California’s world-leading vehicle emissions control programs are under threat. The federal government is attempting to revoke both the state’s heavy-duty omnibus regulation, which requires manufacturers to sell cleaner diesel trucks, and its Advanced Clean Trucks Rule, which requires manufacturers to sell more zero-emission trucks.

In response, Governor Gavin Newsom asked for new ideas to achieve the state’s goals while it defends these rules. Here’s a creative solution that doesn’t require any federal waiver: a revenue- and technology-neutral manufacture incentive program that encourages cleaner internal combustion engine vehicle sales while providing the largest incentives to zero-emission vehicles.

The program would establish a self-funding pollution fee and clean vehicle sales incentive system paid for entirely by vehicle manufacturers. The simplest approach would be for regulators to select a single performance-based measure of pollution, such as grams of carbon dioxide (g CO₂) per mile, and then define a benchmark pollution level that distinguishes clean vehicles from dirty vehicles. The benchmark could be an absolute amount of grams of CO₂ emitted per mile, and the fee could be set according to the value of each gram of CO₂ emitted per mile. Manufacturers would pay a fee on each vehicle sold that emits more CO₂ than the benchmark and receive an incentive for each vehicle that emits less than the benchmark. Applying such a system to a diverse population of commercial vehicles could require more than one set of performance-based measures, pollution benchmarks, and fees, but in all cases each vehicle category would receive the same treatment.

Figure 1. A benchmark pollution level defines the environmental performance of each vehicle and determines whether the manufacturer pays a fee or receives an incentive on each sale

To manage the program, regulators would set the initial pollution benchmark such that it achieves revenue neutrality in the first year. This benchmark would reflect average fleet pollution levels from CO₂ emissions data that manufacturers already submit. Each year, the state would settle the net fees and incentives with each manufacturer based on their reported sales registered in California. All fees and incentives would be paid into and out of a common fund managed either by the state or an independent third party. As vehicles get cleaner over the years, the balance of fees and incentives will fall out of equilibrium; to re-balance, the state will reset the benchmark pollution level to a point reflecting a new revenue-neutral balance of fees and incentives.

The table below illustrates how fees and incentives would apply in a single year to a hypothetical group of vehicles produced by two manufacturers. Here I’ve chosen a pollution benchmark of 1,000 g CO₂ per mile and a fee/incentive of $50 per g CO₂.

Fiscal policies such as this have many advantages. If the federal government ultimately succeeds in blocking California’s ability to implement its existing rules, then moving forward with alternatives for reducing vehicle emissions will be essential. By utilizing their authority to protect public health and welfare through fees and incentives, California and like-minded states can continue to encourage cleaner vehicle sales without mandates that require federal waivers. Additionally, although incentive programs typically require substantial funding (and this can be challenging for states experiencing budget constraints), a program of balanced fees and incentives is self-funding. In this case it would provide incentives to manufacturers who sell cleaner vehicles and it would provide incentives to each individual manufacturer to prefer the sale of increasingly cleaner vehicles. Manufacturers would also benefit from a clear, long-term signal that’s not only self-adjusting but also predictable based on either a preferred rate of technology improvement or historical improvements.

Other governments have developed variations of this kind of program, though they primarily have been focused on passenger vehicles and have targeted consumers. The so-called “bonus–malus” system in France is the longest-running, a similar program exists in Singapore, and programs in Sweden and New Zealand have ended. Morocco has committed to implementing a new program. The ICCT published a review of program design best practices in 2010 and researchers at UC Davis evaluated a program for cars and trucks in California in 2017. The ICCT makes available a tool on its website that allows users to simulate different program designs.

Never has the authority of California and other U.S. states to deliver cleaner vehicles been at such risk. But this pressure is also an opportunity to develop new and innovative solutions. A self-funding, revenue-neutral clean commercial vehicle incentive program would provide a clear policy signal to manufacturers to continue investments in both cleaner internal combustion engine vehicles and zero-emission vehicles in California. In seizing the chance to implement it, the governor would show the world that California remains a leader in clean vehicle policy.