The recently released 2023 California Green Innovation Index concludes that California is not close to meeting its climate change mandates.

But the situation in California is even worse than this report suggests. It is important for us to all take a breather, look at the actual numbers and ask: have we fallen for CO2 mitigation and pricing policies that aren’t actually working, let alone efficient? Have we put the policy cart before the GHG reduction horse? The answer is a resounding ‘Yes.’

Let’s Start with Passenger Vehicle Emissions

California first introduced the state’s Zero Emissions Vehicle (ZEV) rule in 1990. In theory, the California ZEV standard is and has always been more stringent than the US federal CAFÉ standard. Under US federal law, every other state must comply with either the federal CAFÉ standard or the California ZEV standard.

From 2005 through 2021, California on-road passenger vehicle fleet greenhouse gases (GHGs) have reportedly reduced 17.6%--about the same as the reported US average of 16.3%. But California transportation fuel retail prices are and have consistently been significantly higher (in both absolute and state CPI-rated terms) than all other states, for many years. 

In 2022, ZEVs accounted for 16% of new car sales in California, compared to a US national average of 6%. California accurately reports that they exceeded their 2025 1.5 million ZEV sales target in mid-April—way ahead of schedule

But, despite California’s robust 2022 ZEV sales numbers, the state’s on-road passenger vehicle fleet GHGs increased almost 11%, in 2023, relative to 2022 levels. (They also increased in 2022 relative to 2021.) 

In other words, there is no correlation between the California ZEV standard, or the state’s new ZEV sale targets, and passenger vehicle fleet GHG trends, especially if we were to control for the California gasoline and diesel price premiums. Similarly, we see no such correlation, at least so far, between ZEV sales and passenger fleet GHG trends in other ample locations such as Norway, where the ZEV sales’ share of new car sales is world-leading.

California has had a ZEV rule for over 30 years. How much longer do we have to wait to get a significant impact on transportation sector GHGs out of this very expensive policy? Are there other policies or measures governments could have tried out that might have got us farther and faster, in GHG reduction terms? What lessons should we take away from these 30 years?

Now the Elephant in the Room – How California Accounts for Electricity Sector GHGs

In 2008, California adopted a unique approach to reporting the state’s GHGs. California includes a subsector called “Imported Electricity” in the state’s official GHG inventory. These are GHGs that are released outside the state’s boundaries, in the production and transport of electricity to meet demand inside the state. Imported electricity” accounts for almost 45% of California’s 2005 to 2021 GHG reduction claim. At first glance, that looks pretty good, compared to the US electricity sector average 2005-2021 GHG reduction of 37%.

But all of the Imported Electricity GHG reductions included in California’s inventory—and which inform the California Green Innovation Index report--are double-counted. California claims a reduction in California’s official GHG inventory if/when they cut off electricity imports, whether or not the power plant they used to rely on for supply shuts down, and even though a shutdown would be recorded as a reduction in the electricity-exporting state’s GHG inventory.

Why is California doing this?

Because incorporating electricity import emissions in the state’s GHG inventory delivers a competitive advantage to a state with a long history of reliance on electricity imports—potentially at the expense of the other states they used to rely on for essential electricity supply. As example when a California utility terminates a power purchase agreement (PPA) with a natural gas-fired power plant that is located in, say, Arizona and that PPA is terminated, it shows as a reduction in Imported Electricity GHGs in the California GHG inventory. Then, if a new gas-fired power plant is built in California with exactly the same emissions profile as the Arizona plant, the net result appears as a 0 net increase in California’s reported electricity sector GHG emissions, even though the new plant is emitting signing GHG’s.

In fact, from 2005 to 2021, GHGs discharged from power sources operating within California state boundaries shrank by only 5.5%. That does not compare well to the US national average of 37%. California has the highest electricity rates in the nation and would rank among the top three in the world if it was a country.

If we take the double-crediting Imported Electricity account out of California’s GHG inventory, the state has realized a 14.5% reduction in state-wide GHGs, accounting for all sectors, since 2005. Not bad. But significantly less than the 20% reduction the state claims and so many experts have accepted at face value. And slightly lagging—not leading—the 18% US national all-sector GHG reduction. And we can’t be sure, but there is a distinct possibility that we will see an increase in state-wide GHGs, relative to 2021 levels, when the 2023 California GHG inventory is released.

Shouldn’t we be trying to understand why California’s high price and command and control regulation stacking approach hasn’t got us quite as far as we thought they would—and are being told, incorrectly, that they have? There is a huge learning opportunity in this history. Shouldn’t we take advantage of it?

A Foundation for robust and trustworthy CO2 markets or a competitive advantage?

We shouldn’t be opposed to reporting global supply chain GHGs in the inventory of the jurisdiction in which finished products are ultimately used/consumed.  In fact, that is ultimately the correct foundation on which we can build robust and trustworthy CO2 markets.

But California does not do that. They only include upstream emissions associated with electricity imports. They do not include upstream emissions associated with coal, oil or natural gas imports.  Why? Incorporating electricity imports in the state’s inventory delivers an artificial and perpetual competitive advantage to the importing state, at the expense of states on which they historically relied for imports.  But their reliance on fossil fuel feedstock imports has increased since 1990 and 2005, and so they treat those products and sectors differently.

And what happens if/when the importing state includes the upstream GHGs associated with their cement, critical minerals and metals, chip and some other key imports in the state's GHG inventory and baseline?

As long as the measure of performance, in GHG market terms, is percentage reduction from a base year or period, we introduce a system that establishes artificial but perpetual future market advantage to jurisdictions that: (1) were highly dependent on imports in the base years, and (2) were least efficient/high emitting producers in the base years.  Any nation that were more efficient producers of exported products in the base years, and developing economies that were not producers of the products in question in the base years, are perpetually disadvantaged if the unique California GHG inventory accounting method was to scale up to form the foundation of a selective and biased US national CO2 Intensity (CI) "performance" metric.

Lessons to Learn

There are many lessons to take away from the California experiment. But the most important lessons are:

The measure of performance in a real, robust, fair GHG or "carbon" market must NOT be "percentage reduction relative to base year/period GHGs". The CI of goods and services should be traced and reported down the global supply chain. National and state-level GHG inventories should be reported on a consumption/end use, not production—or, as in California’s case, an internally inconsistent hybrid of consumption and production—basis.

Defining GHG performance in percentage reduction-from-base-year terms delivers perpetual advantage to developed economies at the expense of developing economies.  It also delivers perpetual competitive advantage to developed nations that offshored manufacturing during the 1990s and early 2000s and now want to "reshore" or return manufacturing capacity to their jurisdictions. A system that institutionalizes biases like these is unlikely to result in accelerated rates of reduction in atmospheric concentrations of heat-trapping gasses.

But it could lead to unprecedented and unnecessary trade wars.

In a fair global CO2 market, any delivered products/services that have a lower global product lifecycle CI at the point of final use should derive competitive advantage over competing products/services with higher CIs delivered at the same point (jurisdiction) of end use, over the same CI reporting period. Any products with the same global supply chain CI, at first point of entry into the market where those products will finally be used, should be treated equally.

What happens if we continue to get our CI and CO2 market designs wrong? Here’s just one example:

Since 1990, when we account for Scope 1 and Scope 2 GHGs, the CI for aluminum produced in Canada is 4 to 6 TCO2e per metric ton of wrought Aluminum ("Al") output ("TAl"). 85% of the Al produced in Canada has always been exported, mostly to the US.

In 1990, 1995, 2000 and 2005, the CO2e/TAl for aluminum produced in the US or EU ranged from 9 to 12 TCO2e/TAl. 

Most likely we will find that aluminum produced in China and South Korea has a lower CI/TAl than competing US or EU products, but a higher CI/TAl than the Canadian product.

It would cost, per TAl delivered to market, about 4 times as much to cut Canadian Al sector GHGs from 6 to 5 TCO2e/TAl than it would cost to cut the CI for US and EU-produced Al from 12 to 9 TCO2e/TAl.

So if the "performance" measure that determines carbon import tariff rates is defined in percentage-reduction-from-base-year terms, the Canadian aluminum sector shuts down (eventually), investment in smelter upgrades flows into the US, and domestically-produced Al with a new  9 TCO2e/TAl CI score will be substituted for 4 to 6 TCO2e/TAl imports from Canada. Global aluminum supply chain GHGs go up while the US claims to have achieved significant reductions in the US national GHG inventory--while, in fact, the US policy has directly caused global GHGs to go up.

A much simpler, fairer, more transparent CO2 market rule can be demonstrated. The easiest way to stop the expansion of the percentage-reduction-from-base-year-import-tariff-based model is to pilot and demonstrate a more efficient, more transparent and more fair model--sooner rather than later.

In the meantime, we need to stop lauding the plethora of California climate change policies that have delivered the world’s highest electricity and heating costs for households and small businesses, while delivering limited value in terms of climate change, water security and/or food security risk mitigation or adaptation.