from Energy Realpolitik and Energy Security and Climate Change Program

What States, Cities, and Corporations can do in the Face of Federal Resistance to the Clean Transportation Transition

A motorist drives past a parking lot full of new Tesla electric vehicles in Richmond, California, U.S. June 22, 2018. (REUTERS/Stephen Lam)

August 2, 2018

A motorist drives past a parking lot full of new Tesla electric vehicles in Richmond, California, U.S. June 22, 2018. (REUTERS/Stephen Lam)
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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

Stefan Koester is an intern with the Energy Security and Climate Change program at the Council on Foreign Relations. He is a graduate student at the Fletcher School of Law and Diplomacy at Tufts University.

Today the Trump administration published proposed rulemaking rescinding the authority of California to set its own tougher vehicle emissions standards along with the state’s Zero Emission Vehicle (ZEV) mandate. Under what the Environmental Protection Agency (EPA) and National Highway Traffic Safety Administration (NHTSA) are calling the One National Standard, California and nine other states following its lead, would no longer have the authority to set GHG emissions standards or ZEV mandates that are different from a federal standard. California and other states have promised to sue the Federal government, likely leading to years of litigation and market uncertainty.

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While this battle plays out in the courts, there are lessons that can be learned from the clean electricity transition to see how states, cities, and corporations can spur EV adoption in the absence of federal leadership. There are unique differences between the electric power and transportation sector, but there are broad lessons from the electric power sector to apply to the burgeoning transportation transition.

In the absence of the authority of states to set ZEV mandates, there are ways states, cities, and corporations can work collaboratively to drive the clean transportation transition. State-level taxes on gas guzzlers and rebates for EVs can send the right market signal to consumers and spur automakers. Strong and public EV procurement commitments on the part of logistics and transportation companies would show corporate leadership. And finally, U.S. automakers may realize competitive difficulties in managing multiple, parallel business platforms if automakers do not focus more attention on the global EV market. All this is to say that U.S. automakers could ignore federal rules, regardless of federal policy, and stay the course to comply with the California standard.

Where Renewables and EVs are today

Wind and solar are now the second and third fastest growing energy sources in the United States, respectively. Since 2010, nearly half of all new capacity additions have been from renewables. This year, under the less-than favorable conditions of the Trump administration, wind and solar are the second (1,956MW) and third (1,921MW) largest source of new generation after natural gas (6,646MW). In total, wind and solar made up 36 percent of all new generation this year. With the falling cost of wind and solar, along with battery storage technology, it is likely that renewable energy will hit grid parity with natural gas, on a levelized cost basis, in the next five to ten years. Renewables still only make up 7.3 percent of the electricity sector to date, but several states, like California, Iowa, and Massachusetts, are well on their way to reaching 50 percent in the coming decades.

Electrification in the transport sector, even in California which has had incentives for several decades, is not matching the success of renewables. Today, there are roughly 269 million registered motor vehicles in the United States, and while EV (both plug-in and pure-battery) sales grew by 20 percent in 2017, they only make up 0.3 percent of total vehicle stock. Even the most optimistic projections out to 2040 show that EVs will only make up a third of global vehicle fleets. The EIA’s more modest growth trajectory shows EVs growing to 6 percent of total sales by 2040. The Trump administration’s proposed rule will likely slow this development even further, with estimates of an additional 2.2 billion tons of greenhouse gas (GHG) emissions through 2040.

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While Mandates worked for Renewables, they haven’t worked for EVs

It is unclear what the legal outcome of the EPA/NHTSA rule will be and it is unclear whether the courts will issue a stay in California’s favor, allowing the standards to remain in place during litigation. However, it’s clear that while state mandates worked in the clean energy transition, their success in the transportation sector is limited.

Renewable portfolio standards (RPS) for power generation have been around for more than two decades and now apply to 29 states. State RPSs created long term contracting and investment certainty for project developers and utilities, and ensured market demand. Between 2000 and 2016, RPS programs were responsible for roughly 56 percent of total U.S. renewable energy deployments, with estimates that RPSs will drive an additional 4GW of annual generation between now and 2030. States are now building more renewable resources than required under RPS statues due to falling costs and acceptance of wind and solar technologies by utilities and regulators as valuable grid contributors.

The spectacular success of the RPS, however, is not easily transferable to EV adoption. In theory, ZEV mandates, like the RPS, could drive investment and certainty into burgeoning markets by ensuring that if automakers design, build, and market EVs, then there will be a market for them. Ten states have a ZEV mandate, but even the most ambitious, California, will require roughly 6 percent of total vehicle stock to be battery-electric vehicles by 2025 and 5 million by 2030, about a quarter of the state’s 20 million vehicles. California only has 366,000 EVs on the road today. The failure of ZEVs to spur the clean energy transition in the same way that RPSs have is for a number of reasons.

Unlike the electric power sector, which has a couple dozen state-wide utility and regulatory actors, the transportation sector has millions of consumers, thousands of dealers, dozens of large global manufactures, and little existing infrastructure to adequately support deep EV penetration. ZEV mandates have failed to lead to widespread consumer adoption of EVs due to inadequate supporting policies for charging, dealer resistance to marketing EVs, higher upfront costs, limited available model options, and continuing consumer preferences in favor of large internal combustion engine (ICE) vehicles. In addition, turnover of the vehicle stock, which is roughly once every twelve years, requires that the consumer have market access to a perfectly substitutable EV when purchasing a new car, something that is not available today. It is unlikely that stronger mandates, regardless of Federal action, would help drive further EV adoption in the absence of supporting state and local policies to help overcome additional barriers.

A state ‘feebate’ program where consumers pay a fee for gas guzzling cars and receive a rebate for EVs is likely both immune to federal interference and would spur greater consumer demand for EVs than state-wide ZEV mandates. Feebates are analogous to federal and state tax subsidies for renewable energy and, where it exists, carbon pricing that serves as a fee on fossil-fuel generation. Tax subsidies and carbon pricing helped spur investment in renewables above and beyond state RPSs. Feebates could jump start the clean transportation transition.

Corporate and Public Procurement Strategies Can Drive Demand

While ZEV mandates have been disappointing, corporate and public procurement policies could increase EV adoption by driving market demand, lowering technology cost, and helping overcome consumer preference barriers.

When large corporates publically committed to investing in renewables, states and cities competed to adopt clean energy policies to attract investment, leading corporates to invest billions in renewables across the country. Google and Apple made headlines last year when they announced, separately, that they were 100 percent powered by renewable energy. Google signed its first renewable contract in 2010 and rapidly increased its share of renewables with investments totaling more than $3 billion, for more than 2.4 GW of renewables. Apple followed up soon thereafter announcing that they were 100 percent renewable across their global operations with over 1.4GW of renewable capacity. In total, more than 140 international corporations have pledged 100 percent renewables, driving 19GW of renewable energy demand since 2008. While these companies may be investing in renewable energy for the green bona fides, they are ultimately doing it because renewables are cheap.

Strong procurement commitments on the part of large corporate entities could do the same thing for EVs. UPS, FedEx and DHL are now conducting large-scale testing of EVs in their trucking fleets and their doing it because their delivery costs will fall. Total ownership cost of EVs is lower due to fuel, maintenance, and operations savings. EV trucks are also smarter than ICE vehicles, through IoT sensors and routing technologies, allowing for increased efficiency and reduced delivery times. Finally, consumers may come to demand it as the environmental costs of same-day shipping are more widely appreciated.  

Corporates can drive EV adoption in the passenger fleet as well. Uber recently announced a pilot program in seven cities that pays drivers an extra dollar for each ride they do in an EV. Lyft has an ambitious, multi-year plan to become a carbon-neutral transportation company, predicting that by 2025 they will provide one billion rides per year in electric vehicles. In the same way that corporations leaned on states and cities for favorable renewable energy policies, corporations interested in electrifying their fleets could put pressure on states and cities to invest in electric vehicle infrastructure such as public charging, preferential lane access, and license fee waivers. Cities could also require that ride-sharing services switch to EVs over a certain number of years, effectively shifting millions of drivers into vehicles that are cleaner and cheaper to operate.

Cities also did their part to drive demand with commitments to 100 percent renewable energy. More than seventy U.S. cities made 100 percent renewable energy pledges, including Atlanta, Madison, Portland, and San Diego. Similar commitments can drive increased EV adoption. Cities could commit to converting their municipal vehicle fleets to EVs. The public sector can drive down battery costs through electric public bus procurement commitments, in addition to fleet-wide conversions of public vehicles. Cities all around the country are already transitioning to electric buses, but they are not doing it fast enough. New York City aims to switch all 5,700 MTA buses to electric by 2040. San Francisco, Washington, D.C., Salt Lake City, and other have made similar pledges. The average life span of a public bus is twelve years. Speeding these commitments up to within the next decade would fuel growth in the EV bus sector and drive down costs throughout the technology stack. Electric buses are popular with city transit officials because they are cheaper, cleaner, quieter, and popular with riders. In addition, city school boards could push to electrify the nation’s 480,000 diesel school buses. This alone would save roughly $2.9 billion, annually, in fuel and maintenance costs, money cities can reinvest into schools.

Corporate and public commitments like these can move the needle on EV market demand, battery technology costs, and public infrastructure requirements. In addition, states and cities could begin to compete with one another to have the most favorable EV policies, attracting investment from logistics and transportation companies, automakers, and utilities.

Large Corporates Don’t Like Managing Multiple Platforms

When Xcel Energy CEO Ben Fowke announced last year that the western utility with 3.3 million customers would be backing a long term business strategy centered around “steel for fuel”, investors and industry analysis were supportive. The strategy refocuses the utility through massive long term investments in cheap wind and solar, while divesting from expensive coal. A number of other utilities have announced similar plans to back away from costly fossil generation and focus heavily on renewables. Ultimately, some utilities see running two platforms, a fossil-fuel one and a renewables one, as a long term losing strategy.

The major U.S. automakers are currently running multi-platform businesses with ICE vehicles that serve the dominant segment of the market and smaller EV design, production, and marketing divisions. As consumers and corporates begin to demand increased EV options automakers could find that running multiple, parallel production platforms is costly and inefficient. China, as one senior official noted, is working to end the production and sale of ICE vehicles, increasing the pressure on major U.S. car makers like GM, Ford, and Chrysler to build and sell more EVs. In addition, major foreign automakers like Volkswagen, Diamler, Volvo, and BMW have made ambitious commitments to transition away from ICE vehicles and toward all electric platforms. The Big Three automakers have been slow to adapt, but they may find that maintaining two parallel assembly lines, one that builds traditional ICE vehicles and one the builds EVs, is increasingly more expensive and less profitable than optimizing production on just one line. With the global focus on increased EV adoption, together with state, city, and corporate policies to drive further growth in the United States, automakers might start feeling the pressure to compete on their EV offerings. Focusing only on ICEs, as the Trump administration is doing, is not a good global business solution. While ICEs are cheaper today throughout the world, EV costs are falling rapidly. U.S. car manufacturers may lose global market share if they are not able to keep up with global EV demand. In addition, ongoing federal litigation will increase regulatory uncertainty for automakers.  

Just as some utilities have made the choice to invest in renewables for future generation, it is important for U.S. automakers to keep forward looking global strategies. Federal policy should not discourage American automakers from a transition away from fossil-driven technologies if it becomes too costly to maintain two engine platforms or they risk being placed at a global competitive disadvantage to foreign automakers.

The Clean Transportation Transition Going Forward

The Trump administration has shown its hostility to state-level emissions and electric vehicle mandates. While the legal challenges work their way through the court, states, cities, and corporations, including U.S. automakers, can drive the clean transportation transition forward through ‘feebates’, procurement commitments, supportive state EV policies, and a transition away from multi-platform business strategies. Using lessons learned from the successes of the clean energy transition, states, cities, and corporations can advance EV adoption in the absence of Federal leadership. In addition, the clean energy transition shows that an economy-wide shift in a major sector of the economy is possible and can happen within a short amount of time. While a potential compromise between California and the Federal government is conceivable, in its absence there is much that states, cities, and corporations can do.

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