Passenger vehicle regulations in California may reduce overall US greenhouse gas emissions, says new research from RFF Fellow Joshua Linn—even if a traditional economics point of view may claim otherwise.
Two major policies have reduced fuel consumption and greenhouse gas emissions from US passenger vehicles: federal standards for fuel economy and greenhouse gas emissions, and California’s Advanced Clean Car regulations. In California and in the 14 states that participate in California’s program, a minimum percentage of vehicles that manufacturers sell have to be plug-in or fuel cell vehicles. (Plug-in vehicles include both fully electric plug-ins and plug-in hybrids that use gasoline and electricity.) In 2022, California adopted regulations that require all new passenger vehicles sold in the state to be plug-in or fuel cell vehicles by 2035, and other states are deciding whether to adopt California’s new regulations, as well.
At the same time, vehicle manufacturers have to achieve federal standards for fuel economy and greenhouse gas emissions; the California standards are nested within the federal standards. The US Department of Transportation (DOT) and US Environmental Protection Agency (EPA) have set these standards for fuel economy and emissions through 2026, and the agencies are proposing post-2026 standards. The policies implemented by both the federal government and California aim to transform the new vehicle market: by 2026, the federal standards will have roughly halved the average rate of greenhouse gas emissions in new vehicles since 2012, and California effectively has banned sales of new vehicles that run purely on gasoline or diesel by 2035.
Given this nesting of the policies, how do the federal standards and California’s standards fit together? In a new paper, I show that California’s passenger vehicle standards may reduce overall US greenhouse gas emissions—despite what might be assumed from a traditional economics point of view.
According to the traditional view—that nesting policies is wasteful—as long as federal standards determine the average emissions rate of new vehicles that are sold in the United States, California’s regulations wouldn’t affect the overall US greenhouse gas emissions. The assumption here is that the California’s policies come at a cost, yet the added expense is wasted if the federal policies already can achieve the climate goals; in that case, California’s policies would not achieve any climate benefits beyond those facilitated by the federal standards. This view recognizes that California’s program increases the market shares of plug-in and fuel cell vehicles, which would make it costlier for manufacturers to meet the federal standards, because the cheaper option would have been for manufacturers to increase the fuel economy of gasoline-powered vehicles rather than sell more plug-ins. Nonetheless, the traditional economics view holds that California’s regulations would not reduce US greenhouse gas emissions.
My recent research suggests that the traditional view is wrong—in fact, California’s vehicle standards may reduce total US emissions because the state decides on its regulations before DOT and EPA determine the federal standards.
Conceptualizing the Interactions between Federal and State-Level Regulations
Consider this example: California’s latest regulation affects new vehicles that are sold through 2035, whereas DOT and EPA haven’t yet set standards for 2027–2035. Figure 1 illustrates why the regulatory timing is important. The horizontal axis represents how much fuel consumption (and, consequently, emissions) decreases relative to a scenario without regulations, and the vertical axis represents the benefits and costs of those reductions in terms of dollars per gallon of fuel consumption. The upward-sloping lines represent the marginal cost of reducing fuel consumption from two types of vehicles: pure gasoline-powered vehicles and plug-in vehicles. In other words, the slanted lines represent how much it costs to reduce fuel consumption for each additional gallon of gasoline conserved, by vehicle type.
Figure 1. Conceptual Relationship between the Reduction of Gasoline Consumption, the Marginal Cost of Producing Plug-in Vehicles and Gas Vehicles, and the Marginal Benefit of Reducing Gasoline Consumption
For gasoline vehicles, manufacturers can adopt technology that increases the vehicle’s fuel economy and reduces fuel consumption and emissions. Moving from left to right along the line that represents gasoline vehicles, we can expect manufacturers to adopt the most cost-effective technologies before the less cost-effective technologies.
The other upward-sloping line represents the cost of reducing fuel consumption and emissions by selling more plug-in vehicles. At first, manufacturers can relatively easily increase plug-in vehicle sales by, for example, offering price discounts. Increasing sales subsequently becomes costlier as manufacturers have to introduce new plug-in vehicles, because the manufacturers then also have to pay large costs to design, test, and market the vehicles. The line that represents plug-in vehicles is steeper than the line for gas-powered vehicles because historically, it has cost manufacturers more to reduce gasoline consumption by selling more plug-in vehicles than it costs to increase fuel economy in gas-powered vehicles.
The horizontal line that runs through points A and B represents the marginal benefit of reducing gasoline consumption—the benefit of lower fuel costs and reduced greenhouse gas emissions. Consumers benefit from spending less on fuel, and society benefits from lower greenhouse emissions and less climate change. The per-gallon benefit to consumers of reducing fuel consumption is the same as the cost of a gallon of gas, which is why the line is horizontal.
Suppose California didn’t have regulations for plug-in vehicles. DOT and EPA are supposed to set federal standards to maximize the societal benefits, which, in this context, means equating the marginal benefits and marginal costs of reducing fuel consumption; the societal benefits, in this context, are the sum of the consumer benefits from buying vehicles and the manufacturer profits from selling vehicles minus the damages caused by the greenhouse gas emissions from fuel consumption. Points A and B in the diagram indicate the level of emissions reductions if DOT and EPA pick the benefit-maximizing level of the standards, since marginal costs and benefits are equalized for both plug-in and gas vehicles.
But if California sets regulations first, the state may pick a point like C, which requires a certain plug-in market share and corresponding reduction in fuel consumption. Subsequently, DOT and EPA could choose standards that maximize the societal benefits and equate marginal costs and benefits for gasoline vehicles (represented by point B), given that California already would have determined emissions reductions for plug-in vehicles. Consequently, the total reduction of consumption and greenhouse gas emissions would be greater if California regulates plug-in vehicles (represented by point C) than when it doesn’t (point B).
Of course, Figure 1 simplifies factors in the real world. For example, manufacturers base vehicle technology and prices on consumer preferences and policies, and consumers choose between plug-in and gasoline vehicles based on many criteria other than fuel costs, such as performance and refueling convenience. Tighter fuel economy and greenhouse gas standards also can affect plug-in vehicle sales in states that don’t participate in California’s program. The model of the new vehicle market in my paper considers these complicating factors.
How California’s Regulations Affect National Standards and Emissions
Outside of these hypothetical scenarios and back in the real world, California’s recent regulations for plug-in and fuel cell vehicles probably will cause DOT and EPA to adopt more stringent federal standards for fuel economy and greenhouse gas emissions.
Table 1 shows the results of using the model to simulate four scenarios, which illustrate how California’s regulations affect the federal standards for fuel economy and greenhouse gas emissions that are set by DOT and EPA. The two columns indicate two levels of California regulation, such that the numbers represent the percentage of plug-in credits that a manufacturer is required to achieve under California’s regulations. (Credits are proportional to the minimum percentage of plug-in vehicles that a manufacturer must sell.) In 2012, California decided that the credit requirement should be 10 percent in 2020 with an increase to 22 percent in 2025.
Table 1. Effect on Societal Benefits and Greenhouse Gas Emissions of Federal and State Passenger Vehicle Regulations
The rows contain the federal standards in different years; for example, the row marked as 2016 refers to the standards that DOT and EPA imposed in 2016. The federal standards in 2022 require higher fuel economy and lower greenhouse gas emissions than the 2016 standards. Notably, DOT and EPA finalized standards for 2022 after California decided on its own credit requirements in 2012.
The rows within the “Societal Benefits” section show the total societal benefits of the vehicles sold in the year 2022, given the federal standards and California’s regulations. Adopting stricter federal standards would increase these benefits by $9 billion or $22 billion; the amount depends on California’s credit requirement.
The rows within the “Carbon Dioxide Emissions” section show the total emissions from vehicles sold in 2022. More stringent federal standards would reduce emissions by 66 or 69 million metric tons; again, the amount depends on California’s credit requirement.
The key result in Table 1 is that increasing California’s credit requirement from 10 to 22 percent increases the benefits of tighter federal standards from $9 billion to $22 billion. The higher societal benefits that are tied to California’s regulations appear to have increased the likelihood that DOT and EPA adopted stricter fuel economy standards. In other words, according to the simulation results, California’s decision in 2012 of increasing the credit requirement to 22 percent by 2025 probably caused EPA and DOT to adopt stricter standards for 2022.
The bottom line is that California’s recent regulations for plug-in and fuel cell vehicles probably will prompt DOT and EPA to adopt more stringent federal standards for fuel economy and greenhouse gas emissions. In that way, California’s state-level regulations could reduce overall US greenhouse gas emissions, even if the state’s regulations are nested within the federal standards. In other words, contrary to the traditional view of the wastefulness of nested regulations, California’s regulations probably have supported, and will continue to support, the Biden administration’s goals for reducing US greenhouse gas emissions.
This article also appears on the University of Maryland’s Transportation Economics and Policy Blog, which is supported in part by funding through the Maryland Transportation Institute.