February 2022

Let’s talk about the stigma of the bus. Public transit in the United States is not particularly robust or well-funded compared to its European or Asian counterparts. The American bus system in particular is stigmatized; Americans associate the bus with poverty, crime, and filth. This stigma is not entirely unwarranted, but it has created a self-fulfilling prophecy of sorts. About 40% of buses in the U.S. are in disrepair. 

In Los Angeles, for example, the bus system is painfully underfunded but is in desperate need of a revamp, which has created a cycle of neglect and a decline in middle class users leading to a $861.9 million federal bailout in 2020. Though Los Angeles transit has been in rough shape for a while, the pandemic has sped up the problem since city and county governments temporarily suspended the bus fare, which has been referenced as America’s largest free transit experiment.

Some frequent complaints about the public bus systems are that it is inconvenient, unreliable, unsafe, inaccessible, inefficient, and has poor network integration with other modes of transportation such as the train or micromobility. Moreover, these problems do not impact all communities equally. Continuing with the Los Angeles example, 92% of users are people of color and users had a median income of $12,000 in 2012 and $17,000 in 2019. For readers who are doing the math, not only is $17,000 well below the poverty line, but it’s insidious when compared to the increased cost of living in the city. Coupled with the fact that the bus is in worse shape than other modes of local transportation, it is clear that low-income nonwhite people have worse access to transportation on average and the horrific bus infrastructure is partially to blame.

So, what do we do about the bad reputation of the bus? This question may be related to two blogs the Journal of Law and Mobility has posted recently. On December 23, I wrote about the role of recreation transportation in inspiring creative technology. Then on February 8, Research Editor Namjun Park wrote a blog about clean energy credits and electric vehicles (EVs). It may sound outlandish, but perhaps this is an example of recreation transportation inspiring new ideas about our daily mobility needs, and electrification is a piece of that puzzle.

Though recreation, EVs, and decrepit infrastructure sound like three different ideas, each touches on something important about the bus: the transportation industry has been buzzing about electrifying buses, and people love a “fun” bus. Even the above-linked article from The Atlantic mentions “bus lines of the ‘party’ variety”. Is it possible that electrifying public buses and somehow making the busing experience more enjoyable could increase ridership in a meaningful way? Is it even reasonable to assume that increasing bus ridership is a net positive for public transit? Though it is outside the scope of this blog, it may be important to consider bus fare and what LA’s accidental free transit experiment means for the future of accessible transit as bus fares generally contributes to the infrastructure budget.

First of all, electrifying buses may be a successful strategy for a few reasons. The cleanliness, accessibility, reliability, and network integration complaints could be reduced when new electric buses are introduced and the current units are replaced. With the passage of the recent Bipartisan Infrastructure Law, the United States has $89.9 billion (yes, with a ‘B’!) guaranteed funding for public transit projects over the next five years, which is long overdue considering the Biden Administration estimates there are 24,000 buses in the U.S. in need of replacement. Relatedly, the Biden Administration has placed particular emphasis on electrification as EVs after Biden’s lofty campaign promises regarding the climate crisis and manufacturing jobs. Aside from being politically flashy, electric buses can help combat environmental injustice, which disproportionately impacts poor communities of color; offers a smoother and quieter ride for users, which may promote ridership; and will eventually have lower operating costs than diesel buses, which justifies permanently eliminating bus fare to promote accessibility. 

If revamping and replacing the old, rundown buses with new EV technology does not increase ridership, perhaps local governments must also make the ride more enjoyable for the user. The Atlantic may have mentioned party buses in jest, but the concept has gained popularity in recent years. It seems that people love to watch TV, play video games, socialize, make coffee, or enjoy a cocktail while they are mobile. But the transportation industry has known this for a long time– one of the many appeals of automation has been using time in the car to do productive or recreational activities while the car drives itself. The allure of doing so is relevant to those who rely on public transportation as well. Although arguably those who use the bus have an opportunity to enjoy their coffee or watch a movie on the way to work unlike those who currently drive their own car, the chaos and dilapidation of American public infrastructure is certainly not luxurious. It would be disingenuous to suggest that riding the bus in LA is more relaxing or prestigious than driving one’s own vehicle simply because people on the bus have time to safely watch Netflix on their phones. 

The intersection of all these thoughts forces us to consider whether the stigma around the bus ultimately implies that those who rely on the least expensive means of transportation are simply less deserving of leisure than those who will be able to afford a fully automated vehicle. On the other hand, maybe cities could not eliminate the bus fare if we started advocating for televisions and mini bars to be installed in public buses. The value of a free, accessible bus system for communities with a tight budget certainly outweighs the excitement of making every bus a party bus.

I cannot help thinking, however, there must be a reasonable middle ground. The idea of having luxury options on a free bus is not completely farfetched; we already have movies, video games, lattes, and cocktails for purchase on planes– why not the bus, too? Perhaps there is a way of including optional creature comforts at bus stops or even on the bus itself. If the Bipartisan Infrastructure Bill is truly going to provide for electric buses, why not install televisions in the back of the seat as we already have for decades in airplanes and allow users to choose to pay a few dollars for use? Could we not provide the option to buy a coffee at the bus stop while waiting? Could the proceeds of these luxuries not be collected in an infrastructure account the way traditional bus fare has been for decades? 

As a lawyer, I will not agonize myself (or the reader) by analyzing the tortious nightmare of making every public bus a true party bus, however I will maintain that there could be a feasible way to abolish bus fare while simultaneously making the bus a more pleasant experience for those who have the privilege of choosing to drive their own car. I believe the recent infrastructure legislation, though still not enough money to completely solve the transportation crisis in the U.S., may offer momentum to chip away at the bus stigma. If we can make the bus a cleaner, more reliable, and dare I say even fun experience, maybe ridership would increase so greatly that the inherent value of investing tax dollars in free transit will become undeniable.

As we electrify buses, perhaps every public bus could be a bit more like a party bus. 

This blog is the first in a series about electric vehicles (EVs) in various forms of public and private means of transportation, as well as the unanswered legal and policy questions surrounding electrification. More posts about EVs will follow.

CLEAN ENERGY CREDITS 

            The terms “clean energy credit” or “renewable credit” are used often; but they can refer to different things in different contexts: a tax credit obtained through investment in qualified renewables ventures; or a renewable energy certificate (REC)—generated through producing energy via renewable methods of producing zero-emissions products like electric vehicles (EVs)—that can be sold as a separate commodity to other entities.

TAX CREDITS

            There are a number of federal programs that subsidize investment into renewable energy, but the most famous is contained in the Internal Revenue Code § 30D and can be used by purchasers of “Qualified Plug-in Electric Drive Motor Vehicles” (which include passenger vehicles and light trucks) to offset their tax liability. Each purchaser may subtract $7,500 from his tax liability; when 200,000 units of the qualified vehicles have been sold, the tax credit is gradually reduced quarter-by-quarter until the sixth following quarter, when the credit available to purchasers of each such vehicle is reduced to zero. This federal subsidy program has been crucial in attracting customers to auto manufacturers like Tesla, functioning as a de facto rebate program. 30D was utilized in marketing Teslas to the extent that during Tesla’s tax-credit phase-out period (2018-2020), the company went so far as to guarantee reimbursement to customers if manufacturing delays placed deliveries into reduced-credit quarters and caused purchasers to be eligible for less than the full $7,500 in credits. 

RECs 

            Renewable energy certificates (RECs) are different from renewable tax credits. They are creations of state law, being parts of larger state-enacted climate-change initiatives called Renewable Portfolio Standards (RPS.) These standards are commitments to have a certain percentage or a certain amount of a state’s power production come from renewable sources. For example, the Michigan RPS stipulates that 15% of the state’s power production will be renewably produced by 2021. Renewable usually means something like wind, solar, or other ostensibly clean sources. Currently, 37 states have enacted an RPS or less stringent renewable portfolio “goals.” There are currently no federal RPSs, although they have been proposed over the years in Congress.

            Today, RECs are common parts of RPS policies. In most states, power producers—that generate power from renewable sources more than they are required to by the state’s RPS—may either trade or sell RECs to other parties that may not be meeting their own RPS requirements. Each REC represents one megawatt-hour (MWh) of electricity generated from a renewable energy source. Virtually all RPS programs allow energy producers to unbundle RECs from corresponding renewably-produced electricity and thus to collect double revenue streams. This is meant to funnel capital into the renewable energy sector. Caselaw over the past decade has solidified RECs not merely as ancillary proof-of-work aspects of renewably generated electricity, but as commodities separately generated in the process of renewable power generation. This form of RECs—personal property voluntarily unbundle-able from renewably-generated electricity—has been recognized by many government and nongovernmental organizations, including the Environmental Protection Agency, Department of Energy, Federal Trade Commission, the Climate Registry, the CDP (formerly Carbon Disclosure Project), and Center for Resource Solutions. Most states today have opted to impose “home grown” requirements as well on RECs utilized by entities to comply with in-state RPS standards.

AUTO INDUSTRY

            Today, RECs are granted not only to power producers, but to auto manufacturers. Zero Emission Vehicle (ZEV) programs implemented in California and a handful of other states (Colorado, Connecticut, Maine, Maryland, Massachusetts, New Jersey, New York, Oregon, Rhode Island, Vermont, Washington) grant RECs to auto manufacturers that produce and sell qualifying “zero-emissions” automobiles. Just as in states with RPSs in which RECs are earned and sold by renewable power generators, states with ZEV programs award ZEV credits to manufacturers based on the type and range of the qualifying vehicle sold. Credits are awarded not only for pure EVs (ZEVs), but Transitional Zero Emission Vehicles (TZEVs) as well, which include plug-in hybrids. ZEV credits are worth more than TZEVs, and more credits are earned for selling vehicles with longer ranges. And because of the aforementioned “home grown” requirements of most RPSs, ZEV credits cannot be applied out-of-state to assist in compliance with other states’ RPS requirements; which is why many EVs like the Fiat 500e, VW e-Golf, Hyundai Kona EV, and Kia Soul EV are sold new only in states with ZEV programs.

            There is no consensus among regulators, industry groups, or scholars as to how much RECs are aiding in efforts to transition the world to greener economic habits. However, some private-sector entities have benefited massively from RECs, especially ZEV credits.   

            Tesla has been the most high-profile utilizer of renewable energy certificates in the automotive space. In addition to their use of the IRC § 30D tax credit to market their automobiles, they have also reaped enormous benefits from selling ZEV credits. Their annual Form 10-K filing says: “We earn tradable credits in the operation of our business under various regulations related to zero-emission vehicles (“ZEVs”), greenhouse gas, fuel economy, renewable energy and clean fuel. We sell these credits to other regulated entities who can use the credits to comply with emission standards, renewable energy procurement standards and other regulatory requirements.”

            The 10-K’s Revenue by source section that disaggregates revenue by major source shows that sales of ZEV credits (“automotive regulatory credits”) brought Tesla $419MM, $594MM, and $1.58B of revenue in years 2018, 2019, and 2020, respectively. Tesla, however, showed a profit (positive net income) for the first time in 2020. Tesla showed a net loss of $976MM and $862MM in years 2018 and 2019, respectively; and showed a profit of $721MM in 2020. As a result, market analysts and commentators have noted since that Tesla’s recent profitability is purely attributable to the sale of regulatory credits, without the $1.58B in regulatory-credit-sale revenue, they would not have ended 2020 with $721MM in profit. 

            Short traders Michael Burry (who was the subject of Michael Lewis’s book The Big Short and the movie based on it) have taken large short positions against Tesla, reasoning that a balance sheet sustained by regulatory artifice cannot be sustainable. On the analyst side, commentators like Tim Benson at RealClearEnergy have painted depressing pictures about ZEV programs’ effects on the auto industry’s progression toward EVs. Benson writes that automakers are effectively given two choices: buy ZEV credits from Tesla to fulfill regulatory requirements, or spend billions on EV R&D and maybe one day fulfill regulatory requirements by EV sales. They have mostly chosen to delay EV R&D, instead opting to buy hundreds of millions of ZEV credits from Tesla—because it’s the cheaper option. So ZEV programs have mostly amounted to direct wealth transfers from incumbent auto manufacturers to Tesla. A question we should now ask is whether this arrangement is actually aiding in our societal transition to renewable energy sources and whether the opportunity or transaction costs make the arrangement worth it.

            To start, energy credits systems such as ZEV credits are undeniably spurring investment into renewables. Enterprises focused on renewable energy production and zero-emissions products like EVs have more capital in their coffers than they otherwise would have. If we assume that zero-emissions vehicles like Teslas are truly zero-emissions products (by ignoring the environmental effects of mining required to build EV components such as batteries, nonrenewable power used along every stage of the production process, etc.), then it would seem to be a good thing that an EV market is flourishing as a result of Tesla becoming profitable and staying in business. However, the next (and more important) analytic step is one of costs and benefits. If auto manufacturers other than Tesla were not effectively held hostage by the ZEV credit system and forced to fork over hundreds of millions to Tesla, and if instead they had more of a real choice to invest that money in renewables technology would we maybe be farther along on our journey to a world powered by renewables?

            The empirical data we have so far is worrying, but not dispositive as to the counterfactual question above. The National Renewable Energy Laboratory (NREL) has been tracking voluntary procurements of renewable energy since the 1990s; according to them, the purchase and use of unbundled RECs has grown by over 60 million MWhs between 2010 and 2020. 

            In 2020, sales of unbundled RECs comprised 44.97% of all purchases of renewable energy. Assuming that regulatorily unnecessary purchases of green power did not happen (in other words, no entity purchased more renewable power than they were required to by RPSs), it means that almost half of all RPS requirements imposed on polluters were satisfied using RECs. We can conclude that a corresponding amount of capital was transferred to the renewables sector; however, we can also conclude that RPSs across states had only half the effect they sought in aggregate, because while more renewable energy was produced and purchased than before, only half of RPS requirements was satisfied using actual energy; the other half was satisfied by using an artifice of regulation—RECs.

            In sum: unbundled RECs have become a reality in the regulation of electric utilities and automotive manufacturers; they are undeniably contributing to increased investment in renewables technologies and enterprises; but it remains to be seen whether permitting unbundled RECs to be used to comply with climate initiatives like RPSs is the best—most effective and efficient—arrangement we could have.