California Schemin'

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April 2017 Sarah Miller

Forget skirmishes over coal leasing, power plant emissions or federal fuel economy standards for automakers -- California is the battle that matters in US President Donald Trump's fight to save fossil fuels. Demand is life-or-death for oil and gas -- US coal being dead already -- and no-nonsense California Governor Jerry Brown, better know to some as 'Governor Moonbeam', holds the best cards in that game. If Trump wants to try to take those cards back, it promises a bloody confrontation in the heartland of liberal America. The president probably knows that, and may settle for Twitter attacks over Celebrity Apprentice TV game-show ratings with Arnold Schwarzenegger, Brown's Republican predecessor and the torchbearer for the state’s environmental values in the days of President George W. Bush. But that's not a happy outcome you can bet on.

Trump's March moves -- including reinstituting coal leasing on federal lands and ordering the Environmental Protection Agency (EPA) to reconsider the anti-carbon Clean Power Plan the same agency had issued under former President Barack Obama -- were greeted with a near-yawn. Few cared because the marketplace has moved well ahead of both these federal regulations and any changes Trump may propose.

The underlying reality is that coal-fired power plants in the US are destined for closure because gas-fired power is cheaper, while most of the new generating capacity being built uses renewables, which are getting cheaper by the day and will therefore be providing a rapidly growing share of electricity in years to come. Regulatory lawyers may affect the timing a bit, but probably not as much as Tesla boss Elon Musk, with his solar panels, batteries and electric cars. Musk is, oddly enough, one of the few superstars from California's Silicon Valley still talking to Trump.

One other thing Trump did in March was to order a review of federal corporate average fuel economy (Cafe) standards. That could have a bigger impact, should the EPA slash the 54.5 miles per gallon by 2025 requirement for cars and light trucks combined, up from the target of around 35 mpg for cars and 26 mpg for light trucks in effect through to the end of 2016. Less than 5% of the conventional gasoline and diesel cars sold in the US currently meet even the old standard. So automakers will need to move lots of hybrids and electric vehicles (EVs) to bring the average mileage for all the passenger vehicles they sell up to that level.

Hybrid and EV sales have surged in recent years, and Tesla is on target to start producing a much cheaper, $35,000 version of its EV this summer, amid high expectations. However, a spike in small truck and SUV sales in 2015-16, as gasoline prices fell in the wake of the crude price crash, more than offset the impact of electric cars in improving average fuel efficiency. That shift is at the core of the auto industry's argument for changing the rules they agreed with Obama in 2012.

Enter California. The regulations the Trump administration is reviewing were negotiated not only with the auto industry, but also with officials from that state. If left in place, these mileage requirements will apply nationwide in 2022-25, after decades in which California has had tougher rules. Brown has signaled that, whatever the federal EPA decides, California will stick with the 54.5 mpg standard for 2025, and the famed -- and feared -- California Air Resources Board (Carb) in January recommended a "major push" to develop even tougher post-2025 standards.

This is critical because California and other states that follow its lead account for nearly 40% of all auto sales in the US. Mainstream automakers can't afford to be frozen out of such a large market, so they focus on meeting its requirements. As these companies can profitably gear their R&D efforts and production lines to making only a limited number of models, the offerings available to consumers in parts of the US with weaker Cafe standards tend to reflect California's stricter rules.

Pricing may differ in order to boost hybrid and EV sales in states applying California regulations. But the auto companies have little time and money to spend on bringing conventional vehicles into alignment with looser federal rules, which will in any case be met as a by-product of their California efforts. The results could include hastening the abandonment of diesel engines in cars nationwide, and discouraging the continued upgrading and production of large SUVs.

When it comes to the electric power sector, what California does has less direct impact elsewhere, but big indirect effects. The state's move out of coal-fired generation in recent years, and a prohibition on renewing contracts to import coal-fired electricity from neighboring states, have not merely helped gas. They have made the state an important laboratory and launch pad for renewables technologies, contributing to the collapse in costs that is making such technologies increasingly competitive.

This has been particularly true for solar power, in which California makes up roughly half of the US market and which now supplies 13% of the state's power, according to the Solar Energy Industries Association. The state legislature is currently debating whether to provide a similar springboard for utility-scale batteries by adopting a so-called clean peak-energy standard that would require utilities to provide a rising portion of electricity from renewables in heavy-demand periods. The stated aim is to encourage construction of battery and other storage systems in preference to gas-fired power plants.

California's right to adopt tougher-than-federal air quality standards if needed to "meet compelling and extraordinary conditions” goes back to 1963, when the federal Clean Air Act was first passed. At that point, the state had already been battling for years to reduce the infamous smog around Los Angeles. Other states don't have a similar right to adopt individualized standards, but they can opt for California rather than federal rules.

Where Brown is Green

California has to get periodic waivers from Washington in order to exercise that right, but federal regulators have mostly granted these without question. The exception was in 2007, when the Bush administration withheld a waiver covering California's proposed 2011-16 auto emission standards. Jerry Brown, then California's Attorney General and now the state's Democratic governor, sued the EPA to force them to provide the waiver, with the backing of then Republican Governor Arnold Schwarzenegger. 

Before the courts could decide the matter, however, Obama became president and quickly provided the waiver -- leaving unresolved the legal issue of whether climate change constitutes a "compelling and extraordinary" condition.

Not surprisingly, Trump's choice for EPA administrator, Scott Pruitt, was grilled repeatedly in his confirmation hearing about whether he would challenge California's position on carbon controls, and he deftly avoided a straightforward answer, engendering speculation that he might.

It's not an easy call for the Trump administration, firstly because they could lose in court, and secondly because the resulting political warfare might have little upside, given that it would bring no obvious immediate benefit to Trump's middle American supporters and would simply bolster the anti-Trump Democratic front in Washington. It would also require conservatives to reverse long-held positions in favor of states' rights in ways that could come back to haunt them.

The big guns on the California side that Trump would face in any political confrontation include the state’s Attorney General Xavier Becerra, who gave up a 23-year stint in US Congress and chairmanship of the House Democratic Caucus in Washington to take the job, and Obama's former US Attorney General Eric Holder. 

Even Schwarzenegger is sticking with his state, rather than with his political party, on this one, a decision which surely has nothing to do with nasty Twitter exchanges between him and Trump on who had better ratings as host of TV game show Celebrity Apprentice, where somebody always gets fired at the end.

Sarah Miller is a former editor of Petroleum Intelligence Weekly, World Gas Intelligence and Energy Compass.

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