October 1, 2019 4:20PM

Greenhouse Gas Emissions and the California Waiver

Since the 2016 election, the Trump administration has intended to freeze or repeal vehicle fuel economy and emissions standards. Last summer, the administration announced a plan to freeze Corporate Average Fuel Economy (CAFE) standards and to revoke a waiver that allows California to set its own vehicle emissions standards. While there has apparently not been much headway in the efforts to freeze CAFE standards, President Trump recently tweeted his intention to officially revoke the California waiver.

As I discussed in a blog last year, CAFE standards are a costly and imperfect remedy to limit vehicle emissions. They were originally enacted to address an entirely different problem: the oil shocks of the 1970s and soaring oil prices. The rules have since been repurposed to address greenhouse gas emissions, but they are an inefficient and clumsy tool.

But while the flaws of CAFE standards are straightforward, the costs and benefits of the California waiver are more ambiguous. The waiver, which was originally granted because of unique weather and geographic conditions around Los Angeles that make it particularly susceptible to smog, has also been repurposed to address vehicle greenhouse gas emissions. California is allowed to set vehicle emissions standards that are stricter than the federal government, and states are able to pick whether they follow the federal standards or California’s.

I argued in my blog last summer that, while CAFE standards should be repealed, the California waiver does serve a purpose, though its use as a tool to combat greenhouse gas emissions is ineffective:

Regulation of pollutants that affect local air quality should be decentralized because both the costs and benefits are local. But reduction of CO2 emissions is a global public good. Any benefits accrue to the world’s climate even though the costs are local. This mismatch between the geographic incidence of costs and benefits imply that a waiver that exempts one state makes no sense in the context of CO2 emissions and has the potential to unduly increase compliance costs for automakers.

In a recent blog post, James Sallee, an economist at UC Berkeley and the Energy Institute at Haas, makes the point that not only are the benefits of California’s higher vehicle emissions standards diffuse while costs are concentrated on Californians, but the benefits themselves are undermined by the fact that the state’s higher standards allow car companies to sell less efficient cars elsewhere. Sallee argues,

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.

Sallee’s point reinforces the argument that the California waiver has, just like CAFE standards, been ineffectively repurposed as a tool to limit greenhouse gas emissions. But despite its flaws, California and 22 other states filed a lawsuit challenging the Trump administration’s revocation of the waiver. Perhaps they’d be less willing to fight for the waiver if they realized their higher emissions standards burden Californians with increased costs but only provide minimal benefits.

Written with research assistance from David Kemp.