Recently, I spoke with John Boesel of CALSTART on a wide ranging set of issues: new legislation in California that requires a 40% reduction in GHGs by 2030, the California Low Carbon Fuels Standard (LCFS) program and the federal fuel economy standards.
The new legislation that was just established this year sets California on a really clear path toward hitting what I think is a pretty tough number, which is a 40% reduction in greenhouse gases below 1990 levels by 2030. So the good news is that this is a big challenge, and the way we view challenges is they’re opportunities. And I think this is going to mean that the state is going to have to be using all of its resources, both on the policy and regulatory front, but then also on the financial side to provide incentives and to help with the advancement of technology to move the industry forward. So that’s going to be both the big challenge and the big opportunity, and the second part of your questions was what does it mean for California to be moving ahead with these tough new goals while also facing some uncertainty around the cap and trade program?
Let me just say that to clarify where things are with cap and trade right now is that the program has been very successful so far. The auctions have been held, they’ve been orderly, there haven’t been any kind of shenanigans or manipulation of the market, so we are all crossing our fingers on that, but I think the program’s worked very well. It has generated some very significant revenues up until the last two auctions. Those revenues from the initial auctions were put to use in many different ways to reduce greenhouse gases in the state, and I think we’re spurring a lot of growth. Now right now the program is facing a legal challenge in the courts, and the courts will determine whether or not it will be allowed to continue. If the courts decide that the program should not continue or that there is a reason why it shouldn’t be allowed, there would need to be a two-thirds vote of the legislature to sustain the program going forward. And that would most likely require bipartisan support for that measure. And that would be the tough thing. Could the legislature muster the two-thirds vote to continue the program if the legal challenge was successful? So we’ll have to see how that plays out. Hopefully the program will continue, but if not, we’ll have to adjust to it.
There’s no doubt that the 40% target is going to require some major, transformational changes. The good news is that there’s just a lot of innovation occurring in the transportation sector. You hear it, you see it when you go to meetings with venture capitalists in Silicon Valley, but you also hear it and you see it when you go to automotive conferences in Michigan. You know, I think everybody is overwhelmed, or at least certainly impressed by the rate of technology innovation that’s occurring in the automotive and bus and truck spaces. So the good news is that there is so much happening and things are changing and improving so quickly, that I think there’s a good shot we’ll be able to hit that target.
Now, having said that, my biggest concern is, is there enough happening on the liquid fuel side of the equation? The regulations, from the zero emission vehicle regulation to the federal light-duty vehicle standards, are really pushing a lot of innovation and investment on the automotive side. And the suppliers, per a recent survey we did, are indicating that they’re innovating like they never have before and they believe these standards can be met. But are we seeing that same level of innovation and sense of urgency on the liquid fuel side? And that’s what I’m just not sure I’m seeing it, and I would love to see more happening in that space.
I’m not quite as involved in sort of the goings-on in Washington, but from talking to enough people, it does seem like there’s a growing interest in not scrapping but improving the Renewable Fuel Standard at the federal level. I think there are folks on both sides that would really like to see that policy improve. So I think that would really be a great thing. I do think that in many ways, the California policy is a little more elegant, perhaps. At least it basically has lessened the role of picking the types of fuels that should be used. And I think there’s some controversy about the indirect land use side of the analysis that ARB uses. That isn’t necessarily part and parcel of what would have to be adopted by other states or at the national level, but by and large it’s been a good policy and provides some clear analysis about the wells to wheels benefit of the various fuels. And I think CARB has done a pretty good job of implementing it. And so I think what might help create some change is if other states really started to move ahead with a renewable fuel, their own Renewable Fuel Standard, and it might vary from state to state. And some states have, say, a biodiesel or maybe an ethanol requirement, but I think if more states started to adopt a comprehensive fuel program, that then that might spur some more action at the federal level as well.
The federal government, the EPA and National Highway Traffic Safety Administration have established a 2025 standard for both greenhouse gases and fuel economy. And the EPA has kicked off what’s called a mid-term evaluation process that right now they’ve done their technology assessment report. They’re reviewing now the feedback on that. And at some point in 2017, they’ll make the recommendation as to whether or not in the out years 2022 to 2025, the standard should remain as it is or if it should be weakened or strengthened. What we did was we had Ricardo interview on a confidential basis about 23 automotive suppliers, and about 90, more than 90 percent of them were tier one, so they were the big suppliers that sell directly to the auto companies. And we asked them about the standards. And they, by two-thirds or more in regards to all the questions, were very supportive of the standards. They felt like they were developing the technology, they were innovating, and that the standards certainly could be met. And they also felt like they were investing in the standards being maintained, and that at least some of them felt like if there was a weakening, it would harm those investments.
I think there is a growing realization that the current program as structured does provide a significant amount of credits for various types of electric vehicles, and that because there are so many credits in the system, the value of those credits is starting to decline fairly significantly. There are a number of OEM’s that have had to enter the credit market to meet their requirements. So that has been interesting, and of course they don’t like having to buy credits from other car manufacturers, and that’s understandable. I think there’s a real possibility that, and based on the analysis that I’ve seen, that it is possible that the current policy could be met and it could end up coming up short of its original stated goal, which was 15 percent of new car sales being either battery electric fuel cell or plug-in hybrid. And it is possible that we could have, because there are so many credits in the system, that we may not get that many vehicles being sold in 2025. Now I don’t know what the Air Board will do at its, at the meetings later here in December and then next year on this policy.
I will say that one to keep in mind is that there are nine other states that have opted to not pursue the federal standard but to follow the California standard relative to this area, and they have zero emission vehicle rules, too. So I think California is making a concerted effort to provide assistance to the car companies in terms of providing financial incentives, access to the diamond or HOV lanes, and other types of incentives. Now there’s still a lot more to be done in California in terms of preparing the market, but it’s moving ahead quickly. And I think that we’re not seeing quite as much activity in the Northeast by all those states. I think that will start to change. I think we’ll see more activity on their part. I think what’s also going to be important for those other states in the Northeast is that vehicles that are electric vehicles will also need to be offered that have all wheel drive capability, because a much higher percentage of the vehicles sold in the Northeast do have all wheel drive capability. While I commend Tesla for offering two products that do have all wheel drive, Volvo has a plug-in hybrid with all wheel drive, as does BMW. So they’re to be commended for that, and to be providing an electric vehicle that would meet more of the needs of people who live in the Northeast. So I am hopeful that we’ll see more offerings that are both electric and have all wheel drive in the future.