enthusiastic about a new technology when it's first announced – here is a great answer that may save the world and may be cheaper in the future. Then, there's a very long lead time before anything is developed. I know a lot of your research looked at how the internal combustion engine was initially launched, and then it took many years before it was adopted in the 1880s and 1990s.

John Sterman: Absolutely. The early history of the automobile industry is very instructive here. Internal combustion was actually a latecomer to the party for automobiles. There were steam automobiles first, but this was not a great technology because before you could hop in your car and go down to the grocer you had to build up a head of steam and it was inconvenient. But there were also electric vehicles early on and they were the early movers in the market. They were widely considered to be safe, quiet and convenient in cities and were used as taxis, for example. Internal combustion came later.

Back then, with electric vehicles, it was hard to expand the electric grid fast enough to allow people to recharge in the countryside or between towns, but it was pretty easy to get gasoline in every little town. One of the interesting things is that because vehicles back then were extremely inefficient and broke down a lot and were extremely uncomfortable – and the roads were bad – if you were driving from, say, Boston to New York on the Post Road, you basically had to stop in every town for fuel or water or repair or just to stretch your aching back. And that created demand for fuel infrastructure at every town along the way.

Today, we're facing two problems. The first is that an alternative vehicle needs to offer a range of hundreds of kilometres to be attractive so you don't need to stop everywhere, and that reduces the incentive for infrastructure investment. The second problem is when internal combustion entered the market around the turn of the 20th century, it was a new market. It wasn't saturated; there were no real competitors other than horses.

Today, we've had more than 100 years of dominance by the [internal combustion] gasoline engine and we're very good at making highly reliable, traditional cars. They're cheap, their performance is terrific. You can get any kind of car you want so the threshold for an alternative vehicle to become attractive is much higher now than it was 110 years ago.

Knowledge@Australian School of Business: Alternative cars also don't look that different from existing cars. When the first cars came on to the road, they were very different. There was the word-of-mouth factor as everybody talked about the latest development, the new model they'd seen.

John Sterman: That's a huge factor. And, I have to say that some car companies have recognised this and done very well. For example, Toyota styled the Prius so it was instantly recognisable. Whether you like it or not, you can instantly tell that's a Prius when it's rolling down the street. You can't (immediately identify) the other hybrids. It looks just like a Camry, a Focus or an Ultima – you can't tell that it's a hybrid – and that weakens the development of awareness and familiarity, which then suppresses market development.

Knowledge@Australian School of Business: There's also the factor that a failure of one development may lead to a perception that the whole technology is flawed, even when it's working.

John Sterman: This is a really interesting paradox. People are completely habituated to the idea of driving around on top of 80 litres of highly explosive gasoline. No problem. But people are incredibly fearful of driving around with a battery or with a tank of hydrogen or whatever the alternative fuel might be. It would take one Hindenburg to set back the entire platform for quite a while. So safety, which is important all the time, is even more important in the context of the alternative vehicles.

Knowledge@Australian School of Business: There are other alternative fuels that seem to be very successful, but only in niche markets. For instance, some South American countries have widely adopted ethanol.

John Sterman: Right, and Brazil is a great example here. But, what's not as well known about Brazil's transition to ethanol is that they failed in their first attempt. They have sugar cane resources that are able to make ethanol relatively cheaply and without having to import expensive foreign oil. But the first time they tried to go with an ethanol-based vehicle system, it was based on 100% ethanol and that meant incompatible fuel infrastructure. For the reasons we've discussed, it fizzled after a promising start. They relaunched their ethanol program, but this time with a blend. So today, it's Flex Fuel E85 – 85% ethanol – and all vehicles are Flex Fuel, so you can flip a switch, you can run on either. This appears to be successful because the Flex Fuel options allow you to obviate the infrastructure problem.

Biofuels are very promising. The lifecycle analysis of ethanol from sugar cane suggests it's probably better than gasoline. But in the US where we're making ethanol today from corn, it's pretty clear from lifecycle assessments that it's not helping with climate change. It's displacing land from food production to fuel production and pushing up corn prices. This causes serious problems for poor people around the world who can't afford then to eat. And on top of that, ethanol-based fuel from corn uses so much fossil fuel and has such deleterious impacts on the fertility of our land, pesticides, herbicides, run-off of fertilisers et cetera, it may even be increasing the net carbon emissions.

If we're to go down the biofuel route, we're going to have to find a way to do it with what's called third generation biofuels, such as ethanol made from cellulosic feedstocks and genetically engineered biofuels coming from algae. People are working on this intensively, but it's not ready for prime time yet.

Knowledge@Australian School of Business: The lead times on that seem to be enormous. It may be 20 or 30 years before we get any successes. Whereas I can just go out and buy an electric vehicle now, although there's still that perception that the battery life isn't good enough.

John Sterman: People do face a challenge right now. The range you can get with a Nissan Leaf (battery) is less than 100 miles (161kms). In a Chevy Vault, which is a hybrid it's about 35 to 40 miles (56kms to 64kms) but when the battery is depleted it also has the gasoline engine – I've driven it, it's a terrific car! It's not doing very well in the marketplace right now because it's expensive, but it solves the range problem. You do give up cargo space in the vehicle given the energy density of the batteries right now. I think there's going to be progress on that front. There's a lot of exciting new technologies, whether its ultra capacitors or nano materials to increase the charge density in the battery. There's tremendously exciting things going on. We'll probably get where we need to go.

Charging time remains an issue. It can take 48 hours to charge your vehicle with conventional power out of the wall. That's fine if you're home and you can charge it overnight but it's not fine if you're out on the road and your battery has run down.

Another model that's being proposed is the battery swap technology that's being pioneered by Better Place, which is active here in Australia. I believe you can now buy the Better Place vehicle, the Renault Fluence. The idea there is, you rent the battery in the way you have a cell phone and buy minutes. You'll drive in to a swap station when your battery is running down and a robot will unscrew the current battery and put a fully-charged replacement in at no additional cost to you – it takes no more time than a conventional filling station and while you're waiting you can order a soda and a snack. For this to succeed widely, every auto-maker would have to agree to design their car with the same standard for the battery design and they're not willing to do that right now.

There's lack of agreement about standards for charging, plug shape and even signage; signs that will indicate that a parking space has a charge point and is reserved for electric vehicles only, in other words, “park here with a conventional car and you'll pay a big fine” – just as we have universally recognised signage for handicap parking spots. This lack of standards slows the adoption and diffusion of these technologies and can keep them from becoming economically sustainable.

Knowledge@Australian School of Business: Maybe some technologies will work in one country but won't work in another because the design of cities is different or the infrastructure is different. I'm thinking of, say, Berlin or Paris, which are perfectly designed for electric cars except you trip over as you're walking because people run electric cables along the pavement to charge up their cars.

John Sterman: The problem of charge points for on-street parking spaces remains largely unresolved. How are you going to bill for it? All these are technically solvable, but there's no standard or agreement so people improvise and you get this extension cord problem or power theft and so forth. I actually think those are all solvable problems.

The real issue though, and we've been talking about vehicles, is there are just too many cars. We're going to have to make a transition away from internal combustion gasoline to a renewable low-carbon fuel, but there are still just too many cars.

If everybody in the world lived and drove the way Australians do today, global greenhouse emissions would be equivalent to 172 billion tonnes of carbon dioxide per year which is something like five times more than the total world emissions today. We need to reduce emissions by about 80% by 2050 in order to avoid the worst risks of climate change. Whether cars are electric or conventional, we're in deep trouble here because if everybody drove like Australians currently do, there would be more than five billion private vehicles on the roads and they would take up an area larger than the country of Austria, just in parking spaces – that's without any roads to get the cars out of that parking lot. This is not going to happen.

We're going to need more mass transit; we're going to need alternatives to vehicles. You're probably aware of the multi-day 60km-long traffic jam in China in 2010. This is just the beginning, too many cars. So yes, we're still going to have private vehicles, but we're going to need more light rail, trams, buses and inner city trains in order to address the problem of mass mobility in a world of 9.3 billion people by 2050.