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.)
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.
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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 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.