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Waving Goodbye to the California Waiver?

The latest twist in the Trump fuel economy rollback.

The year 1969 was highly notable—Apollo 11 landed on the moon, free love blossomed at Woodstock, and Richard Milhous Nixon was sworn into office. It was also the first effective year of the “California waiver,” which gave the Golden State the right to impose standards on automobile tailpipe emissions that were stricter than new federal rules.

In the five decades since, dozens of waivers have been granted. These waivers have been critical both in giving California the right to control pollution in the state and in implicitly giving it leverage to drive federal policy.

Since the summer of love, however, we’ve traded Neil Armstrong, naked hippies and Nixon for the likes of Space X, Burning Man and Donald Trump. The latter of these, President Trump, announced last week plans to revoke the latest California waiver targeting greenhouse gas emissions from cars.

The move represents the most recent step in the administration’s ongoing attempt to rollback fuel economy regulations. California and a collection of like-minded states have already sued in response. Is this the end of the waiver? If so, should we mourn its loss? Or might the coming legal battle be primarily an unhelpful distraction?

What is the waiver?

In the 1950s and 60s, air quality in Los Angeles and other urban centers in the state was terrible. In response, California pioneered scientific understanding about the role of automobiles in air pollution and developed the first policies aimed at mitigation.

By the time the federal government got around to regulating vehicle emissions in the late 1960s, California—under Governor Ronald Reagan—had already established the Air Resources Board and passed regulations aimed at spurring adoption of new pollution control technology. (Based on ongoing research, in a future post I will argue that the subsequent evolution and diffusion of catalytic converters was a signature achievement of twentieth century environmental policy.)

Governor Reagan pictured here authorizing the creation of the Air Resources Board. Source: ARB

In recognition of California’s first mover status, its demonstrated competence, and the exceptional environmental problems in the state, the federal government “waived” California from the new federal program, allowing it to keep its own stricter rules, so long as they were necessary to meet “compelling and extraordinary conditions” in the state. Thus the waiver was born.

The waiver in question today regards carbon emissions, rather than local air pollution as in the original. (The administration is also revoking a second waiver for the state’s Zero-Emission Vehicle mandate, but I am focused on the greenhouse gas policy in this post.)

The greenhouse gas waiver came about because California passed legislation requiring a doubling of vehicle fuel economy for cars sold in the state in the waning years of the Bush administration. Before the policy took effect and created separate California standards, President Obama took office and adopted regulations that were in harmony with California’s rule, thereby avoiding a two-tier system. Today, the Trump administration is planning to roll back the Obama fuel economy standards, in spite of industry opposition and gaping flaws in the supporting regulatory analysis. But California’s law is still on the books, so the rollback would create two distinct standards. The administration thus proposes to eliminate California’s waiver too, preventing creation a two-tiered system.

The economic logic of two-tiered standards

Originally the waiver process allowed California to have tighter exhaust standards, in line with the more severe air quality problems plaguing the state. Starting in 1977, other states were allowed to opt for California’s stricter rules if they decided it was in their interest. This differentiation increases efficiency by better matching regulatory stringency to the air quality conditions in each state.

Unfortunately, the economics of two-tiered standards for global pollutants works very differently. The problem has to do with the way that a California greenhouse gas rule “nests” into the federal standard.

The federal greenhouse gas rule for automobiles, called Corporate Average Fuel Economy (CAFE) standards, require automakers to sell vehicles that, on average, have fuel economy above a certain threshold. If California has its own, stricter greenhouse gas rule, the cars sold in California still count as part of the federal fleet under CAFE. This means that every Leaf, Prius and Tesla sold in California improves the industry’s federal average. That enables automakers to sell more Mustangs and Suburbans in the rest of the country, which means that much, if not all, of the greenhouse gas mitigation that takes place in California will be offset by increased emissions throughout the nation.

The application of this so called “waterbed effect” to California fuel economy standards was described elegantly in a paper by Larry Goulder, Mark Jacobsen and Arthur van Benthem back in 2012. They studied the implementation of a California-specific fuel economy rule and concluded that between two-thirds and three-quarters of emissions reductions in California would be offset by increases in other states. In the meantime, the burden of complying with strong regulations would fall on Golden State consumers.

It seems safe to say that the Trump administration’s challenge to the waiver owes to a desire to gut the overall regulation, rather than a concern over inefficiencies and leakage. But regardless of the administration’s motives, the direct environmental benefits of granting California a waiver so that it can pursue a stricter greenhouse gas rule may be minimal and will certainly not be cost effective.

So is there still a case for loving the waiver and rooting for California to prevail in the brewing legal battle?

The California effect and the climate crisis

Fussing over economic inefficiencies is all well and good for an economist like me (this is basically my job description), but we face a climate crisis. Transportation accounts for about 30% of greenhouse gas emissions in the US, and finding ways to push those numbers down at an acceptable cost is hard. California, for example, has seen significant reductions in greenhouse gas emissions from electricity in recent years, but transportation emissions are on the rise.

If leadership on reducing transportation emissions is not going to come from Washington, perhaps it can come from Sacramento. Is a greenhouse gas emissions waiver key to this goal?

When California originally passed a tighter standard during the Bush years, it was essentially holding itself hostage by threatening to create a two-tiered system that the automakers loathed and would create a large burden on the state in exchange for minimal net environmental benefits. From one perspective, that looked like a dumb move.

But in hindsight, the strategy worked. By moving first and passing its own standard, California set the terms of debate for the federal policy and eventually got its way. This is but one example of what is sometimes called the “California effect,” by which California moves first to establish environmental rules that eventually get exported elsewhere.

California needs to lead again, but the way forward does not need to be through CAFE-style rules that require a waiver. Even before worrying about nested state-federal distortions, fuel economy regulations are riddled with inefficiencies, some of which we have blogged about here and here and here. As such, CAFE is a clumsy and costly tool for addressing the barriers to radical transformation of the transportation sector.

Thus, my great hope is that the death threat to the greenhouse gas waiver will serve as an occasion for clever minds to raise their line of sight towards broader and more ambitious policies that make the state into a laboratory for the future of transportation. This means more attention to how electricity prices impact electric vehicle adoption, to electric vehicle charging infrastructure chicken-and-egg problems, to steering the evolution of the ride sharing industry to align with environmental goals, to fostering basic research on automation as well as answering the hard policy challenges of rolling it out, and to reducing emissions from the existing fleet, including through better pricing of road use and congestion.

My fear is that instead of spurring policy innovation on these topics, the legal fight over California’s greenhouse gas emissions waiver will soak up the attention of interested parties, who will war over a deeply flawed prize, distracted from the true task of finding a lasting solution to transportation emissions. If so, environmental advocates would fall victim to the same fate as many of Trump’s political opponents, who become distracted by insult and conflict away from the hard work of finding real solutions.

Keep up with Energy Institute blogs, research, and events on Twitter @energyathaas.

Suggested citation: Sallee, James. “Waving Goodbye to the California Waiver?”, Energy Institute Blog, UC Berkeley, September 23, 2019, https://energyathaas.wordpress.com/2019/09/23/waving-goodbye-to-the-california-waiver/

 

James Sallee View All

James M. Sallee is an Associate Professor in the Department of Agricultural and Resource Economics at UC Berkeley, a Research Associate of the Energy Institute at Haas, and a Faculty Research Fellow of the National Bureau of Economic Research. He is a public economist who studies topics related to energy, the environment and taxation. Much of his work evaluates policies aimed at mitigating greenhouse gas emissions related to the use of automobiles.

15 thoughts on “Waving Goodbye to the California Waiver? Leave a comment

  1. I’m not an economist, so forgive me my ignorance. This is an informative post, but it leaves me to continue asking the following questions:

    1. Trump seems to want to do away with this waiver system in order to **loosen** emission standards nation-wide, not make them stricter or more efficient. Which is worse: the current system, or Trump’s proposed looser standards?
    2. Given that Trump wants looser standards nation-wide, wouldn’t carmakers side with Trump? Why are they trying to cut a deal with California? Is it because there is some public relations benefit to the current system by which they can associate themselves with fuel efficiency and the “green” movement while simultaneously profiting from the offset in other states? Or is there some other force at work?
    3. Given that carmakers — or, “big businesses” — don’t seem to want the looser regulations, what motivates the Trump administration to persist in trying to loosen them? (This may be unanswerable, but I keep asking…)

    Thanks, Jim, for the pointer to the issue with nested regulations.

  2. “Since the summer of love, however, we’ve traded Neil Armstrong, naked hippies and Nixon for the likes of Space X, Burning Man and Donald Trump.” — wow you’ve drawn a super interesting parallel here!

  3. As I understand it, Sallee’s line of argumentation basically boils down to ‘CAFE standards are just so darn inefficient economically’ — if only we could raise fuel taxes (or implement carbon taxes) we’d achieve the twin goals of reducing driving overall and increase fuel economy (thereby reducing total emissions)– not to mention achieving a nirvana-like state of bliss for all sentient energy economists. The key word is “could”. The federal gasoline tax has been stuck on 18.4 cents/gallon since 1993 and its hard to imagine there is any political will to even consider thinking about it in today’s DC political climate. We did increase the state gasoline tax in CA this past summer (not without a political price) — I suspect that there is little enthusiasm for taking up that issue again anytime soon (I have no idea whether the current tax, ~41 cents/gal, will have any of the desired effects…). Raising taxes (of any sort) is a legislative and political process, unlike most standard-setting activities (not to say that sometimes standards run afoul of politics) – an externality not captured in most economic wishful thinking.

    Sallee’s argument also ignores (conveniently??) the fact that 22 other states are joining the lawsuit against the Trump administration’s attempt to undo the waiver – many of those states have relied on CA automobile emissions standards for their own standard setting. In addition, this past summer four automobile manufacturers signed on to CA’s setting emissions standards. So maybe the waiver and the CAFE standards are imperfect tools – and certainly the looming issue of how to incorporate an increasing EV fleet into electricity rate setting is a public policy area the waiver/CAFE standards don’t address — but we risk letting the near perfect being the enemy of the good enough (for now) – especially if all Sallee has to offer is “a great hope” (‘if wishes were horses, beggars would ride’ – Scottish proverb).

    I would argue that, in fact, the CAFE standards have been a major (maybe not sole) driver for some of the technological innovation in transportation – stratified charge engines, hybrid vehicles, electric vehicles. Even Max Auffhammer, in his “A tale of two standards” piece from a couple of years ago (cited above) agrees that having CAFE standards is better than nothing…

  4. Nice, thought-provoking piece. Curious, though, as to why economist seems to embrace a premise of “radical transformation of the transportation sector.” Many economists would indeed consider CAFE standards (fleet average vehicle GHG intensity regulations) to be a “clumsy and costly tool,” but why no mention of California’s cap-and-trade system, which since 2015 covers transportation fuels?

    The catalytic converter is certainly a great success story. Indeed, tailpipe catalysts and their successive, regulation-driven refinements have been so effective for cleaning up vehicle exhausts that any direct air quality benefits of the now 29-year-old ZEV mandate are quite difficult to observe. Essentially all criteria air pollution reductions achieved to date for highway vehicles have been due to performance-based emissions regulations. Those CAFE-like rules spawned the many flavors of “ultra,” “super-ultra,” “partial zero,” etc., combustion engine vehicles that rely on catalytic converters and related emission control technologies, including low-sulfur reformulated gasoline. So much (so far) for the “radical transformation” that the ZEV mandate was also supposed to spur.

    This being said, it’s great to hear of your ongoing project on the evolution of the catalytic converter. In case you’ve not seen it, an interesting article on the early history of the topic is:

    Palucka, Tim. 2004. Doing the Impossible. Invention & Technology Magazine 19(3), Winter.

    However, history seems unlikely to repeat itself. Electric vehicle technologies are nowhere close to having the technologically grounded benefit/cost performance for mitigating CO2 emissions that catalytic converters had for reducing criteria air pollution. A richer policy toolkit, including measures you highlight related to vehicle charging and pricing-based demand management, would certainly be helpful. But it is yet to be seen whether any such policies can achieve even the limited level of leverage on transportation sector CO2 emissions held by California’s CAFE-like new fleet average GHG (“Pavley”) standards.

    There are a lot of babies in the proverbial bathwater for transportation and climate. The Pavley standards are arguably the most mature at this point. Can California really afford to discard this “big baby” even as it seeks to nurture others?

  5. Richard McCann:
    Have the laws of physics changed that much since 2010?
    Does the sun now shine at night?
    Or is CA still generating electricity from gas when the sun ain’t shining and the wind not blowing?

    • I’m pointing out that the costs have changed dramatically since 2010. The study was a cost-effectiveness study. The cost (and performance) data used in that study are no longer valid.

      You can argue separately about the physics of operating the system, and a cost effectiveness study should account for how the system operations might change with different configurations. But the bottom line is that such a study is largely driven by the relative costs of the resources.

      • Richard McCann: Your claim that the pair of 2010 CCST reports are obsolete is simple to rebut. 1. A stable grid requires baseload generation to meet about 50% of the peak load requirement. Furthermore, examination of current daily CAISO records shows the minimum daily load is several times the nameplate capacity of Diablo Canyon. Grids that have added more intermittent generation in the UK, Germany, and Australia have experienced very expensive grid collapses. Solar and wind require large amounts of natural-gas-fired generation to compensate for their substantial intermittencies. Furthermore this natural -gas-fired generation is operated inefficiently. These imposed costs are not accounted for in your claim that solar and wind costs have declined. In particular, the social cost of carbon in California is only about 1/3 of the value determined by the U.S. EPA circa 2017. To reiterate, even if solar panels were free, the imposed costs make solar a bad deal. A similar analysis applies to wind.

  6. Thanks James for a thought-provoking blog posting. CPUC Intervenor Californians for Green Nuclear Power, Inc. has long pressed for expansion of nuclear power in California to support vehicle electrification. This would be cost-effective decarbonization. As an example, zero-emissions Diablo Canyon Power Plant (DCPP) runs 24/7, Sun or no Sun, wind or calm, drought or flood. In recent years, California’s in-state generation has been about 60% natural gas. That means an electric vehicle (EV) is not truly zero-emission. It is more accurately a 60% natural-gas-fired generation vehicle.

    If the convenience of at-home recharging is available, most EV owners prefer to recharge at night, when solar’s contribution to California power falls to zero and wind power tends to be diminished. (I also observe this preference at the nearby Tesla recharging station at the Madonna Inn in San Luis Obispo.) As has been argued elsewhere, the greatest (and most cost-effective) statewide emissions reductions would result from expanding nuclear power, as advocated in a pair of 2010 reports from the California Council on Science and Technology (CCST) while expanding the use of EVs in California. This would be zero-emissions power generation coupled with zero-emissions vehicles.

    • You keep referring to the obsolete 2010 report that claims nuclear power is a cost effective solution. Since 2010 (when I was preparing yet another Cost of Generation study for the CEC that reviewed the range of cost estimates for all of the significant technologies) the cost of renewables has fallen by 75%, and nuclear power costs doubled at the plants that we were looking at in 2009. An updated report would not come to the same conclusions.

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