Assessing California’s Climate Policies—Transportation

Assessing California’s Climate Policies— Transportation MAC TAYLOR LEGISLATIVE ANALYST DECEMBER 2018 analysis full gutter AN LAO REPORT LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Table of Contents Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Key Takeaways From Review of Major Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Light-Duty Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Overview of Light-Duty Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Assessment of Costs and Benefits: Light-Duty Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Other Issues for Consideration: Light-Duty Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Heavy-Duty Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Overview of Heavy-Duty Incentive Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Assessment of Costs and Benefits: Heavy-Duty Vehicle Incentives . . . . . . . . . . . . . . . . . . . . . . . . . 24 Other Issues for Consideration: Heavy-Duty Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Low Carbon Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Overview of LCFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Assessment of Costs and Benefits: LCFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Other Issues for Consideration: LCFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Vehicle Miles Traveled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Overview of SB 375 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Assessment of Costs and Benefits: SB 375 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Other Issues for Consideration: SB 375 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 www.lao.ca.gov analysis full gutter AN LAO REPORT LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Executive Summary Overview of Report. Chapter 135 of 2017 (AB 398, E. Garcia) requires our office to annually report on the economic impacts and benefits of California’s statutory greenhouse gas (GHG) emission goals—statewide emissions to 1990 levels by 2020 and to 40 percent below 1990 levels by 2030. This report provides our assessment of the effects, of major policies in the transportation sector intended to help meet these goals, as well as identifies some key issues for the Legislature to consider as it makes future policy and budget decisions. In a companion report, Assessing California’s Climate Policies—An Overview, we describe the general types of economic effects of state climate policies, key challenges in measuring these effects, and broad issues for the Legislature to consider when designing and evaluating its climate policies. State Has Many Policies to Reduce Transportation Emissions. Transportation is the largest source of California’s GHG emissions—mostly from light-duty passenger vehicles. Emissions declined from 2006 to 2016, but have increased slightly in recent years. As we discuss in this report, the state has many policies in place to reduce GHG emissions in the transportation sector. The major categories of programs include (1) reducing emissions from light-duty vehicles, (2) reducing emissions from heavy-duty vehicles, (3) increasing the use of lower carbon fuels, and (4) reducing the number of vehicle miles traveled. These programs are intended to work in a variety of ways. For example, some programs provide financial assistance incentives to reduce the cost of adopting lower emission technologies, while other programs are designed to increase the costs of using higher emission technologies. Some programs are targeted towards consumers of fuel, while other programs are targeted towards vehicle manufacturers and fuel producers. Key Takeaways From Review of Major Policies. In this report, we assess each of the four major categories of programs in terms of their costs and benefits, as well as identify key issues for legislative consideration. Based on our review, we identified several important takeaways. Broadly, we find that: • Overall Economic Impacts and Benefits Are Unclear. The overall effects of the state’s policies aimed at reducing transportation GHGs are largely unclear. The Legislature might want to consider options to facilitate a more consistent evaluation of these policies, such as requiring regular retrospective evaluations of these policies and prioritizing policies that are designed in ways that facilitate evaluation. • Large Number of Policies Targeting Transportation Emissions Creates Challenges. Although implementing multiple programs could be justified in some instances, the wide range of programs creates several challenges, including (1) interactions whereby emission reductions from one policy offset those from a different policy, (2) challenges in evaluating the net effects of each policy, (3) a potential lack of coordination among policies, and (4) higher administrative costs. • Policies Are Relatively Costly Ways to Reduce GHGs, but Could Be Valuable in Limited Instances. The state’s transportation-specific policies are generally much more costly ways to reduce emissions than carbon pricing policies, such as cap-and-trade. As a result, the Legislature might want to consider relying more heavily on cap-and-trade to achieve www.lao.ca.gov 1 analysis full gutter AN LAO REPORT low-cost GHG reductions. In some limited instances, there is a rationale for targeted policies that complement carbon pricing—such as those that promote public zero-emission vehicle fueling infrastructure and that promote technological innovation. Some policies might also be justified based on their ability to reduce co-pollutants. • Effect on Emissions in Other Jurisdictions Unclear. The effect of California’s transportation policies on emission reductions in other jurisdictions is especially difficult to quantify. In concept, policies such as those aimed at supporting technological innovation seem most likely to achieve “spillover” benefits from reductions in other jurisdictions. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT INTRODUCTION Chapter 135 of 2017 (AB 398, E. Garcia) requires and vehicle miles traveled (VMT). Our assessment our office to report annually on the economic is largely based on our review of available program impacts and benefits of the state’s greenhouse gas data, agency reports, and academic studies. (GHG) limits. This report is one of two 2018 reports We begin the report by providing background that fulfill this requirement. In a companion report, information on California’s major GHG policies in Assessing California’s Climate Policies—An the transportation sector and summarizing some Overview, we provide conceptual overview of of the key takeaways from our review. Then, for the overall effects of the state’s GHG reduction each group of policies, we (1) provide an overview policies. In this report, we assess in more detail of the policies, (2) assess the economic costs and the effects of the state’s major GHG policies aimed benefits of those policies, and (3) identify issues for at reducing emissions from the transportation the Legislature to consider as it continues to modify sector, specifically policies focused on light-duty and develop policies to achieve its statewide GHG vehicles, heavy-duty vehicles, low carbon fuels, goals. BACKGROUND State Has Ambitious GHG Reduction Goals. activities occur in California (as does much of Chapter 488 of 2006 (AB 32, Núñez/Pavley) the refining activity for fuel sold in the state), the established the goal of limiting GHG emissions inventory reflects estimates for those emissions statewide to 1990 levels—431 million metric tons in other sectors (such as industrial sector). In of carbon dioxide equivalent (CO2e)—by 2020. In addition, the estimates assume no net carbon 2016, Chapter 249 (SB 32, Pavley) extended the dioxide emissions from combusting biofuels, such limit to 40 percent below 1990 levels—259 million as ethanol used in cars and biodiesel for trucks. metric tons CO2e—by 2030. As shown in Figure 1 In recent years, roughly 90 percent of emissions (see next page), emissions have decreased since from the transportation sector have come from AB 32 was enacted and were already below on-road sources, specifically passenger vehicles the 2020 target in 2016. However, the rate of (69 percent) and heavy-duty vehicles (22 percent). reductions needed to reach the SB 32 target are The remaining emissions have come from a variety much greater. of other sources, including ships, airplanes, and Transportation Is Largest Source of State rail. GHG Emissions. The California Air Resources Transportation Emissions Have Been Board (CARB) maintains a GHG inventory that Increasing in Recent Years. Figure 3 (see estimates emissions from most sectors of the state. page 5) shows the level of emissions from the According to the inventory, there were 429 million transportation sector from 2006 to 2016 (most tons CO2e emitted in California in 2016. As shown recent available data). As shown in the figure, in Figure 2 (see next page), these emissions came overall transportation emissions declined by from a variety of sectors, with transportation being 14 percent from 2007 to 2011. This includes the largest source of emissions (39 percent). emission declines from light-duty vehicles, We note that CARB’s emission estimates for medium- and heavy-duty vehicles (together referred the transportation sector are based on tailpipe to as heavy-duty vehicles), and other types of emissions only and do not include emissions transportation. However, transportation emissions associated with the extraction or production have increased since 2013, primarily from light-duty of gasoline or diesel products—also known as vehicles. These overall trends are affected by a “upstream” emissions. To the extent that these range of factors, including economic conditions www.lao.ca.gov 3 analysis full gutter AN LAO REPORT Figure 1 State Met 2020 Goal Early, but 2030 Goal More Ambitious Million Metric Tons of Greenhouse Gases 500 450 2020 400 AB 32 Target 350 300 2030 250 Actual Emissions SB 32 Target 200 150 100 50 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 Figure 2 and state policies (such as those intended to reduce emissions). Almost 40 Percent of GHG State Has Many Policies Emissions From Transportation Sector to Reduce Transportation Emissions. The state has many policies in place to reduce GHG Industrial emissions in the transportation Transportation sector. For the purpose of this report, we have categorized the major state transportation-related programs into four major categories: (1) reducing emissions Commercial and from light-duty vehicles, Residential (2) reducing emissions from heavy-duty vehicles, (3) increasing the use of lower carbon fuels, and (4) reducing VMT. As discussed in more detail later in this report, Agriculture, Waste, these programs are intended to and High GWP work in a variety of ways. For Substances example, some programs provide Electricity GWP = global warming potential. financial (or other) incentives to reduce the costs of adopting 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT lower-emission technologies, while Figure 3 other programs are designed to increase the costs of using Transportation Emissions Had Declined, higher-emission technologies. But Increased in Recent Years Some programs are targeted In Million Metric Tons towards consumers of fuels 200 (individual drivers, businesses, 180 and governments that rely on Total 160 vehicles), while other programs 140 are targeted towards vehicle manufacturers and fuel producers. 120 Light-Duty Vehicles Figure 4 (see next page) 100 summarizes the various programs 80 designed to reduce GHG 60 Heavy-Duty Vehicles emissions in the transportation 40 sector. 20 Other In addition to the major state programs identified in Figure 4, 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 the state oversees certain GHG = greenhouse gas. programs that are smaller in scale, as well as some programs that primarily are targeted at other cap-and-trade program. In addition, there are a goals, such as reducing criteria air pollutants. There number of federal programs and policies that are are also a number of other state programs that— designed to reduce transportation emissions. While while not targeted specifically at the transportation the above programs could impact GHG emissions, sector—could impact GHG emissions in this this report primarily focuses on the state’s major sector. The clearest example of this is the state’s transportation programs. KEY TAKEAWAYS FROM REVIEW OF MAJOR POLICIES Based on our review of the various polices amount and quality of available information about designed to reduce GHG emissions in the each major program varies significantly, but, in transportation sector, we identified several many cases, the available research on major important takeaways. Broadly, we find that effects is limited. Most notably, there are very few (1) overall economic effects, including effects on retrospective analyses—conducted by outside GHG emissions, are unclear; (2) the large number researchers or state agencies—that isolate the of different policies creates various challenges effects of each policy from other important factors for such things as program coordination and such as economic conditions and other policies. As evaluation; and (3) the policies are generally more we discuss in our companion report, these types of costly strategies to reduce GHGs than alternatives, analyses are often difficult for a variety of reasons. such as cap-and-trade, although they could For example, controlling for other factors that affect provide other important benefits in certain limited emissions (such as economic conditions) and circumstances. quantifying implicit and indirect effects often require Overall Economic Impacts and Benefits Are advanced statistical methods. In our view, such Unclear. The overall effects of the state’s policies analyses are critical for understanding the actual aimed at reducing transportation GHGs—both effects of state policies. In our assessment of each positive and negative—are largely unclear. The major category of policies later in this report, we www.lao.ca.gov 5 analysis full gutter AN LAO REPORT Figure 4 State Oversees Various Programs Designed to Reduce Greenhouse Gas (GHG) Emissions in Transportation Sector Light-Duty Vehicle Programs • Clean Vehicle Rebate Project. Rebate for purchase or lease of a new zero-emission vehicle (ZEV). • Clean Cars 4 All. Rebate to retire an older, high emission vehicle and replace it with a newer zero or lower-emission vehicle. • Single-Occupant Vehicle Decals. Program that allows ZEV drivers to use the high-occupancy lane even when containing only a single individual. • Clean Car Standards. Joint state and federal regulation requiring auto manufacturers to incrementally improve fuel efficiency and reduce GHG emissions from their vehicle fleets over time. • ZEV Mandate. State regulation requiring auto manufacturers to increase the number of ZEVs sold in the state. • Public ZEV Infrastructure Funding. Funding to support the installation of public electric vehicle recharging and hydrogen refueling stations. Heavy-Duty Vehicle Incentives • Demonstrations and Pilots. Grants for technologies and equipment that are not yet commercially available. • Programs for Early Commercial Deployment. Incentives for technologies that have passed the pilot stage and commercial models are starting to become available. • Programs Focused on Local Pollution Reductions. Programs primarily focused on reducing near-term reductions in local emissions, such as incentives for vehicle replacements. • ZEV Fueling Infrastructure. Programs that fund infrastructure for heavy-duty vehicle charging and refueling stations. Low Carbon Fuels • Low Carbon Fuel Standard. Regulation requiring reductions in the carbon intensity of transportation fuels. Vehicle Miles Traveled • SB 375. 2008 legislation requiring regional transportation planning agencies to create plans to reducing light-duty vehicle miles traveled. identify areas for future research that could help effects of these programs. Finally, the Legislature address key gaps in knowledge. could (1) prioritize policies that lend themselves The Legislature might want to consider taking to an evaluation of costs, such as market-based various steps to facilitate greater, more consistent policies where credit prices provide information on evaluation of state climate policies. For instance, program costs, or (2) design programs in a way the Legislature could require agencies to use an that facilitate evaluation, such as piloting programs independent expert review panel to comment on in certain parts of the state. the estimated costs and benefits of programs Large Number of Policies Targeting before they are adopted. It could also require Transportation Emissions Creates Challenges. departments to conduct retrospective evaluations The wide range of state (and federal) programs of major programs after they are implemented. As intended to reduce emissions can overlap and part of this process, the Legislature might also want interact in complex ways. For example, there to require state agencies to establish a plan for are a wide variety of policies aimed at promoting this retrospective evaluation before the program is light-duty zero-emission vehicles (ZEVs) such implemented. These additional evaluation activities as battery electric vehicles. These include a would likely result in additional state costs, but few different types of consumer rebates for ZEV could improve the available information on the purchases, a regulation requiring manufacturers to 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT produce a minimum number of ZEVs, and funding allocated to the highest priority projects. In for charging and refueling infrastructure. There are addition, having multiple programs could also likely some limited cases where more than one create confusion among potential program program is needed to effectively achieve a policy recipients. goal. For instance, separate (but coordinated) • Increased Administrative Costs. More policies meant to encourage both vehicle programs tends to increase administrative purchases and charging infrastructure might be overhead costs. At the time of this report, justified. However, having multiple programs often CARB had not provided updated information creates several problems or challenges, such as: on the administrative costs of its major programs. However, based on available • Interactions With Other Policies. In information, state administrative costs are some cases, emission reductions from likely at least in the low tens of millions of one policy could be offset by increases in dollars annually. (These costs are relatively emissions from other policies. For example, small compared to magnitude of the overall in some cases, interactions between state economic effects.) transportation-specific policies might interact with other policies—such as the Policies More Costly Than Cap-and-Trade . . . state cap-and-trade program, the federal We recommend the Legislature consider limiting Renewable Fuel Standard (RFS), or federal its GHG policies to those that achieve its policy fuel efficiency standards—in ways that goals most cost effectively, particularly as these “reshuffle” emissions to other jurisdictions, goals become more ambitious in future years. rather than reduce net emissions. This is Most notably, there is a broad consensus among an inherent challenge in implementing GHG economists that economy-wide carbon pricing— reduction policies at the state-level. As a cap-and-trade or a carbon tax—is the most result, the Legislature might want to consider cost-effective way to reduce emissions. In contrast, funding more research on the relationship some of the major policies aimed at reducing between different state and federal policies to emissions in the transportation sector—such as better understand: (1) how they interact with the low carbon fuel standard (LCFS) and financial one another and (2) the net effects of each incentives for ZEVs—appear to be much more policy. costly. As a result, the Legislature might want to • More Difficult to Evaluate Programs. These consider modifying or eliminating some of the more interactions also make it difficult to evaluate costly programs and, instead, relying more heavily the effects of each policy. For example, on cap-and-trade (or a carbon tax) to encourage although we know ZEV sales are increasing, the lowest-cost emission reductions. In practice, it is difficult to evaluate the effects of any this would likely lead to higher cap-and-trade one policy. In turn, this makes it difficult to allowance prices, but lower overall costs of GHG determine which policy the state should reductions. expand to achieve future state goals most . . . But Well-Targeted Complementary effectively. Policies Could Be Valuable in Limited Instances. • Potential Lack of Coordination. The In some limited instances, there may be a strong existence of multiple programs and rationale for additional state policies to complement administering agencies can make state a carbon price. Notably, in some cases, there coordination difficult. For example, three are other “market failures” that would prevent different state agencies administer different businesses, households, or governments from heavy-duty vehicle and infrastructure incentive taking low-cost emission reduction activities, programs—many of which fund similar types even with a carbon price in place. For example, of activities. Given the potential lack of there could be “network effects” related to electric coordination, it is not clear whether funds are vehicle deployment—meaning the demand for www.lao.ca.gov 7 analysis full gutter AN LAO REPORT ZEVs and charging and refueling stations is Effect on Emissions in Other Jurisdictions partially dependent on the availability of each other. Unclear. Given California’s small contribution Other policies to address market failures could to global GHG emissions, the Legislature might include research and development funding for want to give extra consideration to GHG policies new technologies or providing more information to that encourage reductions in other parts of the consumers about the products they purchase. world. Unfortunately, the effect of California’s Although some of these market failures transportation policies on emission reductions in almost certainly exist, we found limited evidence other parts of the world is difficult for our office to suggest that the current mix of policies are to evaluate. In general, targeted policies aimed effectively addressing these failures. The Legislature at supporting technological innovation—such as might want to direct agencies to ensure that any incentives for pilots and demonstrations of new GHG reduction policy beyond carbon pricing is technologies—seem more likely to encourage based on strong evidence that a market failure these types of “spillover” benefits than policies that exists and the policy is effectively targeted at address issues that are more California-specific, addressing that identified market failure. such as land use and transportation planning in California. We also note that some of the transportation policies—although not cost-effective tools for In the following sections of this report, we reducing GHGs—might still be worthwhile based on (1) provide background on each of the state’s the other benefits they provide (such as reducing major transportation policies aimed at reducing co-pollutants). If so, the Legislature will want to GHGs, (2) provide our assessment of the available ensure that these policies are effectively targeted information on their costs and benefits, and toward achieving these non-GHG benefits and that (3) identify key issues for legislative consideration. the overall benefits outweigh the costs. LIGHT-DUTY VEHICLES CARB estimates that 70 percent of GHG detailed description of the different types of ZEVs.) emissions from California’s transportation sector— The emphasis on ZEVs is consistent with state and 28 percent of all GHG emissions in California— policies, including Chapter 530 of 2014 (SB 1275, come from light-duty vehicles (specifically, cars de León) and Executive Order B-48-18, which set and trucks that weigh 8,500 pounds or less). targets of 1 million ZEVs on California roads by As discussed in detail below, the state oversees 2023 and 5 million ZEVs by 2030, respectively. several programs designed to reduce emissions There are currently about 400,000 ZEVs registered from light-duty vehicles, including (1) financial and in California, which is just over 1 percent of total other incentives for consumers to purchase and light-duty vehicles in the state (and about half of use more fuel-efficient and ZEVs, (2) regulations on all ZEVs nationally). We estimate that if the state auto manufacturers to sell more of these vehicles, reached the goal of 5 million ZEVs by 2030, their and (3) increased financial support for additional share of the total fleet would have to increase to ZEV charging and refueling stations. about 15 percent. Several of the state’s programs are specifically targeted at increasing the deployment of ZEVs, such as battery electric and hydrogen fuel cell vehicles. (Please see nearby box for a more 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT OVERVIEW OF purchased. Vehicles that qualify for the rebate are plug-in hybrid electric, battery electric, LIGHT-DUTY PROGRAMS and hydrogen fuel cell cars and motorcycles. Since 2016, lower-income households—those Clean Vehicle Rebate Project (CVRP) with incomes at or below 300 percent of the Provides Consumer Rebates. CVRP is intended federal poverty level—can receive an additional to increase deployment of ZEVs by reducing the $2,000 rebate. High-income households—over cost to consumers of obtaining these vehicles. $300,000 gross annual income for joint filers, for Specifically, the program provides rebates for the example—are ineligible to receive the rebate. purchase or lease of ZEVs by eligible individuals, Rebates to Date. As of November 2018, the businesses, nonprofits, and government agencies program had provided a total of $589 million in in California. As shown in Figure 5 (see next rebates to 264,000 consumers since it began in page), the amount of the rebate ranges from 2010. CVRP rebates are currently funded entirely $900 to $5,000, depending on the type of vehicle from the Greenhouse Gas Reduction Fund (GGRF), Different Types of Low- and Zero-Emission Vehicles There are a number of different technologies used by automobile manufacturers to meet state requirements for low- and zero-emission vehicles (ZEVs). ZEVs. A full ZEV has no tailpipe exhaust of any criteria pollutant or greenhouse gas (GHG). The different types of ZEVs include: • Battery Electric Vehicle—Relies solely on a battery to propel the vehicle and has to be recharged from an external power source. • Fuel Cell Vehicle—Uses an electrochemical reaction to combine hydrogen fuel and oxygen to produce electricity to propel the vehicle, with water being the other byproduct of the reaction. (Also referred to as fuel cell electric vehicles.) • Neighborhood Electric Vehicle—Low-speed battery electric vehicles. Other Types of Reduced Emission Vehicles. There are several categories of vehicles that have lower GHG and other air pollutant emissions compared to typical cars. Some of these categories are or have been qualifying vehicles for some of the state’s emission reduction programs. • Extended Range Battery Electric Vehicle—Utilizes an electric battery as its main power source for propulsion, but also has an auxiliary power unit (fueled by gasoline, for example) that can be utilized when the main power source is depleted. • Hybrid Electric Vehicle (HEV)—Combines a conventional internal combustion engine with an electric-propulsion system. Consequently, HEVs are at times powered by gasoline and at other times by an electric battery. • Hydrogen Internal Combustion Engine (HICE)—Uses hydrogen as the onboard fuel source for combustion, rather than gasoline. • Plug-in Hybrid Electric Vehicle (PHEV)—Uses a battery that can be recharged by plugging into an external power source—a type of HEV. • Transitional ZEV—Is a category of vehicles with 90 percent fewer tailpipe emissions than average gasoline powered cars, as well as meets other requirements. Can include PHEVs and HICEs. www.lao.ca.gov 9 analysis full gutter AN LAO REPORT purchase newer vehicles that Figure 5 meet specific requirements. CVRP Rebate Amount Based on Type of Technology Replacement vehicles eligible for Technology Type Examples Amounta the rebate include ZEVs as well as certain non-ZEVs and can Hydrogen fuel cell • Hyundai Tucson Fuel Cell $5,000 include used vehicles. The program • Toyota Mirai also provides an additional Battery electric • BMW i3 2,500 incentive to consumers who • Chevrolet Bolt reside in or near a disadvantaged • Nissan Leaf • Tesla Model 3 community. (For purposes of state climate policies, disadvantaged Plug-in hybrid electric • Audi A3 e-tron 1,500 communities are defined by the • Ford Fusion Energi • Honda Clarity Plug-In Hybrid California Environmental Protection Agency (EPA) based on various Zero-emission • Alta Motors Redshift EX 900 measures of environmental and motorcycles • Energica Ego a socioeconomic conditions within Applicants from lower-income households can receive an additional $2,000. High-income households are ineligible to receive the rebate. each census tract.) CVRP = Clean Vehicle Rebate Project. Currently, the program operates in two of the air districts in the which is supported by proceeds of the state’s state that have not reached federal cap-and-trade program on GHG emissions. As air quality standards—the San Joaquin Valley Air shown in Figure 6, most rebates have been for Pollution District and the South Coast Air Quality battery electric vehicles. Management District—though CARB is considering whether to expand the program into other areas Clean Cars 4 All Program of the state. In total, the financial incentive ranges Rebates to Replace Higher Polluting Vehicles. from $2,500 to $9,500 per vehicle. As shown The Clean Cars 4 All Program offers rebates in Figure 7, the specific amount a consumer is to certain consumers who retire their existing, eligible to receive depends on household income, older vehicles that have failed smog tests and the choice of replacement vehicle, and whether the consumer lives in or near a disadvantaged community. Consumers can participate in both the Figure 6 Clean Cars 4 All Program and CVRP if they meet Most CVRP Rebates for the eligibility requirements for both programs. Battery Electric Vehicles Over 3,000 Rebates to Date. In the first three Through July 2018 years of the program—through June 2018—the Other Fuel Cell Electric program provided about 3,700 incentives totaling $28 million. Funding for the program comes through a combination of vehicle-related fees and GGRF. As shown in Figure 8, over two-thirds of the replacement vehicles have been standard hybrids Plug-In Hybrid Battery or plug-in electric hybrids. Electric Electric Single-Occupant Vehicle Decals Allow Solo Drivers in Carpool Lanes. This program is designed to provide consumers a nonfinancial incentive to purchase and use ZEVs. State law allows qualifying electric, plug-in CVRP = Clean Vehicle Rebate Project. hybrid, and hydrogen fuel cell vehicles to use 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Figure 7 Clean Cars 4 All Program Incentive Based on Replacement Vehicle, Income, and Location Hybrid Electric Conventional Plug-In Hybrid Alternative Income Levela (20+ MPG) (20+MPG) (35+MPG) Electric Battery Electric Transportationb Residing in or Near Disadvantaged Community Above moderate — — — $5,500 $5,500 $2,500 Moderate — — $5,000 7,500 7,500 3,500 Low $4,000 $6,500 7,000 9,500 9,500 4,500 All Others Above moderate — — — $2,500 $2,500 $2,500 Moderate — — $3,500 3,500 3,500 3,500 Low $4,000 $4,000 4,500 4,500 4,500 4,500 a Moderate-income level is defined as from 226 percent through 300 percent of the federal poverty level. b Includes transit passes and is available in lieu of a replacement vehicle. MPG = miles per gallon. high-occupancy vehicle (HOV) lanes even when standards set by the federal EPA and fuel economy only a single occupant is in them. The Department standards set by the National Highway Traffic of Motor Vehicles (DMV) issues decals for cars Safety Administration (NHTSA). United States EPA identified by CARB as meeting the definition of a and CARB have established maximum average ZEV. (Previously, conventional hybrid vehicles were emission rates (grams of C02e per mile) that apply also eligible for decals.) Higher-income earners to each car manufacturer’s entire fleet of (1) cars who purchase a hydrogen fuel cell vehicle are and (2) light-duty trucks. These emission standards required to choose between receiving the decal or are scaled based on the size of each car or truck the rebate available through CVRP. (Higher-income so that larger vehicles face a less strict standards earners who purchase an electric or plug-in electric compared to smaller vehicles. The emission vehicle are eligible for the decal but not the rebate.) standards are scheduled to become more stringent 400,000 Decals Issued to Date. Since the each year through 2025. program began in 2001, the state has issued about 400,000 clean air decals. Very few decals Figure 8 were issued in the early years of the program, Most Clean Cars 4 All Program Rebates and conventional hybrid vehicle owners received Have Gone Towards Hybrid Vehicles most of the decals in mid- and late-2000s. In more From July 2015 Through June 2018 recent years, the total number of decals issued has increased significantly with most of these being for Internal Alternative Transportationa Combustion electric and plug-in electric vehicles. Plug-In Hybrid Clean Car Standards Battery Electric State and Federal Regulations to Reduce Fleet Emissions. The Legislature adopted Chapter 200 of 2002 (AB 1493, Pavley), which required CARB to develop regulations to reduce emissions from each auto manufacturer’s fleet of Conventional passenger cars and light-duty trucks (sometimes Hybrid referred to as the clean car standards or “Pavley Standards”). California’s standards, which first took a Includes transit passes and is available in lieu of a replacement vehicle. effect in 2009, are currently aligned with emission www.lao.ca.gov 11 analysis full gutter AN LAO REPORT To comply with the standard, manufacturers the regulation, CARB assigns a different ZEV estimate the emissions for each vehicle model credit—ranging from zero points to 4 points—to and compare it to the standard established for each qualifying vehicle model sold in California that vehicle size, generating credits for vehicles based on its technology and distance range. For with lower emissions than the standard and example, a fuel cell vehicle with a range of more deficits for vehicles with higher emissions than than 350 miles would receive a full 4 points, while the standard. At the end of each year, each a plug-in hybrid electric vehicle with an all-electric manufacturer is evaluated based on its entire fleet range of more than 80 miles per charge would of new cars sold. If the average emissions rate is receive a maximum of 1.3 points. In addition, under at or below the standard, the manufacturer is in the regulation manufacturers have other constraints compliance. The regulation also gives flexibility for on the amount of their compliance obligation that auto manufacturers that do not comply in a given can be met through transitional ZEVs (generally, year. For example, they can buy credits from other plug-in hybrid electric vehicles). manufacturers that overcomply with the regulation The regulation includes an annual requirement or use excess credits that were banked from that each medium and large manufacturer previous years. If a manufacturer does not comply generates or acquires a certain number of credits with the regulation in one of these ways, it faces a (expressed as a percentage of total cars sold). financial penalty. Figure 9 shows how this annual compliance Manufacturers have several options for how to requirement increases over time. Manufacturers modify their fleet over time in order to maintain can bank credits generated in prior years, as compliance with the regulation. For example, they well as buy excess credits generated by other can modify individual vehicles in ways to reduce manufacturers to ensure they have enough to meet emissions. This can include making changes that the annual requirements. Manufacturers that do not increase the fuel economy of the vehicle, such as meet their annual targets are required to make up by making the vehicle lighter or more aerodynamic. the deficit in subsequent years or face a financial It can also include other technological changes penalty. to the engine to make it more efficient or reduce leaks from air Figure 9 conditioning systems. In addition, manufacturers can change the mix ZEV Regulation Requires of vehicles they sell by promoting Increasing Compliance Rate Over Time and selling more low- and Credits as Percent of Total Light-Duty Vehicle Sales zero-emission vehicles. 25% ZEV Mandate Regulation Requires 20 Increased ZEV Sales. This CARB regulation is designed to 15 increase the number of ZEVs sold in California. CARB first 10 established the program in 1990, and it has been modified several 5 times in subsequent years. The current regulation, established in 2012, is intended to result in an increasingly higher number of 2018 2019 2020 2021 2022 2023 2024 2025 ZEVs being sold in California by Model Year ZEV = zero-emission vehicle. auto manufacturers. To implement 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Manufacturers Have Generated Excess challenge of finding refueling opportunities as less Credits to Date. Auto manufacturers have of a barrier to owning and driving a ZEV. Various overcomplied with the mandate’s regulatory state entities are responsible for implementing requirements to date. Through 2017, they have or overseeing the implementation of vehicle generated a net balance of 1.2 million unused charging stations and hydrogen refueling stations credits, which can be used for future compliance. that can be accessed by different segments of For context, we estimate manufacturers will need the public (versus installing charging stations at to have roughly 100,000 credits to meet the individuals’ homes). This includes installation of 4.5 percent regulatory requirement in 2018. ZEV infrastructure along major transportation routes (such as highways), as well as at apartment Public ZEV Infrastructure Funding buildings, commercial locations, and publicly Increased Spending on Charging and owned office buildings. Refueling Stations. The goal of this effort is Over $1 Billion in Spending. The largest public to build more electric charging and hydrogen light-duty ZEV infrastructure efforts overseen by refueling stations for the public to use. In so doing, state agencies are summarized in Figure 10. the expectation is that consumers will view the As shown, there is over $1 billion already spent Figure 10 Major State Zero-Emission Vehicle (ZEV) Infrastructure Programs Funding Program Agency Amount Source Description Volkswagen (VW) California Air $800 million over Volkswagen A 2016 settlement requires VW to invest settlement Resources ten years $800 million in ZEV projects—mostly for ZEV Board fueling infrastructure—in California over ten years. The first two rounds of spending will invest about $270 million to construct over 3,000 charging stations. Alternative and California Energy $275 million through Vehicle fees Spent about $40 million annually for public ZEV Renewable Fuel Commission 2018-19 infrastructure in past years. Recent budget and Vehicle actions increased that amount to $114 million Technology in 2018-19. Has funded about 7,000 electric Program charging and hydrogen refueling stations funded to date, and increased spending could result in more than an additional 10,000. Investor-owned California $230 million since Ratepayers Since 2016, CPUC has approved about utilities plans Public Utilities 2016 $230 million for ZEV infrastructure pilot projects, Commission primarily at multifamily residential, workplace, (CPUC) and other public locations. Estimated to result in over 12,000 charging stations. NRG settlement CPUC $100 million NRG Energy A 2012 settlement requires the energy company (one time) NRG to install at least 200 public fast-charging stations and infrastructure for up to 10,000 privately owned charging stations at residences and workplaces. Vehicle charging at Department $90 million over State General Fund The department has a plan to install 6,200 state buildings of General four years and special funds charging stations at state buildings for Services employees and the state fleet. Vehicle charging on Department of $20 million Fuel taxes The 2017-18 budget included $20 million to install state highways Transportation (one time) over 30 electric vehicle fast chargers along highway corridors. www.lao.ca.gov 13 analysis full gutter AN LAO REPORT or planned to be spent on ZEV infrastructure increase the number of ZEVs purchased, they also over the next several years. This funding comes identify several reasons why the effectiveness of from a variety of sources, including electricity rebates to increase demand, as well as reduce net ratepayers, private corporations (in response to GHG emissions, can be limited. Most importantly, legal settlements), and state funds. This spending some individuals receiving a ZEV rebate would is estimated to result in tens of thousands have purchased a ZEV even in the absence of the of additional charging and refueling stations California rebate. These consumers are sometimes throughout the state. referred to as “free-riders.” This might be because consumers believe that the long-term operational ASSESSMENT OF COSTS savings of owning and operating a ZEV—such as from reduced fuel costs—outweigh the additional AND BENEFITS: upfront costs to purchase the vehicle. In addition, LIGHT-DUTY PROGRAMS certain consumers are less likely to depend on a rebate for their purchase decisions if they are Based on our review of the literature and relatively wealthy and/or if they want to be “early discussions with academic and other experts adopters” of a technology. In fact, survey data in the field, it is impossible to draw definitive compiled by the Center for Sustainable Energy— conclusions regarding the amount of costs and which administers the CVRP for CARB—shows benefits associated with each of the light-duty more than half of consumers who received a CVRP programs described above. Largely, this is because rebate reported that they would have purchased a of two factors. First, program administrators have ZEV even if the program did not exist. not been required to develop and update cost In addition, the effectiveness of a ZEV rebate and benefit information for all of the individual on GHG emissions could be further limited even programs. Second, even where some of these in cases where a consumer would not have estimates have been developed, the various purchased a ZEV otherwise. Specifically, this could evaluation complexities described earlier in this occur when a consumer would have purchased report make it challenging to validate those a non-ZEV, highly fuel-efficient vehicle instead estimates. Consequently, we find it difficult to of a ZEV. This might occur, for example, with a compare the costs and benefits of each of these consumer that is specifically interested in reducing programs to each other or other GHG reduction his/her “carbon footprint” but where the ZEV price programs. Despite these research challenges, we is too high without the rebate. In such cases, the identify below some useful research findings about rebate does have the effect of encouraging a new the potential effects of these programs. ZEV purchase, but the net reductions associated GHG Emission Reductions with buying a ZEV rather than a highly fuel-efficient vehicle might not be that significant. Estimated GHG Reductions for Consumer For the two rebate programs—CVRP and Clean Rebate Programs Uncertain. A rebate can be Cars 4 All Program—CARB has issued GHG expected to increase consumer demand for a reduction estimates. Specifically, CARB estimates ZEV because the rebate effectively reduces the that both programs would result in about six tons price the consumer has to pay for the vehicle. of GHG emission reductions over the lifetime of There are a number of studies that find that each vehicle. In reviewing the GHG estimates for rebates do increase ZEV (or other low-emission these two programs, we note that they rely on vehicle) purchases in California and elsewhere. certain assumptions that are subject to significant The amount of additional demand estimated varies uncertainty that would offset each other to some across studies, and the effectiveness of different degree. On the one hand, the GHG reduction programs is likely affected by the structure of the benefits estimated may be understated because program—including the size of the rebate and they assume that those benefits are achieved for eligibility rules—and market demand, which can only the first couple of years of the vehicle’s life, vary by location. While researchers find that rebates 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT rather than for the full life of the vehicle. On the been made incrementally stricter over time. Most other hand, we find that the estimates include a analysts find that these standards have had a real significant methodological shortcoming that could and significant effect on emissions. This effect is overstate the GHG reduction benefits. Specifically, most clearly shown in Figure 11, which displays the department’s analytical approach to estimating how average fuel economy has increased over time benefits implicitly assumes that none of the in very close relationship to the federal standards. participating consumers would have purchased a The U.S. EPA and CARB estimate that under the qualifying vehicle in the absence of the program. current regulations, average GHG emissions will It is difficult to know exactly which participants decrease to 175 grams per mile by 2025, which is were incentivized by the program to replace their less than one-third of the average emission levels in old vehicle or to purchase a more efficient vehicle, 1975. making it difficult for us to estimate how overstated It is important to note that this correlational the department’s estimates for these programs are. data is not conclusive. There could be other Consumer Surveys Suggest That Decals factors that contribute to improving fuel efficiency Incentivize ZEV Purchases. Regarding the over time, especially consumer demand for fuel single-occupancy decals, we did not find any savings, such as when gas prices increase. In fact, studies that estimate the emissions reduction researchers do find that consumer demand for benefits associated with the decal program. Thus, more fuel-efficient cars increases when gas prices it is unclear what level of GHG emission reductions rise. (Similarly, demand for less fuel-efficient cars are being achieved by the program as a whole increase when gas prices fall.) However, gas prices or by the specific vehicle types covered by the can rise and fall unexpectedly, and researchers program. Despite no formal analysis of the state’s suggest that the standards can have an important program, several surveys and studies suggest that longer-term impact on auto manufacturers’ the availability of HOV decals is a strong motivator planning processes by setting clear expectations for some consumers to purchase and use ZEVs. for future emissions levels. This is important for For example, a survey of approximately 19,000 manufacturers because it can take several years CVRP recipients between 2012 and 2015 found to design and integrate new technologies into their that 17 percent said that having HOV lane access vehicle models. was their primary motivation for purchasing an electric vehicle. Figure 11 Other research has found consistent results, including that Fuel Economy Has Improved as used cars with HOV decals sell Federal Standards Have Become Stricter for more than the same vehicle 60 without an HOV decal, providing a Car Standard monetary estimate of the value of 50 the decals. History of Fuel Efficiency 40 Standards Show Positive Car Actual Incremental Effects. The 30 Truck Standard state’s clean car standards are Truck Actual 20 currently aligned with the federal government’s standards to reduce 10 emissions and increase fuel efficiency from light-duty cars and trucks. These federal fuel 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 efficiency standards were first established in the 1970s and have www.lao.ca.gov 15 analysis full gutter AN LAO REPORT A 2017 analysis by CARB, U.S. EPA, and NHTSA the estimation approaches are inherently more estimated that the existing emission standards theoretical.” will reduce lifetime GHG emissions from all model Currently, most of the state agencies overseeing year 2021 through 2025 vehicles sold in the nation these programs have not issued estimates of the by about 100 million metric tons per model year GHG reductions they anticipate achieving. We (540 million metric tons total). (In 2016, GHG note that the NREL analysis of the commission’s emissions in the U.S. were over 6 billion metric past spending of about $160 million on ZEV tons.) We note that these estimates are subject infrastructure estimated that this spending would to substantial uncertainty for several reasons. result in direct emissions reductions of about Importantly, they presume that the regulations 150,000 tons annually. We note, however, that this will be implemented successfully. The federal estimate assumed that none of the charging and government has proposed to repeal the current refueling infrastructure funded by this program plan to make the standards stricter in out-years. As would have occurred in the absence of the we discuss in greater detail below, if implemented, program. In other words, the study assumed that this repeal likely would significantly reduce future without this funding, drivers would have driven emission reductions that could be achieved from gasoline-powered vehicles instead of ZEVs. both the federal and state standards. Economic Costs Analytical Basis for ZEV Infrastructure Based on Potential Market Failure. Developing estimates Consumer Financial Incentives Involve for the GHG emissions reductions associated Opportunity Costs. Providing state funding for any with spending on public ZEV infrastructure is program involves an “opportunity cost”—that is, challenging because the programs are intended the funding is not available for some other purpose. to address the network effect that the demand This is certainly true for the light-duty programs for ZEVs and recharging and refueling stations receiving state funding. In fact, in economic terms, is partially dependent on the availability of each the opportunity cost is the primary cost associated other. In other words, consumers are less likely with the two rebate programs. The CVRP and Clean to buy and use ZEVs if they have concerns that Cars 4 All Programs are funded by cap-and-trade there will not be sufficient infrastructure to support auction revenues and vehicle registration revenues. their driving patterns, often referred to as “range The state has historically used these two revenue anxiety.” However, the market is less likely to sources to support a variety of activities, including invest in this infrastructure if it is not confident that other emission reduction programs. Therefore, to a sufficient number of consumers will be driving the extent that these programs do not encourage ZEVs in the future to make the investment pay as many new ZEV and low-emission vehicle off. The spending on ZEV infrastructure overseen purchases as hoped or expected, the main cost of by state agencies is intended to address this the program is the opportunity cost to use these problem by (1) reducing the costs of installing ZEV funds in other ways, such as (1) increased spending infrastructure and (2) increasing consumer demand on other strategies that are more cost-effective for ZEVs by reducing range anxiety. We note that at reducing GHG emissions or (2) lower vehicle a report by National Renewable Energy Laboratory registration fees. Consequently, looking at the (NREL) analyzing several of the California Energy cost-effectiveness of these programs is very Commission’s (CEC’s) programs attempted to important to ensure that the spending is targeted estimate the “market transformation” effects of to the most effective programs possible. Based on spending on ZEV infrastructure. It estimated the CARB data, CVRP results in a state financial cost emission reductions associated with this spending of over $400 per ton of GHGs reduced. Primarily in a nascent market to be substantial. However, because the rebate amounts are much higher the report notes that these estimates “are based on average, the Clean Cars 4 All Program costs on data that is relatively more uncertain and about $900 per ton of GHGs reduced, according to CARB. As discussed above, these estimates are 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT uncertain because they are based on assumptions Other Benefits and Costs that could both underestimate and overestimate Other Air Pollutant Reductions. An important emission reductions. co-benefit associated with consumers using more Clean Car Standards and ZEV Mandates ZEVs and other types of fuel-efficient vehicles is Shift Costs to Purchasers of Higher Emission the reduction in other air pollutants that can be Vehicles. Improving fuel efficiency and developing achieved. Unlike GHG emissions, which have technologies that can reduce GHG emissions an impact on global climate change, the effects results in additional costs for auto manufacturers. of other air pollutants tend to be more local. In order to remain profitable, they have to recover Therefore, the air pollution reductions associated these costs in their vehicle sales. Increased with these programs are particularly important in prices, however, would have the effect of reducing some areas of California with particularly poor air consumer demand. Therefore, in order to ensure quality, such as the Central Valley and areas of that they meet the minimum annual sales levels Southern California which are not currently meeting required under the Clean Cars Standards and ZEV federal clean air standards. regulations, manufacturers will (1) discount prices For example, CARB’s 2018-19 Funding on the vehicles that help them meet the regulations Plan provides estimated reductions for CVRP. and (2) make up those costs by increasing prices Specifically, it estimates that each CVRP rebate on other vehicles in their fleet. This has the effect of reduces less than one one-hundredth of a ton providing a financial subsidy for purchasers of the of criteria pollutants (NOx, PM 2.5, and ROG). In vehicles targeted by the regulations—lower-emitting addition, the assessment done for the Clean Car vehicles and ZEVs—while effectively taxing Standards and federal fuel efficiency standards purchasers of higher-emitting vehicles. estimates that by 2030, those standards will result The analysis done by CARB and federal agencies in a net reduction of almost 50,000 tons of criteria for the Clean Car Standards and federal fuel and toxic pollutants in the U.S. annually. In recent efficiency standards estimates that the average years, annual emissions of criteria pollutants has per vehicle cost to meet the model year 2025 exceeded 100 million tons nationally. standards for light-duty cars and trucks will be Consumer Savings. Another benefit cited for around $900. The actual costs will vary by vehicle consumers that drive more fuel-efficient vehicles, and across manufacturers’ fleets, and each including ZEVs, is that their ongoing costs of manufacturer could take different strategies to how ownership will be lower, largely because of reduced they distribute those costs across their fleets. fuel and maintenance costs. In some estimates, ZEV Infrastructure Costs Partly Borne by these future savings are estimated to outweigh Various Tax and Fee Payers. As described above, the increased purchase costs of these vehicles. the costs to implement ZEV infrastructure programs While there is consensus in the literature that these are being paid from a variety of sources. In the case vehicles do have reduced fuel costs, the amount of the CEC and utility programs, these programs of savings is very dependent on the projected are funded through higher vehicle fees and utility gasoline prices, as well as the specific vehicle being rates, thereby increasing what individuals and evaluated and individuals’ driving patterns. businesses have to pay. For the CalTrans and DGS Agencies have estimated operating savings programs, the funding is coming from existing state for some light-duty programs. For example, the taxes and fees. So, spending from these programs 2018 Initial Statement of Reasons for the Clean represent an opportunity cost of not being able to Cars 4 All Program estimated annual operating spend these funds on other allowable purposes savings to consumers of between about $800 or lower taxes and fees. In contrast, the spending and $2,000, largely from reduced fuel costs. The by Volkswagon and NRG is coming from those assessment completed for the Clean Cars Standard corporations consistent with settlement agreements estimates savings in the same range—an average designed to offset the negative emission effects of of $1,600 per 2025 vehicle model. their past actions. www.lao.ca.gov 17 analysis full gutter AN LAO REPORT VMT. Researchers point to the potential that OTHER ISSUES FOR some of these programs could contribute to CONSIDERATION: additional VMT and congestion. One example LIGHT-DUTY PROGRAMS of this is the Clean Car Standards, which—by requiring cars to become more fuel efficient— In this section, we highlight a few additional have the effect of reducing the cost of driving. issues that are important in understanding the Consequently, it becomes less expensive to drive, costs and benefits of light-duty programs, as well and consumers will drive more. This “rebound as in considering how to shape future policies. effect” can contribute to increased congestion Specifically, we discuss (1) the likelihood of (as well as offset some of the GHG and other air programs becoming more costly in the future, pollutant reductions associated with the program). (2) the potential effects of proposed changes to Studies over the years have estimated different federal regulations, and (3) potential issues for sizes of the rebound effect, and the assessment future research. completed for the Clean Car Standards and federal fuel economy standards assumes a 10 percent State’s Ambitious Goals Mean rebound effect. In other words, for every 10 percent Program Costs Likely to improvement in fuel economy, the assessment Increase Over Time assumes that drivers will increase VMT by 1 percent. As discussed above, we generally do not have conclusive information on the costs and benefits of Safety. Some researchers have raised questions the state’s existing light-duty programs. Importantly, regarding whether an increase in the share of the the current costs and benefits are not static. That fleet that is made up of ZEVs could have a negative is, meeting the state’s ambitious GHG goals, effect on driver and passenger safety, including including by significantly increasing the number of a risk of increased fatalities. The concern is that ZEVs, will most likely lead to higher costs in the these vehicles tend to be smaller and lighter than future. These costs include the increased spending other vehicles and, thus, might be more badly associated with providing more rebates for ZEV damaged in collisions. To date, the research on this purchases, as well as more indirect costs such issue is somewhat mixed. Researchers generally as more congestion in HOV lanes. In addition, as find that collisions between larger, heavier vehicles the state’s Clean Car Standards and ZEV mandate and smaller, lighter vehicles is more dangerous for become stricter over time, this could lead to the smaller vehicle and increases the probability increasing manufacturer costs that are ultimately of fatalities in the smaller vehicle. On the other borne by consumers. The potential magnitude hand, one of the potential effects of the Clean Car of these costs could vary widely depending on Standards and federal fuel economy standards technology advancements and consumer demand. could be to make larger vehicles—such as SUVs and light-duty trucks—lighter than they would While the magnitude of future costs is highly otherwise be, which could contribute to overall uncertain, the potential for high costs makes driver safety. Consistent with that, research it important that administering agencies more suggests that the trend towards smaller, lighter consistently evaluate the costs and benefits of vehicles (such as driven by federal fuel economy their programs. This should include the evaluation standards) has correlated with increased crash of programs in light of the state’s cap-and-trade frequency but has not resulted in increased program, which also incentivizes deployment of fatalities. lower-emission vehicles, including ZEV, by putting a price on carbon emissions. More consistent evaluation of programs’ costs and benefits would better assist the Legislature in its future policymaking decisions regarding how to allocate limited resources. 18 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Proposed Federal Changes Could consumers who are less likely to purchase ZEVs Undermine State Programs currently? There could be lessons learned on this question from upcoming studies on the Clean Cars Federal Administration Proposes to Freeze 4 All Program, which is targeted to lower- and Current Auto Emission Standards. The U.S. EPA middle- income consumers. As discussed above, and NHTSA have proposed to freeze (at the higher-income individuals may be more likely to buy 2020 levels) existing federal regulations that are ZEVs even in the absence of rebates. scheduled to make automobile fuel economy Another design feature of the Clean Cars 4 and emission standards stricter for model years All Program worthy of further analysis is that the 2021 through 2025. The proposal would also program permits the purchase of used vehicles revoke the federal waiver that allows California and non-ZEVs (conventional hybrids and internal to set its own emission standards. California’s combustion engine vehicles). On the one hand, standards through 2025 currently align with both of these program characteristics mean that the federal standards previously authorized. If consumers can participate in the program even if the federal government continues to pursue its they are not purchasing new ZEVs, which would proposed changes, many analysts believe that seem to incentivize the purchase of a broader there could be years of litigation before the issues set of cleaner vehicles. On the other hand, these are resolved. design features incentivize purchases where the Less Strict Federal Standards Could per vehicle emission benefits are probably not as Undermine Effectiveness of State’s Program. great as for ZEVs because (1) older cars will not If the federal proposal is ultimately implemented, have as long of a useful life on average as new it would mean that California could no longer cars and (2) even highly efficient gasoline powered implement its efforts to reduce emissions and hybrid vehicles result in more GHG and other through the Clean Car Standards and ZEV emissions in California than ZEVs. To the best of mandate. Importantly—and not as intuitively—the our knowledge, there is not yet any clear evidence effectiveness of the state’s Clean Car Standards about the net benefits of these different design could be jeopardized in a scenario where the characteristics. federal standards were frozen but California was Another potentially important design feature allowed to continue operating its program under of Clean Cars 4 All Program is that it requires the the existing waiver. This is because California’s retirement of an older vehicle. It might be worth stricter standards would make it easier for auto evaluating the extent to which this requirement manufacturers to comply with federal standards in increases the emissions benefits of the program other states. In other words, emissions reductions compared to a typical rebate program that allows achieved in California would be at least partially existing vehicles to stay on the road. offset by fewer emission reductions being made in Better Understanding the Interactions Among other states. On net, this means that California’s Different Programs. As discussed earlier in this stricter standards would not reduce total GHG report, a significant complication to evaluating the emissions as much as otherwise estimated. costs and benefits of climate change programs is Potential Issues for Future Research having multiple programs targeting the same types of emission reductions. This is certainly true in the Identify Design Features to Make Rebate area of light-duty vehicles, where there are multiple Programs Most Effective. Based on the attempts to promote ZEVs by (1) providing financial findings above, we believe there are a couple incentives and nonfinancial incentives, (2) placing of key research questions the Legislature and minimum sales requirements on manufacturers, administration may want to pursue regarding the and (3) increasing the convenience and reducing state’s rebate programs. For example, are there costs associated with recharging and refueling. ways to reduce the free rider problem, such as by Consequently, it is often very difficult to evaluate targeting rebates (or information campaigns) to whether, for example, a particular consumer www.lao.ca.gov 19 analysis full gutter AN LAO REPORT purchases a ZEV because they received a rebate, is debate in the literature regarding the degree to had access to an HOV lane, felt less range anxiety which consumers underestimate the longer-term because of greater proximity to infrastructure, and/ fuel savings associated with driving a ZEV. Some or the manufacturer lowered the sale price of the researchers have pointed to these information vehicle in order to meet regulatory requirements. issues as important challenges to ZEV deployment In addition, as we discuss later in this report, and have suggested that more efforts should be the LCFS program provides additional incentives made to educate consumers. This might be an for ZEV purchases. In many cases, several or area ripe for additional research to better test how all of these factors could influence an individual public outreach and education campaigns might consumer to purchase a ZEV, but it is difficult to be effective (and potentially lower cost) ways to disentangle which factors were most important. better inform consumers about the benefits of Consequently, it is more difficult for policymakers ZEVs, particularly for individuals or targeted groups to determine which policies are likely to accomplish who would not otherwise purchase one of these the greatest benefits at the lowest cost. Given vehicles. the complicated way that these programs can Determine How Infrastructure Spending Is interact, there would be value in research designed Best Targeted. Researchers seem to agree that at disentangling those effects. In many cases, there are market failure-based reasons for some this likely requires designing programs with this public spending on ZEV infrastructure. However, it sort of evaluation in mind. For example, piloting would be valuable to have more definitive research program changes in certain regions (rather than into a couple of key questions around how much implementing them statewide) can make it easier to and where to place that infrastructure. evaluate the effects of those changes. • First, how can public subsidies for One example of where there could be infrastructure be best targeted given different duplication across programs that we have not driving patterns in different communities. For seen studied is between the CVRP rebates and example, most research to date suggests ZEV mandate. The state’s ZEV mandate requires that the vast majority of charging will happen auto manufacturers to sell increasing numbers of at people’s homes and workplaces. To what ZEVs in California. One way for manufacturers to extent should those locations be targeted for comply with this requirement is to lower prices on public subsidies versus other locations—such ZEVs to encourage greater consumer demand. as highway corridors, travel destinations, gas However, the CVRP also reduces the vehicle price stations, and commercial centers—to better to encourage increased demand. So, to the extent spur utilization? that the CVRP increases demand, manufacturers • Second, how will ongoing advancements do not have to reduce their prices. It is unclear in rapid charging technology—both in the which program—CVRP or the ZEV mandate—is infrastructure and vehicles—affect how more cost-effective at increasing ZEV sales and consumers are most likely to utilize chargers? reducing emissions. In addition, an important implication of this potential duplication is how the • Third, in the longer term, at what point reduction in ZEV prices is paid for, whether from will ZEV deployment be sufficient and ZEV cap-and-trade auction revenues (the fund source infrastructure profitable enough that public for CVRP) or by purchasers of non-ZEVs. subsidies are no longer necessary? Address Potential Information Barriers to ZEV Deployment. Research indicates that a significant share of the population is not familiar with the current state of ZEV capabilities or many of the specific ZEV models available. In addition, there 20 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT HEAVY-DUTY VEHICLES There are a wide variety of types of medium- and OVERVIEW OF HEAVY-DUTY heavy-duty vehicles and equipment. On-road INCENTIVE PROGRAMS vehicles—such as trucks, delivery vans, and buses—account for 9 percent of overall GHG The state has a wide range of heavy-duty emissions and 22 percent of emissions from the incentive programs. Most of these programs target transportation sector. Other equipment used multiple pollutants—including GHGs, as well as for freight (such as cranes), agriculture (such as NOx and PM—making it difficult to know which tractors), construction (such as excavators), certain programs would have otherwise been implemented railroad activities (such as switch locomotives), if the Legislature had not adopted GHG limits. and ships account for another 3 percent of Below, we discuss the major incentive programs statewide emissions. Hereafter, we refer to the where: (1) GHG reductions are a primary goal combined emissions from the above different types and/or (2) funding comes from the GGRF, which of equipment—both on-road and off-road—as receives revenue through a state GHG reduction heavy-duty vehicle emissions. The vast majority of program (cap-and-trade). We exclude several other these vehicles use diesel fuel. programs that are primarily focused on NOx and/ The Legislature has not adopted statewide or PM emissions, including the Carl Moyer Program goals for the number of zero-emission heavy-duty (non-GGRF), Proposition 1B (2006), and the vehicles deployed by a certain year. We note, Volkswagen Settlement Mitigation Trust Fund. We however, that the 2016 Governor’s Sustainable also exclude funding that is allocated primarily for Freight Action Plan establishes targets of improving transit, which we discuss in a later section of this freight system efficiency by 25 percent and report. deploying over 100,000 vehicles and equipment Figure 12 (see next page) summarizes the major capable of zero-emission operation by 2030. heavy-duty incentive programs. The programs are There are currently over 500,000 total heavy-duty administered by CARB, CEC, and the California freight vehicles in California and over 10,000 are Public Utilities Commission (CPUC). Total funding capable of zero-emission operations. In addition, authorized for these programs over the last several Chapter 524 of 2014 (SB 1204, Lara) requires years exceeds $2 billion, with over $1 billion CARB, in consultation with CEC, to develop a authorized in 2018-19. Each program generally strategy for financial incentives for heavy-duty falls into one of four categories: (1) demonstrations vehicles with a goal of supporting new technologies and pilots, (2) early commercial deployment through the commercialization process. of new technologies, (3) programs focused on The state has several different programs to reducing local pollution through fleet turnover, and reduce heavy-duty vehicle emissions. In this (4) installing fueling or charging infrastructure. section, we focus on state programs that provide Demonstrations and Pilots financial incentives for new or upgraded heavy-duty vehicles. Although CARB is also implementing Several programs focus primarily on (or developing) regulations that target heavy-duty demonstrations and pilots for technologies and emissions, we do not discuss these regulations in equipment that are not yet commercially available. this report for various reasons. In particular, the They are part of CARB’s overall strategy for using regulations are driven primarily by federal policy, financial incentives to support new heavy-duty have a relatively small effect on statewide GHG technologies over the next few years. (Please emissions, and/or are primarily focused on reducing see the box on page 23 for additional information local and regional air pollutants. regarding CARB’s strategy.) Some examples of projects that have received funding through these pilots and demonstrations include: www.lao.ca.gov 21 analysis full gutter AN LAO REPORT Figure 12 Major GHG Heavy-Duty Vehicle Incentive Programs (In Millions) Agency 2018-19 Totala Demonstrations and Pilots $88 $522 Freight Demonstrations CARB 55 238 Advanced Freight and Fleet Technologies CEC 18 144 Zero-Emission Truck and Bus Pilots CARB — 85 Rural School Bus Pilots CARB 15 55 Early Commercial Deployment 125 553 Clean Truck and Bus Vouchers (HVIP and Low-NOx Engines) CARB 125 366 School Bus Replacement Program CEC — 75 Natural Gas and Propane Vehicle Deployment CEC — 72 Zero-Emission Off-Road Freight Vouchers CARB — 40 Local Pollution Reductions 377 762 AB 617 local programs to reduce emissions CARB 245 495 Agricultural equipment replacements CARB 132 267 Fueling Infrastructure 592 614 IOU Electric Vehicle Charging CPUC 592b 592 Natural Gas Fueling CEC — 22 Totals $1,182 $2,451 a Total funding for CARB programs since 2012-13 and funding for CEC programs since 2009-10. b Funding approved by CPUC in 2018 will be spent over next several years. GHG = greenhouse gas; CARB = California Air Resources Board; CEC = California Energy Commission; HVIP = Hybrid and Zero-Emission Truck and Bus Voucher Incentive Program; IOU = investor owned utility; and CPUC = California Public Utilities Commission. • Battery electric, plug-in hybrid electric, and program provides incentives for low-emission low-NOx freight equipment used at various equipment that is commercially available, including ports and goods distribution centers. up to $300,000 for zero-emission trucks and buses • Electric tractors in the Central Valley, with an and $30,000 for eligible hybrid trucks and buses. accompanying electric truck outfitted with Funds are also available for low-NOx engines that an ability to charge the tractors at remote use renewable fuel, such as natural gas trucks locations. or buses that use renewable natural gas. The incentives are provided on a first-come, first-serve • A hydrogen fuel cell ferry providing passenger basis for qualifying vehicles and technologies. service in the Bay Area. Programs Focused on Early Commercial Deployment of Local Pollution Reductions New Technologies Some programs are primarily focused on Some programs provide incentives for reducing near-term NOx and PM emissions, rather technologies that have passed the demonstration than promoting new or innovative technologies. and pilot stage, and commercial models are starting Generally, these programs aim to accelerate fleet to become available. These early commercial turnover—or the rate at which old equipment is models are often still more expensive than replaced by newer or upgraded equipment. In many conventional equipment. The main state program cases, this newer equipment might still use diesel that is used to support technologies through this fuel, but the emissions are much lower than the phase is CARB’s Hybrid and Zero-Emission Truck old equipment. (We discuss these programs here and Bus Voucher Incentive Program (HVIP). This because they are primarily supported by revenue 22 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT State’s Strategy to Support New Vehicle Technologies The state’s primary strategy for using financial incentives to support new technologies is described in the California Air Resources Board’s (CARB’s) annual Three-Year Investment Strategy for Heavy-Duty Vehicles and Off-Road Equipment. (The strategy is developed in consultation with the California Energy Commission.) Senate Bill 1204 requires CARB to, among other things, establish an overarching vision for how the state can move technologies through the commercialization process. The figure below summarizes the priority projects identified in the 2018-19 investment strategy. The funding amounts are for planning purposes only and actual amounts will depend on future legislative appropriations. According to CARB, the amounts included in the plan would help support the development of the identified technologies, but would not meet the overall level of funding (both public and private) needed to meet California’s air quality and greenhouse gas (GHG) goals. The plan is based on three concepts: • Technology Pathways. The plan focuses on technology pathways seen as necessary to meet the state’s 2030 GHG goals and air quality goals. These are zero-emission technologies (battery electric, fuel cell, and hybrid), low NOx engines, and more efficient engines and operations. • Stages of Commercialization. The plan provides incentives to technologies across different “stages of commercialization.” These stages are (1) technology design and development and early stage demonstrations, (2) advanced stage demonstrations and pilots, and (3) early market entry. CARB assesses the status of different technologies and applications, and where they might fall into one of these categories. • Expansion of “Beachhead Markets.” The plan prioritizes funding toward beachhead markets—which are successful applications of new technologies that can then be transferred to other market applications. For example, supporting the development and deployment of electric buses, which are showing some early signs of market acceptance, could eventually help transfer to other electric heavy-duty vehicles. Summary of CARB’s Three-Year, Heavy-Duty Strategy Investment Plan Funding (In Millions) Program 2019-20 2020-21 2021-22 Project Examples Demonstrations $65 to $100 $60 to $85 $50 to $90 ZE/PHEV delivery trucks, longer range heavy-duty goods movement, construction equipment ZE/hybrid heavier cargo handling equipment ZE regional delivery Pilots $170 to $310 $185 to $310 $200 to $325 ZE/PHEV drayage, regional delivery, heavy-duty trucks, advanced power trains, and ZE/hybrid heavier cargo handling equipment Fuel cell transit Commercial $215 to $325 $365 to $545 $420 to $580 ZE/PHEV drayage and regional delivery Deployment ZE/hybrid heavier cargo handling equipment Low NOx Linehaul trucks ZE delivery trucks and transit Total Funding $450 to $735 $610 to $940 $670 to $995 CARB = California Air Resources Board; ZE = zero-emission, such as battery electric; and PHEV = plug-in hybrid electric vehicle. www.lao.ca.gov 23 analysis full gutter AN LAO REPORT from the state’s cap-and-trade program.) These includes infrastructure for buses, forklifts, and programs are: equipment for ports and warehouses. • AB 617 Local Programs to Reduce ASSESSMENT OF COSTS AND Emissions. Since 2017-18, the Legislature BENEFITS: HEAVY-DUTY VEHICLE has allocated $495 million GGRF for projects that promote the goals of Chapter 136 of INCENTIVES 2017 (C. Garcia, AB 617), which establishes a framework and process for improving air Compared to light-duty vehicle policies, there quality in communities with the highest levels appears to be relatively little academic research of pollution. Funding is allocated to local air on the economic effects of heavy-duty vehicle districts to reduce diesel emissions, largely incentive programs. For example, we found very through the structure of the existing Carl few academic studies estimating program effects Moyer Program (which provides incentives retrospectively. Most of the available information for diesel equipment upgrades and has been is from CARB and CEC reports and planning operating since 1998). In 2018-19, some of documents. Below, we summarize and assess the this funding will also go to emission reduction information contained in these reports. projects at stationary sources. Agencies Have Estimated GHG Reductions • Agricultural Equipment Replacement. for Some Programs . . . Estimates of GHG Since 2017-18, the Legislature has allocated emission reductions are available for some, $247 million—primarily from the GGRF— but not all, of the heavy-duty vehicle programs for agricultural equipment upgrades and identified in Figure 12. For example, CPUC does replacements. This includes harvesting not estimate emission reductions from all IOU equipment, heavy-duty trucks, agricultural infrastructure programs. In other cases, agencies pump engines, and tractors. The program have not projected future emission reductions is known as the Funding Agricultural because they do not know which types of vehicles Replacement Measures for Emission are likely to receive the funding. For the programs Reductions program. In 2017-18, 80 percent where estimates are available, those estimates are of the funding was allocated to the San generally based on departments’ technological Joaquin Valley Air Pollution Control District. assessments of the emissions and costs of different This program also largely relies on the technologies and equipment compared to a guidance from the Carl Moyer Program to conventional vehicle (typically diesel). Outcomes are determine what projects qualify for funding. then measured based on the number of vehicles that receive funding. Fueling Infrastructure For example, CARB estimates that $170 million (GGRF) for various heavy-duty Some of the programs mentioned above fund demonstrations, pilots, and commercial deployment infrastructure for fueling or charging heavy-duty projects implemented through 2017 reduced vehicles, but they primarily focus on new 247,000 tons of GHG emissions. It also estimates vehicles. Other programs focus exclusively on the that $195 million allocated to heavy-duty projects infrastructure. Most notable, as mentioned above, in 2018-19 will reduce 724,000 tons of GHGs. In in 2018 the CPUC approved a significant amount of addition, as part of a 2017 CEC report, the NREL IOU ratepayer funding for electric vehicle charging estimated that about $185 million in CEC funding infrastructure. Most of this funding is for heavy-duty for heavy-duty demonstrations and deployment vehicle charging infrastructure. Southern California projects through June 2017 will directly reduce Edison and Pacific Gas and Electric are authorized emissions by about 15 to 25 thousand tons to spend almost $600 million for infrastructure at annually through 2025. As discussed above, 1,500 sites to support electrification of more than NREL also estimates reductions related to market 15,000 medium- and heavy-duty vehicles. This 24 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT transformation but these estimates are subject to at a state cost of $600 per ton. Estimated costs for substantial uncertainty. each program range from about $250 per ton to . . . But Emissions Reductions Likely over $3,000 per ton. Further, as described above, Somewhat Overstated. Similar to light-duty there are likely some assumptions that overstate incentive programs, estimates of emission the emission reductions attributable to the program, reductions assume all equipment receiving which suggests the state cost per ton could be an incentive would not have been purchased even higher. otherwise. By not adjusting for free-riders, the . . . But Supporting Early Stage Technologies estimates of direct emission reductions for some Could Have Significant Long-Term Benefits . . . programs are likely somewhat overstated. For The primary goal of some of the programs is to example, an evaluation of the CEC’s Alternative and support new technologies that are in the early Renewable Fuel and Vehicle Technology Program stages of development or deployment, when they (ARFVTP)—which funds advanced freight and fleet tend to be relatively expensive. For example, technologies, among other things—found that demonstrations and pilots are one way to help roughly half of the projects would have likely been businesses and governments learn about new implemented even without the program funding. technologies. This knowledge can then spillover to However, the extent to which this finding applies to other businesses who could then potentially use heavy-duty projects versus other types of ARFVTP this information to further develop the technology. projects that receive funding through the programs In the short-run, this likely leads to relatively is unclear. high near-term costs for GHG reductions from Furthermore, the GHG reduction estimates these programs. In the long run, however, these do not account for overlaps with other state knowledge spillovers might provide social benefits policies that affect heavy-duty vehicle emissions. by supporting the development of new technologies For example, if a transit agency receives an that lower emissions. HVIP incentive to buy a new electric bus, CARB . . . And Programs Have Benefits for Local attributes all estimated emission reductions to the Air Quality. The primary benefit of some of these HVIP. However, the agency buying the new bus programs are the reductions in local air pollutants, might also receive revenue from LCFS credits for such as NOx or PM. Heavy-duty vehicles are the the electricity used as a fuel and IOU support for largest source of NOx in both the South Coast and installing the infrastructure (as well as federal and San Joaquin Valley. In addition, CARB estimates that local funding). As a result, CARB’s estimates likely about 70 percent of total known cancer risk related overstate the GHG reductions directly attributable to air toxics in California is attributable to diesel to the program. (As we discuss below, an alternate PM. The total co-pollutant reductions from these way to describe this concern is that the estimates programs is unclear. However, CARB estimates understate the overall costs of the reductions.) that 2018-19 funding for heavy-duty incentive Near-Term GHG Reductions Generally More programs will potentially reduce 1,300 tons of NOx Costly Than Alternative Approaches . . . The and 34 tons of PM2.5 over the life of the vehicles. primary cost associated with these programs is In addition, NREL estimated that the CEC programs the opportunity cost associated with the use of funded through June 2017 will reduce annual NOx funds—generally either GGRF, vehicle-related and PM2.5 by more than 3 tons and about 0.3 tons, fees, or IOU ratepayer funds. These funds could respectively. (For context, total 2016 NOx and otherwise be returned back to households— PM2.5 emissions from mobile sources were about through rebates, lower fees, or lower electricity 400,000 tons and 21,000 tons, respectively.) These rates—or used on other state programs. Based on estimates are subject to similar uncertainties and the available estimates, GHG reductions per dollar limitations we described for the GHG estimates of state spending on heavy-duty vehicle incentives above. is relatively high. For example, CARB estimates that its heavy-duty GGRF programs reduce emissions www.lao.ca.gov 25 analysis full gutter AN LAO REPORT OTHER ISSUES FOR research that evaluates what types of heavy-duty programs—research and development, pilots, CONSIDERATION: demonstrations, or incentives for deployment—do HEAVY-DUTY VEHICLES the most to promote innovation. In addition, the state could fund research to evaluate the optimal Impacts of Other Innovation and/or structure of incentives, such as how large the Co-Pollutant Reductions. Heavy-duty vehicle incentives should be and when they should be incentive programs appear to be a relatively costly phased-out. This would help the state prioritize way to reduce near-term GHG emissions. Still, limited state funding to ensure it is used most these programs likely produce other benefits, effectively. such as supporting new technologies or reducing co-pollutants. When considering funding these Program Coordination or Consolidation. Many heavy-duty programs, the Legislature might want to of the state’s heavy-duty vehicle programs support consider which programs (1) are likely to encourage similar types of technologies and equipment, technological innovation and/or (2) which programs some of which are new or recently expanded. For are likely to achieve the greatest reductions in example, both CEC and CARB fund heavy-duty co-pollutants. In both cases, the Legislature will vehicle demonstration projects and school bus want to consider whether these other benefits are replacement programs. In addition, several program worth the costs. that support heavy-duty charging infrastructure, even though CPUC recently approved a significant Potential Issues for Future Research. Based amount of IOU funding for these activities. The on our review, it is not clear which heavy-duty Legislature might want to consider whether it programs support new technologies or reduce is necessary to have multiple programs funding co-pollutants most effectively. As a result, the similar types of activities and whether there are Legislature might want to take steps to ensure opportunities to consolidate these programs at one there is additional research in this area. For department. This might ensure funding is better example, the Legislature might want to fund coordinated and help improve accountability. LOW CARBON FUELS The previous two program categories—light-duty carbon intensity (CI) of fuels used in California and heavy-duty vehicle programs—are intended to and to diversify the fuel mix to enable long-term promote vehicles that use less fuel or alternative decarbonization of the transportation sector. types of fuel that have fewer emissions. The state CARB adopted the LCFS regulation in 2009 and also has policies to reduce the GHG emissions from began implementing it in 2010. The regulation was the fuels that are used to power those vehicles. adopted under the broad authority given to CARB The largest state program in this area is the LCFS. by AB 32. There is limited statutory direction on Below, we (1) describe the LCFS, (2) assess the the LCFS. As a result, the details of the program available information on the economic costs and have been developed almost entirely through CARB benefits of the program, and (3) identify issues for regulations. the Legislature to consider as it makes future policy Establishes Statewide CI Standard for decisions about the program. Transportation Fuels. The program establishes statewide “carbon intensity” standards for OVERVIEW OF LCFS transportation fuels supplied in California. Figure 13 provides an overview of the major Program Developed Through CARB types of transportation fuels. Carbon intensity Regulations. The primary purpose of LCFS is measured as GHGs per unit of energy is to reduce GHG emissions by reducing the (technically, grams of carbon dioxide equivalent per 26 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Figure 13 Overview of Different Types of Transportation Fuel In Millions of Gallons 2017 Fuel Type Description Volume Solda Gasoline Liquid fuel made from refined petroleum used to power light-duty vehicles. 14,062 Diesel Liquid fuel made from refined petroleum used to power heavy-duty vehicles 3,342 and equipment. Ethanol Liquid fuel made from biogenic materials—such as corn—that is typically 1,575 blended into gasoline. Renewable diesel Liquid fuel made from biogenicmaterials—such as used cooking oil—that can 335 be blended into regular diesel without limit. Biodiesel Liquid fuel made from biogenic materials—such as used cooking oil or corn 170 oil—that is subject to limits on the amount that can be blended into regular diesel. Renewable Gas consisting largely of methane emissions captured from biogenic 107 natural gas sources—such as landfills or dairies—that can power natural gas vehicles. Electricity Electricity used to power battery electric and plug-in hybrid vehicles and 75 certain heavy-duty equipment Fossil natural gas Gas consisting largely of methane extracted from underground (often in 52 association with petroleum) that is sometime used to power natural gas vehicles. Hydrogen Gas that can be burned with oxygen to power hydrogen fuel cell vehicles. 0.3 a Certain fuels expressed in gasoline or diesel gallon equivalents. megajoule). The program establishes two major emissions on a lifecycle basis. This includes direct CI standards. One standard is for gasoline and emissions related to combusting the fuels (tailpipe gasoline substitutes, such as ethanol, electricity, emissions), as well as producing and transporting and hydrogen. The other standard is for diesel the fuels (upstream emissions). It also includes and diesel substitutes, including biodiesel, indirect emissions associated with changes in land renewable diesel, fossil natural gas, and renewable natural gas Figure 14 (biomethane). Both standards are Carbon Intensity (CI) Standards Decline Through 2030 set relative to a 2010 benchmark Percent Reduction in CI Relative to 2010 Benchmark carbon intensity—roughly 100 gCO2e/MJ for both gasoline and 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 diesel. As shown in Figure 14, Fuels above standard generate deficits the standards becomes more -2 -4 stringent annually through 2030, Actual -6 thereby requiring a reduction in Standard -8 average statewide fuel CI. (The -10 CI reduction goals reflect recent -12 Fuels below standard CARB changes, as discussed in generate credits -14 more detail below.) -16 Emissions Measured on A -18 “Lifecycle” Basis. Unlike most -20% other state climate regulations, the LCFS measures GHG www.lao.ca.gov 27 analysis full gutter AN LAO REPORT use from producing crop-based biofuels, such This system is intended to be fuel-neutral, as ethanol from sugarcane or corn. In contrast, meaning it does not require businesses to use CARB’s GHG inventory does not include carbon any particular fuel to meet the standard. Instead, dioxide emissions related to biofuels or upstream market forces determine what mix of fuels (and emissions from fuels that are imported from emission reduction projects) is the least costly way out-of-state. to comply with the CI requirements. The main ways CARB has approved hundreds of different fuel a regulated party can comply with the LCFS are: “pathways,” which assign an estimated CI to • Blend Low Carbon Liquid Fuels. This different fuels based on where they come from and includes blending ethanol, biodiesel, and/or how they are was produced. Figure 15 shows the renewable diesel into traditional fossil-based average CI for the major types of fuels. fuels. In some cases, state or federal law System of Tradeable Credits Used to limit the amount of liquid fuels that can be Demonstrate Compliance. The LCFS uses blended. For example, under California law, a a system of tradeable credits to determine gallon of gasoline can generally only contain compliance. Entities that supply fuels with a CI up to 10 percent ethanol. Similarly, state law above the standard (“regulated parties”) accrue limits the amount of biodiesel that can be deficits. Entities that supply fuels with a CI below blended into diesel. the standard generate credits. The number of • Purchase Credits From Alternative Fuel credits or deficits depends on how much the CI Suppliers. Credits can be purchased from differs from the standard. Each credit reflects one other entities that generate credits, such as metric ton of carbon dioxide equivalent. Regulated businesses that supply low carbon liquid fuels, parties must comply by obtaining enough credits to waste facilities that produce biomethane, cover their deficits each year. Other entities (“opt-in or utilities that provide electricity to electric parties”) can voluntarily participate in the program vehicle owners. In addition, credits can be by supplying lower CI fuels and generating credits generated through certain projects that reduce that can then be sold to regulated parties. Gasoline emissions during the process of producing suppliers can use credits that are generated from transportation fuels. For example, credits can suppliers of diesel substitutes to comply with the be generated by switching from natural gas to regulation, and vice versa. solar power for oil extraction or implementing carbon capture and storage projects. • Use Credits Carried Over From Previous Figure 15 Years. Credits that are not used to comply Average 2017 Carbon Intensities (CI) in a given year can be “banked” and used in for Different Fuels future years. In Grams of Carbon Dioxide Equivalent Per Megajoule Program Has Been Modified Several Times. Fuel Average CI The program originally established a declining annual CI reduction standard that reached Diesel 102 10 percent by 2020. Since then, the program has Gasoline 100 been modified several times by CARB or the courts. Diesel standard 98 Gasoline standard 95 For example, in 2013, the California Court of Fossil natural gasa 89 Appeal froze both the gasoline and diesel standards Ethanol 70 and required CARB to address issues related to Renewable natural gasa 44 the California Environmental Quality Act (CEQA) Biodiesel 34 and the Administrative Procedures Act. To address Renewable diesel 30 the court ruling, CARB adopted a revised LCFS in Electricity 29 2015, which included an updated CI compliance a Compressed natural gas. schedule through 2020. Subsequently, in 2017, 28 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT the Fresno County Superior Court froze the diesel regulated parties are now starting to use some of CI standard again and required CARB to reassess the banked credits to comply with the regulation. the environmental effects of certain aspects of the regulation. Most recently, in 2018 CARB adopted a ASSESSMENT OF variety of changes to the regulation and the court COSTS AND BENEFITS: LCFS unfroze the diesel standard. The CARB changes include less stringent near-term CI standards Below, we provide information on the economic (7.5 percent reduction by 2020), but extending the costs and benefits of the LCFS program. CI reduction standards to 20 percent in 2030. (At Our assessment is based on our review of the time of this report, the changes are still awaiting data available on CARB’s website, regulatory formal approval by the Office of Administrative documents, discussions with CARB and other Law.) stakeholders, and academic papers. We note that Annual Credits Exceeded Deficits in Early a significant amount of LCFS data and information Years, but This Has Changed. Figure 16 shows are easily accessible on CARB’s website. The the annual number of deficits and credits generated information gives researchers, stakeholders, and since the program began. In the first several years, policymakers better information about the program. the annual number of credits exceeded deficits. Economic Costs This was caused, in part, by the court freezing the CI standard in 2014 and 2015. This allowed lower Program Effectively Taxes High Carbon Fuels carbon fuels to continue to expand and generate and Subsidizes Low Carbon Fuels. From an credits, while the number of deficits remained economic perspective, the LCFS has two primary relatively constant. It also created a “bank” of effects: (1) an implicit tax on fuels with CI above credits that regulated parties can use to comply the standard and (2) an implicit subsidy for fuels with the regulation in future years. More recently, with CI below the standard (or any other project as the CI standards have decreased, the number of that generates credits under the program). These annual deficits has increased substantially. In 2017, incentives can be observed through the market for annual deficits started to exceed credits. As a credits. High carbon fuel suppliers have to pay for result, instead of banking excess credits each year, credits to cover the deficits created by each unit of fuel they sell (similar to paying Figure 16 tax). Low carbon fuel suppliers receive money by selling the Annual LCFS Credits Exceeded Deficits Until Recently credits generated from their fuel In Million Metric Tons (similar to getting a subsidy). 12 The amount of the tax and subsidy depends on: (1) the 10 Credits difference between the fuel CI and Deficits the standard during that year and 8 Cumulative Bank of Credits (2) the market price for credits. As 6 discussed below, a wide variety of regulatory, legal, and economic 4 factors affect the market prices for credits. Figure 17 (see next page) 2 shows the amount of the implicit tax or subsidy for a gallon of 2011 2012 2013 2014 2015 2016 2017 2018a different types of fuels, assuming credit prices remain at current a Through first half of 2018. levels. Notably, as the CI standard LCFS = low carbon fuel standard. decreases over time, the costs www.lao.ca.gov 29 analysis full gutter AN LAO REPORT Figure 17 Effect of Low Carbon Fuel Standard (LCFS) on Different Fuels Changes Over Timea In Real (2018) Dollars Per Gallon of Gasoline or Diesel Equivalent Cost (Benefit) of LCFS Credits Assumed Fuel Carbon Intensity 2018 2020 2025 2030 Gasoline (without ethanol) 100 $0.13 $0.19 $0.32 $0.46 Diesel (without biodiesel) 102 0.09 0.19 0.34 0.50 Corn ethanol 70 -0.50 -0.47 -0.34 -0.20 Landfill biomethane 40 -1.34 -1.21 -1.05 -0.89 Biodiesel 30 -1.70 -1.57 -1.41 -1.25 Dairy biomethane -255 -9.50 -9.36 -9.20 -9.05 a Assumes credit prices remain at $185 per ton. per gallon of high carbon fuels increases (because is due to a wide variety of different economic, it generate more deficits) and the subsidy per gallon regulatory, and legal factors. For example, after of low carbon fuel decreases (because it generates credit prices rose to roughly $80 at the end of fewer credits). For example, at $185 credit prices, 2013, they subsequently dropped to below $30 in the program increases the cost of supplying 2014. This is likely a result of the 2013 court ruling gasoline (without any ethanol blended) by about that temporarily froze the CI standard. In 2015, 13 cents per gallon in 2018. These costs would prices began to rise again as CARB readopted increase to roughly 46 cents per gallon in 2030. the regulation with a new CI reduction schedule Conversely, the subsidy for renewable natural gas through 2020. In 2018, prices have increased to from landfills decreases from to $1.34 cents per roughly $185, in large part because: (1) the number gallon to 89 cents in 2030. of quarterly deficits generated started to exceed Credit Prices Reflect Market Expectations the number of credits, thereby creating demand About Marginal Costs. In concept, market prices for credits Figure 18 adjust to the level needed to ensure there are enough credits LCFS Credit Prices Have Been Volatile to cover deficits. If regulated In Dollars Per Ton parties expect that they will not $200 have enough credits to cover their 180 deficits, higher demand for credits will raise prices until they are high 160 enough to encourage the last 140 (most expensive) unit of alternative 120 fuel needed to meet the standard. This is also known as the 100 marginal cost of abatement. Since 80 credits can be banked, current 60 prices reflect, to some extent, expectations about future costs to 40 comply with the program. 20 Credit Prices Have Been Volatile. As shown in Figure 18, 2013 2014 2015 2016 2017 2018 credit prices have been volatile LCFS = low carbon fuel standard. since the program began. This 30 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT for banked credits and expectations of potential cap-and-trade, see our 2017 report Cap-and-Trade future credit shortages, and (2) CARB extended the Extension: Issues for Legislative Oversight.) Please program and established longer-term CI reduction see the box on the next page for more detailed targets declining to 20 percent in 2030. information about the various key differences Credit Prices Indicate Program Is a Relatively between LCFS and cap-and-trade. Costly GHG Reduction Strategy. At the time of GHG Emission Reductions this report, market prices for credits were about $185 per ton. As discussed above, credit prices A Mix of Alternative Fuels Have Been Used to reflects market expectations about the marginal Comply. In 2017, fuel CI was 3.5 percent below the costs to meet the CI standard. Notably, the 2010 benchmark. Roughly 12 percent of the total marginal costs are more than ten times higher volume of fuels were from alternative (not gasoline than the state’s cap-and-trade program, where and diesel) fuels—up from 9 percent in 2011. the market price for allowances is currently about A variety of lower carbon fuels have generated $15 per ton. It is also worth noting that credit credits, as shown in Figure 19. Nearly 90 percent prices are about three times higher than the level of the credits were generated from biofuels. In of CARB’s recently adopted 2021 allowance price 2017, most of the deficits (about 80 percent) were ceiling ($65) for the cap-and-trade program, which generated through gasoline sales, but most of AB 398 directed CARB to implement as a way to the credits (50 percent) were generated by diesel limit program costs. substitutes. The difference in marginal costs between the programs is Figure 19 likely due to two main factors. Mix of Alternative Fuels Used to Comply With LCFS First, economy-wide carbon Millions of Credits pricing, such as cap-and-trade, is generally considered to be 4.0 a more economically efficient method for reducing emissions 3.5 than carbon intensity standards. Second, the LCFS program Ethanol appears to be more stringent 3.0 than cap-and-trade, at least over the next few years, which 2.5 means higher cost reductions are needed to comply. For example, 2.0 as mentioned above, regulated Renewable Diesel parties are starting to use banked Biodiesel credits that from previous years 1.5 because CI standards have Electricity dropped below actual fuel CI. Over 1.0 the next few years, significant CI Biomethane reductions might be needed to 0.5 ensure there are enough credits Fossil Natural Gas to comply. On the other hand, emissions under cap-and-trade 2011 2012 2013 2014 2015 2016 2017 are still below program caps and are likely continue to be so over the next few years. (For more LCFS = low carbon fuel standard. details on allowance oversupply in www.lao.ca.gov 31 analysis full gutter AN LAO REPORT LCFS and Cap-and-Trade Have Key Differences Both the Low Carbon Fuel Standard (LCFS) and cap-and-trade rely on market incentives, rather than technology mandates, to reduce emissions. However, the programs differ in several key ways. Some of these key differences include (1) the emission sources that are regulated, (2) how incentives for reducing emissions are created, and (3) the process for how money is transferred between the affected parties. Regulate Different Sources of Emissions. Within transportation fuels, the LCFS covers a broader set of emissions because it covers upstream emissions from imported fuels and indirect emissions related to biofuels. However, overall, cap-and-trade covers a much broader scope of emissions sources, including electricity, natural gas heating for homes and commercial buildings, and industrial manufacturing facilities. Market-based policies that cover a broader set of emissions are more efficient because they encourage the lowest cost reductions in all different parts of the economy, not just in transportation fuels. Create Incentives for Reducing Emissions in Different Ways. Cap-and-trade is known as a carbon pricing policy. In economic terms, the allowance price acts like an implicit tax on greenhouse gases (GHGs) that is meant to discourage activities that produce emissions. In contrast, the LCFS is an intensity standard. Intensity standards have two effects: (1) an implicit tax on high carbon fuel suppliers who have to purchase credits and (2) an implicit subsidy for low carbon fuel suppliers who can sell their credits. Economists generally consider carbon pricing a more efficient way to reduce GHG emissions than intensity standards. This is largely because intensity standards provide relatively little incentive to reduce emissions by reducing consumption of GHG-intensive goods. For example, the LCFS subsidizes fuels that generate a significant amount of GHGs (such as certain types of ethanol), which actually encourages more consumption of these fuels. In contrast, carbon pricing can encourage emissions reductions in a variety of ways—including reducing the carbon intensity of fuels and reducing the amount of fuels that are consumed. (It is worth noting that the current cap-and-trade program encourages a switch from fossil fuels to biofuels, but it does not differentiate between low- and high-carbon intensity [CI] biofuels.) Different Process for Transferring Money. Gasoline and diesel fuel suppliers have to pay for both LCFS credits and cap-and-trade allowances. Most or all of the costs of purchasing credits and allowances are likely passed on to fuel consumers in the form of higher retail prices. Currently, the costs of purchasing allowances is similar to the costs of purchasing credits (roughly 13 cents per gallon), even though LCFS credit prices are more than ten times higher than allowances. This is because gasoline suppliers have to buy more cap-and-trade allowances than LCFS credits for each unit of fuel. Fuel suppliers must buy enough allowances to cover all the GHGs associated with combusting the fuel, but only enough credits to cover the difference in GHGs between the fuel CI and the CI standard. One major difference between the programs is how the money from purchasing allowances and credits is transferred. LCFS transfers occur through private entities (and some government entities) buying and selling credits. This process automatically transfers funds from higher carbon fuel suppliers—or ultimately their consumers—to low carbon fuel suppliers. CARB partially determines what projects benefit from this process by determining what types of fuels (or projects) generate credits. In contrast, transfers in cap-and-trade occur through the allocation and auction of allowances. Generally, the Legislature determines where the money raised from selling allowances to transportation fuels suppliers is allocated through the state budget process. 32 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Program Reduces GHG Emissions, but On the other hand, certain aspects of the Magnitude of Effect Is Unclear. CARB estimates program work to limit the degree to which the LCFS that the LCFS reduced 2016 emissions by promotes innovation. These include: 2.4 million metric tons. It also estimates that the • Incremental Improvements in Relatively program will reduce a total of 97 million metric tons Mature Technologies. For example, the from 2019 through 2030. However, these estimates program has subsidized a significant amount are subject to substantial uncertainty because there of ethanol production, much of which is a are a wide variety of factors that make it difficult relatively mature technological process that to estimate the magnitude of GHG reductions provides only incremental CI improvements attributable to the LCFS. For example, it is unclear compared to gasoline. how biofuels would have otherwise changed • Volatile Credit Prices. Credit price volatility under the federal Renewable Fuel Standard (RFS) reduces the likelihood of businesses and how the two programs interact. The RFS is a making long-term investments to develop federal program that requires fuel suppliers to blend and produce new low carbon fuels. This is a specified amount of biofuels, including specific because the returns to such investments— categories of biofuels (such as a cellulosic biofuel which can be substantially affected by LCFS and biomass-based diesel). If a large share of credit prices—are highly uncertain. some biofuels are supplied to California in order to comply with the LCFS, then less would need to be • Fuel Reshuffling. Although there has been supplied in other states. As a result, some of the a reduction in the carbon intensity of fuels effects of the LCFS might be to simply change the supplied in California, it is difficult to know location of where biofuels fuels are supplied—but what portion of these changes is due to not the overall type and amount. This is known additional production of those fuels, and what as fuel “reshuffling.” In addition, by reducing portion might be related to fuel reshuffling. transportation emissions that are subject to the Other Environmental Effects. The program cap-and-trade regulation, some of the emission has some additional benefits related to reductions reductions achieved by the LCFS might be offset in co-pollutants, such as NOx and PM. CARB by increases in emissions from other entities that estimates that LCFS will decrease annual NOx are subject to the cap-and-trade regulation. (For emissions by over 1,500 tons and PM2.5 emissions more details on how complementary programs by more than 200 tons. (This amount is less than that reduce emissions from capped sources 1 percent of statewide NOx emissions and less interact with the cap-and-trade regulation, see our than 2 percent of statewide PM2.5 emissions.) 2016 report Cap-and-Trade Revenues: Strategies On the other hand, there may be some adverse to Promote Legislative Priorities.) environmental effects—such as erosion and habitat Other Effects loss—associated with expanding the amount of land used to produce biofuels. Effect on Innovation Unclear. One major rationale for the LCFS is to encourage innovation OTHER ISSUES FOR for alternative fuels, which can help diversify the CONSIDERATION: LCFS overall fuel mix. The degree to which the LCFS promotes innovation is unclear. Perhaps the most Do Other Benefits Outweigh Higher Costs? important factor that would suggest that LCFS As discussed above, the LCFS reduces GHG drives some innovation is the magnitude of the emissions at much higher economic costs than incentive provided by current credit prices. These the state’s cap-and-trade program. These higher relatively high prices provide a substantial incentive costs have real adverse effects on households. for businesses to develop new lower carbon fuels As a result, we recommend the Legislature ensure and invest in newer technologies. that: (1) the LCFS achieves some other significant benefits—beyond California GHG reductions—that www.lao.ca.gov 33 analysis full gutter AN LAO REPORT cap-and-trade does not and (2) these additional funds, among other things, research and benefits outweigh the much higher program costs. demonstrations for low carbon fuels. If not, the Legislature could consider eliminating or • Change LCFS to Prioritize Innovative substantially modifying the program. Technologies. The Legislature could consider For example, as previously indicated, one of the directing CARB to make design changes stated goals of the LCFS is to promote innovation to the LCFS that better target the program in low carbon fuels. However, it is unclear whether toward innovative technologies. For example, the LCFS is driving major innovation. Even if the a fuel producer could generate credits only program provides significant innovation benefits, we if CARB determines that the activities are recommend the Legislature weigh these additional related to a new or innovative technology that benefits against the much higher program costs. produces fuels that are substantially below the In addition, the Legislature could consider whether CI standard. alternative policies, or changes to the existing Role of LCFS in Promoting Electric Vehicles. LCFS, more effectively promote innovation. Such The structure of the LCFS treats electricity alternatives could include: somewhat differently than other fuels, such as • Higher Carbon Prices. As discussed above, biofuels. First, residential EV charging credits are the current LCFS credit prices ($185) likely awarded to utilities based on the estimated amount encourage more innovation than the current of charging that occurs in their service territory. cap-and-trade allowance prices ($15) because Currently, CARB requires utilities to use the revenue the financial incentives are much greater. from selling these credits to promote EVs, such Alternatively, the Legislature could eliminate as providing rebates to their customers that buy the LCFS and, instead, rely on higher or own EVs. The recent CARB amendments to the economy-wide carbon prices. This could program requires utilities to use some of their LCFS be done through the state’s cap-and-trade revenue for a new statewide program that provides program or a carbon tax. Higher carbon point-of-purchase rebates for EVs. (This change prices could also encourage substantial is subject to CPUC approval.) A working group of innovation. This approach would likely lead to utilities and automakers estimate that the rebate less innovation in transportation fuels because could be up to $2,000 per vehicle. they would no longer have the incentive Furthermore, in response to an Executive from the high LCFS credit prices, but would Order from Governor Brown, the recent regulatory create greater incentives for innovation in amendments provide credits for new EV fast other sectors of the economy because they charging stations (and hydrogen fueling stations) would face higher carbon prices. Under based on their charging capacity, rather than the such an approach, the state might also want amount of electricity they provide. This change to consider using a lifecycle accounting was meant to encourage more investment in EV approach to determine cap-and-trade charging infrastructure. However, it is a significant compliance obligations for transportation fuels change because, historically, the program only to ensure the program encourages reductions provides credits for the fuel that is actually from upstream emissions and biofuels. supplied. As a result, some see this new policy as a • Grants for Research and Development. The contrary to the “fuel-neutral” design of the program. Legislature could allocate more funding for Although both the above design features are research and development activities related generally consistent with the state’s overall goals to low carbon fuels. For example, the state of promoting ZEV adoption, they raise several could expand funding for low carbon fuel potential concerns. The two primary concerns are: grants through the existing Alternative and • Coordination and Interaction With Other Renewable Fuel and Vehicle Technology State ZEV Policies Unclear. As discussed Program administered by CEC. This program above, the LCFS is one of many different 34 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT policies that encourage ZEV purchases and meaning market prices could still exceed cap charging infrastructure. It is unclear whether under certain conditions. However, this mechanism these policies are well-coordinated, why is not structured in a way that places a “hard” this approach is more effective than other cap on long-run market prices. Second, if CARB programs at promoting ZEVs, and how this determines that prices might become too high, it program interacts with other state and federal can make regulatory changes that affect the supply policies. of credits (and deficits). For example, the recent • No Legislative Input. Unlike most other regulatory amendments reduced near-term CI state ZEV policies—which have explicit standards and included new fuels that are eligible statutory direction or funding allocations—the to generate credits (such as alternative jet fuels and Legislature has provided no statutory direction EV infrastructure capacity)—both of which can put for the rebates and infrastructure incentives downward pressure on credit prices. provided through the LCFS. The decisions to In our view, neither approach is an optimal provide these incentives, and how the funding way to limit program costs. If there is a long-run is allocated, has been determined through shortage of allowances, market prices could still CARB and CPUC regulations. The Legislature exceed the CCM price. Furthermore, relying on might want to consider providing specific future regulatory adjustments creates uncertainty direction about the role of the LCFS in its in the program, which tends to reduce long-term overall approach to promoting ZEVs. investments in alternative fuels. In response to these concerns, the Legislature might want to Potential Program Changes to Ensure consider directing CARB to establish a hard price Effective Cost Containment. CARB currently ceiling, similar to the cap-and-trade allowance uses a couple of different strategies to limit current price ceiling that the Legislature directed CARB to or future LCFS program costs. First, CARB has establish in AB 398. A hard price ceiling helps limit established a Credit Clearance Market (CCM) that program costs and, relative to existing strategies, acts as a type of “soft” cap on prices ($211 in 2018 provides greater market certainty. and increasing annually at the rate of inflation), VEHICLE MILES TRAVELED Another way in which the state is seeking to OVERVIEW OF SB 375 reduce GHG emissions from the transportation sector is by reducing driving, as measured by Cities and Counties Have Authority Over Land VMT. The centerpiece of the state’s efforts in this Use Planning in California. The State Constitution area comes from Chapter 728 of 2008 (SB 375, grants cities and counties broad authority over Steinberg), which established a new requirement ordinances and regulations involving land use for regional transportation agencies to create planning, so long as they do not conflict with “sustainable communities strategies” (SCS) plans state law. Typically, cities and counties designate as part of their long-range transportation plans. certain areas within their jurisdiction as “zones” that Below, we provide an overview of SB 375’s have specified land use restrictions. For example, requirements and several related state grant zones often limit the density and types of buildings programs, assess their economic impacts (such as residential or commercial). These land and benefits, and identify issues for legislative use limitations, in turn, have major implications consideration. for the area’s transportation network. Less dense, single-use zones tend to require roads to transport people and goods, while denser, mixed-use zones www.lao.ca.gov 35 analysis full gutter AN LAO REPORT often can also support transit and other alternatives SB 375 tasks CARB with setting emission reduction to driving. targets for each MPO to reach by 2020 and 2035, Regional Agencies Are Responsible for and to update the targets every eight years. CARB Developing Long-Range Transportation Plans. also must review each plan to determine whether Metropolitan Planning Organizations (MPOs) are the plan would meet the targets. Additionally, the federally required regional transportation planning legislation coordinates the state’s regional housing bodies located in urbanized areas with a population planning process with its regional transportation greater than 50,000. Their governing boards are planning process, and provides CEQA exemptions made up of officials from local governments and for certain projects that are consistent with a SCS transportation agencies located in the region. They plan. (In the nearby box, we discuss another piece are required, every five years, to prepare regional of legislation that was recently enacted related transportation plans covering the next 20 years. to CEQA and VMT.) Senate Bill 375 took effect in They also are responsible for allocating certain January 2009 and, by September 2010, CARB had state and federal transportation funds—generally established the required targets. for projects having a regional impact. California has MPOs Generally Planning to Meet Emissions 18 MPOs that together cover areas accounting for Targets by Reducing VMT. Senate Bill 375 allows the vast majority of the state’s population. Most MPOs (subject to CARB review) to determine how MPOs consist of a single county or a group of to meet their GHG emission reduction targets in counties. their SCS plans. In practice, MPOs mainly are SB 375 Requires MPOs to Plan to Meet GHG trying to meet their targets by reducing VMT, Emission Reduction Targets. Specifically, the which in turn reduces light-duty GHG emissions. legislation requires each MPO, as part of their The main way MPOs can try to reduce VMT is by long-range plans, to create a SCS plan to reduce changing the criteria they use to allocate regional GHG emissions from light-duty vehicles only. transportation funds, such as by dedicating more Senate Bill 743: Vehicle Miles Traveled to Be Considered Under the California Environmental Quality Act The California Environmental Quality Act (CEQA) requires that state and local government agencies evaluate the potential environmental impacts of proposed projects, including transportation and housing projects. Historically, government agencies have evaluated the transportation impacts of a project under CEQA by assessing the project’s effect on traffic congestion. This can sometimes lead to outcomes that run counter to the state’s goals to reduce vehicle miles traveled (VMT) and, consequently, greenhouse gas emissions. For instance, certain transit and bicycling projects can be found to increase congestion and therefore have a negative environmental impact. This is because the conversion of a car lane to a bike lane might increase vehicular congestion. Moreover, housing development projects often address potential congestion impacts by widening the streets, which in turn encourages more driving. To address these issues, Chapter 386 of 2013 (SB 743, Steinberg) directed the Office of Planning and Research (OPR) to create a new metric for the review of transportation impacts under CEQA that aligns with the state’s GHG emissions reduction goals. In early 2018, OPR submitted proposed guidelines to the California Natural Resources Agency that generally would require government agencies to assess projects for transportation impacts based on VMT (except for roadway capacity projects). (At the time of this report, the guidelines have been approved by California Natural Resources Agency but are still awaiting formal approval by the Office of Administrative Law.) 36 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT funding to transit and biking projects. To forecast SB 375 while others just share the objective of the associated expected changes in VMT, they use reducing GHGs. Most are funded in whole or in part “travel demand models” that take into consideration through the GGRF. Figure 20 summarizes these projects to be funded as well as various underlying programs. (In addition to the programs identified factors that affect VMT, such as changes in in the figure, the state has several other transit population and land use patterns. Notably, and housing grant programs that either pre-date however, SB 375 preserves control over land use SB 375 or do not have GHG emissions reduction as decisions for cities and counties, not MPOs. an explicit policy goal.) Several State Grant Programs Available to Support SCS Plan Implementation In the years ASSESSMENT OF following the passage of SB 375, the state created COSTS AND BENEFITS: SB 375 several transportation grant programs aimed at reducing GHGs, generally by providing funding for In short, SB 375 does not yet appear to be transit, pedestrian, and bicycling projects. Some having a significant effect on statewide VMT. Below, of these programs have statutory goals that cite we review the available evidence on the actual Figure 20 State Has Several Grant Programs to Support SCS Plan Implementation Year Funding Program Established Program Goals Projects Funded (2018-19)a Affordable Housing and 2014 Reduce GHGs and air pollution; improve Housing and various $497 million Sustainable Communities disadvantaged communities, public transportation projects Program health, and connectivity; increase (such as transit projects). options for mobility and transit ridership; preserve and develop affordable housing, and protect agricultural lands. Transit and Intercity Rail 2014 Reduce GHGs, increase transit Transit and rail projects. $493 million Capital Program ridership, integrate rail service, and improve transit safety. Active Transportation 2013b Reduce GHGs; increase biking and Bicycle, pedestrian, and $254 million Program walking; improve safety and public other non-motorized health; and benefit disadvantaged transportation projects. communities and different active transportation users. Low Carbon Transit 2014 Reduce GHGs and improve mobility, Transit projects and transit $124 million Operators Program with a priority on serving disadvantage operating expenses. communities. Transformative Climate 2017 Reduce GHGs and provide local Various types of $40 million Communities Program economic, environmental, and neighborhood-level health benefits to disadvantaged projects. communities. Sustainable Transportation 2017 Reduce GHGs; preserve transportation Various types of $34 million Planning Grant Program systems; increase mobility and safety; transportation and land promote innovation; support economic use planning projects. vitality; improve health; and prioritize social equity. a From all fund sources (including federal funds). b Established through the consolidation of three existing grant progarms. SCS = sustainable communities strategies and GHG = greenhouse gas. www.lao.ca.gov 37 analysis full gutter AN LAO REPORT impacts to date on driving behavior of SB 375 and developments that are at odds with the travel related programs, and examine possible reasons demand model assumptions used by their for why they are not having the desired effect. MPO in the regional SCS plan. A recent survey Following this discussion, we review the potential by the University of California (UC), Davis environmental, economic and other impacts of researchers of local governments found that, policies focused on reducing VMT. on average, respondents had adopted only about half of the eight most common land use No Evidence of assumptions found in SCS plans. Moreover, Any Major Impact to Date over one-quarter of respondents were unaware of the state grant programs available Driving Is Not Decreasing as Planned. Based to support SB 375 implementation. on our review of available information, it appears • Not Enough Time Has Passed. Even if that SB 375 likely has not had a major impact on cities and counties were to modify their land VMT (and, consequently, GHG emissions). In a use policies and make land use decisions in November 2018 legislatively required report on accordance with their regional SCS plans, progress toward meeting SB 375’s goals, CARB transportation policy experts suggest that it found that VMT per capita statewide decreased could take many years or even decades to see by nearly 10 percent from 2005 through 2010, a corresponding large scale transformation in before CARB’s initial adoption of GHG emission land use and infrastructure that would notably reduction targets for each MPO. Experts suggest alter driving behavior. This is because new the decrease likely was due to increased gas land use policies generally would only affect prices followed by the most recent recession, new development, which occurs incrementally which discouraged discretionary driving trips. In over time. Moreover, modifying existing land subsequent years since 2010, as MPOs began use (such as through infill development) can developing their SCS plans, VMT per capita be a slow process. increased to a few percentage points higher in 2016 than it had been in 2005. Though much of • Some Strategies Included in SCS Plans the increase likely was fueled by factors outside the Might Not Actually Reduce VMT. In 2010 control of MPOs (such as an improving economy), and 2014, researchers from UC Davis the overall trajectory suggests that SB 375 did little reviewed the academic literature on the to blunt the general trend. Moreover, CARB found relative effectiveness of various strategies little evidence in other performance indicators that to reduce VMT. Though they found large-scale transportation and land use changes evidence suggesting that many strategies were underway in California. For example, the are associated with lower VMT, the effects percentage of commuters driving alone either varied somewhat and, in a few cases, were increased or stayed level in most regions. nonexistent. For example, the researchers found that increasing residential density, Several Possible Reasons Why SB 375 Is Not employment density, and land use mix by Reducing Driving. Driving might not be decreasing 1 percent is associated with a decrease in as envisioned under SB 375 because: VMT of up to 0.2 percent, but they were • SCS Plans Might Not Be Getting unable to find evidence that increased transit Implemented at the Local Level. Because service or bicycling infrastructure is associated cities and counties retain authority over with lower VMT. The researchers also land use decisions under SB 375, they are identified several uncertainties and caveats. not obligated to make decisions that are For example, they noted that the effectiveness consistent with their regional SCS plan. For of a strategy might vary by context (such as example, they might have zoning requirements in urban versus rural areas). Additionally, they that limit housing density or require minimum noted that the existing research generally amounts of parking for new housing focused on correlations between strategies 38 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT and VMT, not causal relationships. For decrease other air pollutants emitted by vehicles instance, rather than mixed use, compact besides just GHGs. Research shows this can developments causing residents to drive improve certain health conditions, such as asthma, less, it could be that these development only particularly in neighborhoods surrounded by a lot attract residents whose preference is to drive of vehicular traffic. In addition, reducing VMT likely less regardless of where they live. would decrease vehicle-related injuries and deaths. Traffic Congestion. Certain strategies to reduce Potential Future Impacts and Benefits VMT—such as by expanding transit or bicycling infrastructure—can alleviate road congestion in This section provides a general description of the short term if they attract drivers to use these some of the potential effects if more VMT reduction alternative modes of transportation. In the longer strategies were implemented in the future. term, however, congestion likely would rebound GHG Emissions. All else constant, decreases in over time because, as traffic conditions improve, VMT generally reduce GHGs emissions. However, more drivers would be attracted to the use the road actual emission reductions would depend on a who otherwise would have not made the trip— variety of factors, including what types of vehicles commonly referred to as “latent demand” among are driven less. For example, VMT reductions from transportation policy experts. Even if congestion ZEVs would not result in any reductions in tailpipe did not improve in the long run, however, individuals GHG emissions. In addition, reducing VMT from would have more alternatives to driving. vehicles moving at very fast and very slow speeds would result in greater GHG emission reductions OTHER ISSUES FOR than reducing VMT from vehicles moving at medium CONSIDERATION: SB 375 speeds (when vehicles consume fuel at maximum efficiency). How Should VMT Polices Fit Within the Economic Costs and Benefits. If California Overall Framework for Reducing GHG were to fundamentally change its land use patterns Emissions? CARB assumes in its Scoping Plan and transportation systems in the future in order that VMT reductions through SB 375 are necessary to reduce VMT, research suggests there could to meet the state’s main GHG emission reduction be a number of associated economic costs and goals. However, in the very long term, if the state benefits for governments and households. For transitioned to an all ZEV fleet, then reducing VMT example, governments could incur costs to develop to reduce GHGs would essentially become moot. alternative transportation systems, such as for Thus, the importance of VMT reduction in reducing transit operations and infrastructure. However, GHG emission depends heavily on the progress the these costs could be offset by lower costs for state makes toward adopting cleaner vehicles and road infrastructure and other public infrastructure, fuels. Nonetheless, reducing VMT almost certainly such as from requiring fewer utility and sewer lines results in downstream benefits in the areas of for more compact developments. Households health and safety. Currently, however, SB 375 does located in denser developments could have lower not identify these other benefits as program goals. transportation costs if they are able to able to drive How Can the State Actually Achieve VMT less and save on fuel and vehicle maintenance Reductions? Senate Bill 375 does not contain costs, as well as lower utility costs if they occupy any specific state consequences for MPOs and smaller dwellings. Some households, however, local governments for failing to achieve regional might be adversely affected if they have less GHG emission reduction targets. Moreover, personal space and privacy than they otherwise evidence is lacking on the effectiveness of SB 375’s would if housing was available in less dense CEQA-streamlining incentive to encourage developments. developments consistent with SCS plans. Thus, Health and Safety. If VMT is decreased in the Legislature might want to consider other policy California in the future, then this would generally options to help achieve these state goals. For www.lao.ca.gov 39 analysis full gutter AN LAO REPORT example, the Legislature could add more incentives effects of policies to reduce VMT on various for MPOs and local governments to achieve economic outcomes is limited. This is because their targets or it could create consequences for much of the research simply compares VMT across failing to do so. Additionally, the Legislature could areas with different land use and transportation consider changing state law to remove some characteristics. Thus, it does not control for the discretion over certain local land use decisions possibility that individuals with certain driving that act as a barrier to developments that tend to behaviors “self-select” into the different areas. reduce overall VMT. (We note that the Legislature One way to address this issue is through more recently has considered such legislation.) The “natural experiment” studies that examine travel Legislature also could consider VMT reduction behavior changes after the environment changes policy options that have not yet been implemented (for example, after a new metro line opens). With on a widespread basis, such as road pricing. Each improved research to this effect, the state would of these options has significant tradeoffs that would have better information to use to prioritize funding need to be carefully weighed. across various strategies and grant programs that How Could Research on the Effects of VMT aim to reduce VMT. Reduction Be Improved? The research on the CONCLUSION The state’s climate policies in the transportation difficulties evaluating programs); and (3) the policies sector are complex and have a wide range of are generally more costly than cap-and-trade, but effects—both positive and negative. Based on there might be some limited circumstances when our review, some of our main findings include: they could play a complementary role or achieve (1) the overall effects of these policies are, in many other significant non-GHG benefits. In light of these cases, not well understood; (2) the large number of findings, we identify a variety of potential issues for different policies creates several different challenges future research and legislative action. (such as potential for poor coordination and 40 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT www.lao.ca.gov 41 analysis full gutter AN LAO REPORT 42 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT www.lao.ca.gov 43 analysis full gutter AN LAO REPORT LAO PUBLICATIONS This report was prepared by Ross Brown, Paul Golaszewski, and Brian Brown, and reviewed by Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 44 LEGISLATIVE ANALYST’S OFFICE