California to Require 100% Zero-Emission Passenger Vehicle Sales by 2035

Latham & Watkins LLP

The Governor has issued an Executive Order with sweeping implications for the oil and gas industry and others.

On September 23, 2020, California Governor Gavin Newsom signed Executive Order N-79-20, which will have sweeping implications for the oil and gas industry, automakers, low-carbon fuel producers, the logistics industry, and public transit agencies, among others (the Executive Order). Newsom announced the Executive Order against the backdrop of what he called “simultaneous crises,” none of which he argued is more impactful and forceful as the climate crisis. The press conference included Mary Nichols, Chair of the California Air Resources Board (CARB), standing before a small fleet of zero-emission vehicles.

In what will likely be viewed as the most far-reaching measure, the Executive Order requires all passenger vehicle sales starting in 2035 to have zero emissions — a mandate that essentially bans sales of new internal-combustion-powered passenger vehicles in California. As discussed below, the Executive Order raises several significant issues.

100% Zero-Emission Sales Requirements

The Executive Order directs CARB to develop and propose regulations that would require a ramp up to 100% in-state sales of new zero-emission passenger vehicles (cars and trucks) and drayage trucks by 2035. The Executive Order further directs CARB to promulgate regulations that would require a ramp up to 100% in-state sales of medium- and heavy-duty trucks by 2045 “for all operations where feasible.” Here, unlike with passenger cars, the Executive Order fails to narrow its mandate to a prohibition on the sale of new medium- and heavy-duty trucks. Therefore, whether sales of used medium- and heavy-duty trucks must also be phased out is unclear. The Executive Order also instructs CARB to develop and propose “strategies” (as opposed to regulations) to achieve zero emissions from off-road vehicles and equipment operations in the state by 2035.

The Executive Order requires state agencies to develop, with input from local agencies and the private sector, a “Zero-Emissions Vehicle Market Development Strategy” in the next four months that outlines the policies, programs, and regulations necessary to effectuate the goals of the Executive Order. To assist with the transition to zero-emission vehicles, the Executive Order requires state agencies to accelerate the deployment of fueling and charging options for zero-emission vehicles.

The Executive Order is the first of its kind in the United States. Worldwide, only 15 countries have committed to a similar phase-out of internal-combustion-powered vehicles. The Governor’s office states that the regulations will achieve more than a 35% reduction in greenhouse gas (GHG) emissions and an 80% improvement in NOx emissions from cars statewide. Further, the Governor’s office claims that zero-emission vehicles will “almost certainly” be less expensive and better than traditional fossil-fuel-powered cars and trucks.

Extension of LCFS and Other Key Measures

The Executive Order also directs state agencies to take a number of actions focused on the oil and gas industry, including the following measures:

  • Expedite regulatory processes to repurpose and transition upstream and downstream oil production facilities, which presumably will no longer be needed.
  • Develop and propose strategies to continue the state’s current efforts to reduce the carbon intensity of fuels beyond 2030, with consideration of the full life cycle of carbon. In other words, CARB has been directed to strengthen and extend the Low Carbon Fuel Standard (LCFS) program beyond 2030.
  • Develop strategies, recommendations, and actions to manage and expedite the responsible closure and remediation of former oil extraction sites as the state transitions to a carbon-neutral economy. Put another way, the Governor is targeting the GHG emissions from abandoned (aka “orphan”) wells.
  • Strictly enforce bonding requirements and other regulations to ensure oil extraction operators are responsible for the proper closure and remediation of their sites.
  • Propose a significantly strengthened, stringent, and science-based health and safety draft rule that protects communities and workers from the impacts of oil extraction activities. Essentially, the Department of Conservation’s Geologic Energy Management Division has been empowered to develop a “buffer zone” regulation for oil and gas wells.

Additionally, while not included in the Executive Order mandates, the Governor called on the California Legislature to end the issuance of new hydraulic fracturing permits by 2024, setting up a potentially contentious session next year.

Areas of Concern

The Executive Order raises a number of significant issues. First, it is unclear how the Executive Order will impact CARB’s well-established Cap-and-Trade and LCFS programs. For example, the 2035 and 2045 zero-emission-vehicle mandates are likely to result in lower demand and prices for both Cap-and-Trade allowances and LCFS credits. Dampened demand would create significant uncertainty about the future of both programs and could make it challenging for investors to form reasonable expectations about long-term carbon price signals. Depending on the nature of future CARB rulemakings to implement and react to the Executive Order, a number of capital-intensive, low-carbon-fuel infrastructure projects intended to serve the California transportation fuels market could be jeopardized.

Second, to the extent that the zero-emission-vehicle mandates reduce the price of the Cap-and-Trade allowances, they will reduce the state’s revenues in allowance auctions with no correlated increase in state revenue yet identified. These revenues flow to the Greenhouse Gas Reduction Fund and bankroll numerous essential climate mitigation and adaptation programs.

Finally, it is unclear whether California agencies have the power to implement all of the measures contemplated by the Executive Order, absent additional statutory authority provided by the California Legislature and/or approval by the federal government. The legality of the measures will likely depend on the rulemaking approach selected by the relevant agencies. Surely the next two to three years will involve intense stakeholder discussions as the state charts a course toward climate neutrality.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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