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EV's good vibrations

The Golden State prepares to tax petroleum demand into decline, promoting electric and zero-emissions vehicles

Two years ago this summer, California's Department of Motor Vehicles (DMV) resurrected its iconic, black and gold automobile licence plate, last issued in 1969. You'll pay a bit extra for it, but the plate is a hit with drivers nostalgic for an era of The Beach Boys—and ¢30 gasoline. Lawmakers in Sacramento are less wistful, though, and a fresh round of steep petrol taxes and vehicles fees is being prepared. California's goal? To push gasoline consumption from today's zero growth rate into outright decline. So confident are policy designers that they talk of the unthinkable: a steady decline in petroleum-tax revenues, forever.

California has managed to suppress gasoline demand growth already for 10 years. It's one reason why total US oil consumption is still about 10% below the highs of the decade before. Since 2005, California's population has grown by about 9.5% and the number of registered automobiles by 12%. Yet annual taxable gasoline sales, at 15.5bn gallons in 2016, are still beneath the 15.8bn sold in 2006, according to the state's Board of Equalization, which collects tax data. Like a boulder travelling along the edge of a Malibu cliff, petrol demand may need only the lightest shove to start rolling downhill.

"An actual decline in petrol consumption is a conscious goal of the state of California," says Anup Banivadekar, of the International Council on Clean Transportation (ICCT) in San Francisco. A new law passed in April will increase base excise taxes on a gallon of gasoline by $0.12, to $0.30, from November. That's in addition to a separate price-based tax increase that will come into force two years from now. All told, Californians will pay more than $0.47/g in fuel duty by mid-2019. The levy will be indexed too, points out Banivadekar, protecting them from inflation. That hasn't usually been the case in the US.

Even in politically liberal California, with its green economy and environmentalist fervour, the new round of taxes haven't been greeted with universal joy. Still, with Donald Trump taking aim at California's exceptionalism—he has threatened to revoke the long-standing California waiver allowing Sacramento to set vehicle-emissions more aggressively than elsewhere, and open up offshore California to oil drilling—supporting a green-leaning government is easier than a bullying president. That even gives Governor Jerry Brown some latitude as he introduces new fees on all internal-combustion-engine (Ice) vehicles, which will pay $25 to $175 per year depending on a car's value.

Despite its size, California is hardly a juicy prospect for oil producers these days. Gasoline tends to sell for about $0.50/g, or more, above the national average. By the autumn, the spread will widen to more than $0.60/g. Zero-emission-vehicle (ZEV) owners will endure none of these new petrol taxes, and those in middle—and lower-income households also get some tax advantages—all part of a drive to broaden greener cars' market share. The state is already the most active market for electric vehicles (EVs), and its showrooms get first dibs on new models. An ICCT study from 2016 showed that, even by 2015, EVs were accounting for 6-16% of total car sales.

Taxing times

Two years from now, the choices California is making will be plain on the road. EV drivers will enjoy both state and federal tax breaks, plus cheap electricity-charging costs, while those in Ice vehicles will juggle a suite of high petrol and road taxes. (To judge from the recent advances in battery technology, new EV buyers by then will, it seems, also get the benefit of longer-range vehicles.)

Proponents of the transportation transition like Anup Bandivadekar point out that these kinds of advances, carried out elsewhere too, will bring a peak in oil consumption, even if passenger-vehicle numbers double by 2040. "A large amount of that projected decline of gasoline demand is due to improvements in efficiency, and then ever so slowly but steadily either hybrids or ZEV vehicles." California's demand for gasoline could max out well before other areas.

California's measures go beyond petrol taxes and EV incentives. "If you look at where the state plans to deploy its new revenues from fees and taxes, the spending—while weighted towards roads—specifically avoids any construction of new capacity," says Bandivadekar. In other words, the state, currently overseeing enormous buildouts of electrified trains and buses across many cities, no longer sees a need to add more automobile infrastructure. And where California goes, the rest of the US often follows.

The state must, though, now prepare for the fiscal fallout of its own policies. Like most of the US, California developed a deep dependency on car-fuel tax revenue to fund public goods in recent decades. Instead, from 2020, the state will levy a flat $100 road-use fee against even EVs. The new tax has confused green advocates—but it makes sense. All policy is lining up to punish buyers of gasoline and benefit EV owners, also known as consumers of electricity. That means even with higher petrol taxes, total petrol tax revenues should decline. The gap must be made up somewhere, and roads still need to be repaired, whether a gas-or power-guzzler uses them.

This article is part of a report series on Electric vehicles. Next article: Not so fast for EVs

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