What is the Walz administration’s proposed California Transportation Standard?

Yesterday, we discussed the negative consequences of the Walz administration’s proposed California Transportation Standard (CTS). Today, we will discuss how it works.

How the California Transportation Standard works

The CTS is a complicated cap-and-trade system created by the government aimed at lowering emissions of greenhouse gases (GHGs). It attempts to do so by reducing the average amount of GHGs emitted by burning fuel for transportation in the state. The amount of greenhouse gas emitted in each gallon of fuel is described as its carbon intensity (CI).

Proponents of enacting a CTS in Minnesota argue that it is a free market-based system for reducing greenhouse gas (GHG) emissions from the fuels we rely upon every day, but this argument is wrong on its face because government mandates, by definition, are market distortions that pick winners and losers. Mandates are not free markets, and arguments to the contrary are either grossly misinformed or intentionally misleading.

Under the regulations, the government sets a limit on the permissible CI score — called the CI standard — for fuels sold in the state, with the regulations becoming stricter every year. The mandated reductions in the CI standard for California are shown by the black dotted line in the graph below, which was created by CARB. In California, the CI standard requires fuel producers to reduce the CI score of their fuels by a larger amount until reaching a 20 percent reduction by 2030.

Fuels sold in the state with a CI score above the limits set by the government are assessed a deficit, and fuels sold with a CI score below the government-mandated benchmarks are awarded credits (It helps to think of deficits as demerits and credits as merits). Each credit represents one ton of carbon dioxide emissions averted compared to gasoline and diesel fuel.

To comply with the CTS regulations, fuel producers with deficits must either blend lower-carbon fuels with the gasoline or diesel fuel they sell or buy credits from other fuel producers that have accumulated them. In other words, for every deficit that is created, a credit must be purchased to offset it. The system used to track and trade credits is created and administered by the government.

As the standards become more stringent every year, traditional fuel producers must purchase more credits to offset their deficits. According to Stillwater Associates, each incremental reduction in CI becomes increasingly costly because it requires bigger changes to the existing fuel mix. This means the CTS is likely to have smaller up-front costs but become increasingly more expensive over time.

Crazier than California

Since our last report on the CTS was released, liberal Minnesota lawmakers led by Sen. Scott Dibble (D-Minneapolis) and Rep. Jeff Brandt (D-St. Peter) introduced a new version of the regulations that are even more extreme than California’s. This more extreme version would make Minnesota’s CTS the most expensive in the country and effectively phase out gasoline and diesel engines.

In 2009, the California Air Resources Board (CARB) enacted its first CTS mandating a 10 percent reduction in the CI of transportation fuel used in California by 2020 from a 2010 baseline. The regulations were updated in 2018 to require a 20 percent reduction in CI by 2030, a twelve-year lead time to adapt to the new requirements.

In contrast, the proposed Minnesota CTS would require a 25 percent reduction — below a 2018 baseline— by the end of 2030, a 75 percent reduction by the end of 2040, and a 100 percent reduction by the end of 2050. This means Minnesota’s extreme mandates would require a steeper decline in CI in less time than any jurisdiction in North America.

The graph below shows the mandated CI reductions for CTS standards in California, Oregon, British Columbia, Canada, Washington, and Minnesota and compares the stringency of the standards for each year after the CTS was, or would be, enacted.

Minnesota’s CTS mandates are, by far, the most aggressive. For example, Minnesota’s CTS mandates would force fuel producers to reduce emissions by 25 percent in just the next six years when it has taken California 12 years to reduce their fleet-wide CI by 12.63 percent.

Making Minnesota’s CTS more onerous—over a shorter period—will push fuel prices up faster and further than any other area that has implemented a CTS to the detriment of rural families that will pay the most under this ill-advised policy.

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