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A Gap in California’s Plan for the EV Future

Current proposals leave a giant loophole for used vehicles, but policy innovation can help.

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Which way to the all ZEV future? (Source)

I love a good plan. Nothing is more satisfying than defining a goal, charting a course, and ticking off each step along the way.

So naturally I was excited last month when the California Air Resources Board released its regulatory roadmap for getting 100% of new light-duty vehicles sold in the state to be Zero Emissions Vehicles (ZEV) by 2035. The document, which boasts the alluring title, Staff Report: Initial Statement of Reasons for the Public Hearing to Consider the Proposed Advanced Clean Cars II Regulations, lays out a proposed set of regulations and an implementation timeline that will transition California to a new vehicle fleet free of fossil fuels, as called for by Governor Newsom’s 2020 executive order.

The first chance I got, I curled up with a warm cup of coffee, ready to savor the bold ideas put forth in the 230-page report. My first question was the timeline–what tools had CARB used to craft an optimal path for ZEVs between today and 2035?

PathFigure shows the percentage of vehicles required to be Zero Emissions Vehicles by Year. (Source: ARB’s report)

It looks like the main tool was just a ruler. The plan calls for near linear growth from today’s market, with a constant annual increase of ZEV market share of around 8%.

This is an ambitious course. The ZEV market share in 2021 in California was 12.5%, which itself was a big jump up from 7.5% in 2020. Still, this means that the market needs to double between now and 2026, and then grow steadily. The proposal marshals a number of encouraging facts – about the current and future availability of EV models, growth in the charging network, and consumer sentiment – to argue that such a course is within reach.

The proposal has a number of other interesting components, but I want to focus my attention now on one other thing the proposal includes, which is a loophole big enough to drive a car through, specifically a used car.

The used vehicle loophole, part I

The proposed regulation, and the governor’s executive order, only specify rules and targets for new vehicles. They do nothing to encourage the retirement of the ICE vehicles that exist now, nor the roughly 6 million ICE vehicles that will be sold after 2026 if the car market follows the proposed schedule.

In short, if California drivers want to drive a gas or diesel car in 2035 and well beyond, they are going to be able to do so. And, maybe that’s a good thing. When regulations are tighter than necessary or otherwise ill conceived, a loophole can actually increase welfare. Moreover, CARB’s clearly stated strategy is to use regulation to get new EVs into the market, which has impacts on the rest of the US and the world. A new vehicle regulation with a used vehicle loophole forces automakers, who inherently care about selling new cars, to accelerate their EV transitions, but simultaneously gives California consumers who still want ICE vehicles a release valve that might limit voter pushback.

But, if you really want to reduce pollution, you can’t just ignore what’s happening in the used market. While the new vehicle market share of ZEVs was 12.5% in 2021, the California Energy Commission shows that ZEVs are still less than 2% of the entire vehicle stock, and this will change slowly.

A regulation that restricts offerings in the new vehicle market will be sure to trigger what environmentalists call the Gruenspecht effect. A ZEV mandate that raises the cost of new cars and restricts the set of (ICE) vehicles on offer will drive up the value of used ICE vehicles. As those vehicles become more valuable, people will hold onto them longer, extend vehicle lifetimes and expand the used car market, thus eroding some of the apparent gains from the ZEVs taking over the new market.

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Who loves the equilibrium implications of the proposed rule? This guy! (Source)

The same problem plagues any regulation of a durable good that focuses only on new products. Prior research, blogged about here, showed that the Gruenspecht effect erodes the cost effectiveness of fuel economy standards by the same amount as the rebound effect, which tends to get a lot more attention.

The used vehicle loophole, part II

The used car story doesn’t stop there. As currently constructed, California residents would be free to import ICE vehicles from out of state, even after the mandate is fully phased in. If the prior loophole was large enough to drive a car through, you can fit a truck through this one.

Why does this matter? The ZEV mandate in California creates a large, implicit subsidy to sell EVs in the state. This motivates automakers to market and discount their EVs in California relative to other states, over and above what consumers would demand. This creates an imbalance–there are “extra” used ZEV cars in California and a shortage elsewhere. This will create price differences across states, which the used car market will tend to resolve by exporting used ZEVs out of California. CARB cites evidence consistent with this in the current market: used EVs are already disproportionately exported out of state. The stronger the ZEV mandate in the future, the more powerful this force will be.

It is conceivable that the state might prohibit residents from registering a new vehicle purchased out of state (they do restrict new vehicles based on emissions rules today), but it seems less likely they want to be in the business of blocking used cars. And, market participants will be happy to move used ICE vehicles into the state if there are economic incentives to do so–there is already a robust wholesale auction market, worth $3 billion in sales per year, that dealers use to reshuffle inventories across the country.

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An auction parking lot. They move a lot of cars. (Source)

The regulation will likely be a boon to that industry and to used car dealers in the state. If so, then that giant sucking sound you are going to hear will be used EVs, implicitly subsidized when new in California, fleeing to the rest of the country, with the California used market backfilled by lightly-used ICE vehicles originally sold out of state.

The economic efficiency implications of these dynamics are complicated, but what is clear is that the actual fleet of vehicles driving around California might be quite a bit different than you’d expect from just tracing out the implications of the proposed phase in.

The proposal does devote a lot of attention to the issue of the used car market, but the plan seems to be just to ensure that ZEVs are available in the used market, and then hope that consumer sentiment has shifted enough so that drivers overwhelmingly choose ZEVs over readily available ICE vehicles. As near as I can tell, the current proposal makes no attempt to contemplate the pollution or efficiency impacts of these dynamics.

Fortunately, there are policies that can be adopted subsequently if policymakers want to shrink or close this loophole in the future.

The role of complementary policies

If regulators want to close the used vehicle loophole (and, again, it may be worth leaving it open), there are straightforward ways. One option is to establish a schedule of gas tax increases, which will raise the cost of driving ICE vehicles, used and new. This would alleviate pressure by lowering demand for used ICE vehicles here. A reasonable alternative would be to schedule increases in registration fees for ICE vehicles. In either case, fee schedules can be announced ahead of time, giving consumers a chance to adjust their choices. Either would give policymakers a dial that they can move up or down as needed while the market evolves, and both are feasible and easy to administer (we already have them!).

Both options also have the substantial side benefit of raising revenue, and both have the appeal of being approximate taxes on pollution. Advocating prices for pollution is the main activity of environmental economists. When you have a hammer, everything looks like a nail. But, sometimes you really are in a room full of nails.

An immediate, and important, objection to these ideas is distributional considerations. Equity was clearly top of mind for the authors of the proposal, which includes a number of sections on environmental justice and a running commentary on distribution. In terms of the gas tax or registration fees, equity might be addressed by leveraging scrappage subsidies for ICE vehicles instead of taxes (perhaps in conjunction with a gas tax to balance revenue), or by allowing registration fees to be on a sliding scale with income.

The punchline here is that there are imminently feasible ways to make a ZEV mandate more economically efficient and environmentally impactful by evolving complementary policies to target the used vehicle market. Designing such policies to also achieve equity may take a little ingenuity, but the issue isn’t going away, so we have a few years to hash it out.

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

Suggested citation: Sallee, James. “A Gap in California’s Plan for the EV Future” Energy Institute Blog, UC Berkeley, May 9, 2022, https://energyathaas.wordpress.com/2022/05/09/13378/

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.

17 thoughts on “A Gap in California’s Plan for the EV Future Leave a comment

  1. I do not think that attempting to remove used ICEs or new ICEs from the roads by increasing the tax on fossil fuels or increasing registration fees will work. The voters will resist this action for two reasons. FIrst, they want the ICE for the long trips to vacation sites such as Lake Tahoe (by the way, I have yet to see a charging station for electric vehicles up there). Second. they will want the ICE as a back up vehicle for when the electric grid goes down.

  2. This is a good expository piece. I would note that when CARB promulgates rules and regs pursuant to an executive order, in all likelihood, the language will be squishier than when pursuant to statute. (The prime example being Schwarzenegger’s 2005 EO to reduce GHG emissions that a year later became the basis for AB 32.) And whether we’re talking about rules and regs pursuant to an EO or statute, you need to mitigate the risk — or try to circumvent it altogether — of federal preemption or constitutional issues, particularly with the Interstate Commerce Clause.

    Jim offers a number of “food for thought” suggestions that will add to the debate and future policy measures. However, I think this suggestion is problematic: “One option is to establish a schedule of gas tax increases, which will raise the cost of driving ICE vehicles, used and new.” First, as deeply blue as CA is, the prospect of raising taxes, even for many Democrats in the legislature, is about as appealing as a root canal — unless it’s on the upper one or two percent (although we’ve come close to exhausting that as well). In this case, however, it may well be that more lower-income drivers will be behind the wheel of an ICE vehicle, which creates an obvious equity problem, the well-intentioned goal notwithstanding.

    Finally, the elephant in the room here is the cost of electricity itself, which Severin and Jim Bushnell have lamented for a number of years, joined by Jim Sallee and Meredith in last year’s Next 10 report, with which the PUC largely agreed (staff, at least;-). If we don’t straighten that out, the problem that Jim highlights in this piece will be relegated to the back burner.

  3. WE had the same problem 50 years ago when unleaded gasoline was introduced, and older cars could not use it. The new cars that could burn unleaded gasoline slowly replace all but the “Classic Cars” on our roads. When we were building BART in the San Francisco Bay Area, we had pickup trucks that were converted to LP gas by just changing out the carburetor and adding the detachable tank connector so we could drive through the underground and portions but also worked fine on the above ground tracks and roadways leading to the above ground crossings. Retrofitting to hydrogen or LP gas with fuel injected modern vehicles could be worked out but we need to start now with the technology or even offer multi fuel engines with ICE cars. As more people get solar roofs or solar panels with enough excess power to charge an electric vehicle and gasoline prices and available service stations start to disappear because of lack of sales, we could see a smoother transition over the next 50 years. Remember, that we only need to reduce our carbon footprint to 50% of our current one to balance the CO2 equation for sustainability. Removing Fossil fuels from our energy generation and heating is so much easier with wind, solar hydroelectric and battery storage. By installing more solar panels on my roof plus battery storage I was able to eliminate my gas Furnas for heating and that was more efficient than buying an electric car to replace my Buick la Crosse. it cost less and added value to my home where all cars eventually depreciate to ZERO value Economics will drive the changes.

  4. Posted to Haas Energy Blog:
    A good article and thanks for posting it. Two comments:
    1) Used electric cars may become more desirable than ICE ones as they are cheaper to drive. This will be especially true as technology improves. Take for example our 2011 electric Nissan Leaf purchased for used in 2020 for $3,200 and driven 6,000 miles a year with no maintenance except for new tires. Cost $0.09 per mile in input electricity to drive. (Measured input with a watt meter 2.7 mile/kwh, 120v charging, off peak electricity cost from PG&E $0.245/kwh.) Since some parts of the state such as Roseville https://www.roseville.ca.us/government/departments/electric_utility/residential/rates have much lower electricity rates of for like $0.15/kwh the cost of driving an electric car may be only as low as about $0.06/mile. Unfortunately, the 2011 Leaf’s technology is now obsolete and the battery aged so the effective range is only about 30-40 miles. However, this is still very good for local trips in a multi car household. As the technology improves then batteries should last longer with a longer range. We do have a dedicated parking place to plug the car in and charge. Once get used to plugging in the car as soon as one parks the EV becomes very easy to use. After a while it becomes irritating in ICE cars to have to fill up with fuel and take in for maintenance. In comparison our 2017 Toyota Prius gets a reliable 50 miles/USgal. At $5.50/USgal this is still $0.11/mile just for fuel. Maintenance is extra. Cars that get only 25 miles/USgal cost $0.22/mile just in fuel cost. If the electric car can charge and discharge into the grid when plugged in it may save owners more money. See https://www.utilitydive.com/news/california-approves-117m-vehicle-to-grid-pilots-in-pge-footprint/621393/#:~:text=California%20approves%20%2411.7M%20vehicle%2Dto%2Dgrid%20pilots%20in%20PG%26E%20footprint,-Published%20April%201&text=UPDATE%3A%20May%206%2C%202022%3A,for%20Pacific%20Gas%20%26%20Electric%20Co, (Use search terms pge vehicle to grid program for articles.) and https://en.wikipedia.org/wiki/Vehicle-to-grid
    So as technology improves if one has a dedicated parking place to charge an EV, then EV’s may become much cheaper than ICE’s to drive.
    2) When raising taxes or fees it is important to remember the purpose is to reduce CO2 production. If the money raised is spent on projects where the cost of CO2 reduction is greater than $50/tonne, (projects like California high speed rail and light rail systems for example) then it will simply be a useless tax. This tax will fall mostly on lower income residents who do not have a dedicated parking place to charge an EV. As I mentioned before, the carbon fee and rebate:
    https://citizensclimatelobby.org/basics-carbon-fee-dividend/#:~:text=Carbon%20fees%20are%20proposed%20fees,spend%20as%20they%20see%20fit.
    may be a more equitable and politically possible than just raising taxes on carbon fuels.

  5. – Note that in Q1 of 2022, over 16% of new car sales in California were BEVs and PHEVs. The market is growing rapidly.

    – A key factor in increased LDV longevity is the CARB’s emission control warranty requirement. The average age of LDVs in California has gone from 7 years to 12 years in the last 20 years due to this regulation. That ironically will slow adoption of EVs.

    – The owners of large inefficient vehicles likely are not fuel price sensitive. They own those vehicles for other characteristics such as cargo capacity that are not available in more smaller vehicles. A recent study showed that 10% of LDV owners created 32% of the GHG emissions, which was more than the 60% of owners with least amount of emissions. Vehicles offer a bundle of traits, and I’ve seen too many studies that don’t recognize those differences. For example, the CEC and CARB did studies looking at EV acceptability that failed to include the fact that a small commuter car is often (1) used and (2) driven less miles than the larger, long range primary car in the household. That the carmakers are rolling out large capacity pickup EVs is perhaps the most exciting development to reduce GHG emissions given these facts.

    – Gas prices already have a large premium above the national average. As the number of ICE LDVs decrease and gasoline sales fall, I wonder if prices will go up commensurately as fixed costs are spread over a smaller sales base.

  6. I wonder how many hard pressed American people can afford an $83,500 Rivian or a $179,000 Lucid Air. Will people be able to get 30 year mortgages on these vehicle ?

    • Why not a used Chevy Bolt for $22K, or a new one for $40K? There are inexpensive alternatives to the Tesla, etc market.

      • The problem with used, cheap cars, you cannot get the batteries for the Chevy Spark or the Chevy Bolt. It will be years before they can bring the price down to match used ICE vehicles.

  7. This article is right on the money. The policy could be better.

    What you leave out is the trend to make crappier and crappier products coupled with designs that prevent repair. These trends will diminish the value proposition of a used ICE vehicle. Case in point: I have a 2005 Toyota Sienna and it still runs great. I had cause to rent a new one and it was a PoS.

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