TRAIN Intelligence Briefing Q1 2019

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Q1 2019

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The Transportation Research and Intelligence Network (TRAIN) Intelligence Briefing is a resource to share global intelligence on policies, markets, technology, and advocacy related to oil and low-carbon alternatives.

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Zero-emission transportation technology developments

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Oil prices, market share, futures speculations and market trends

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Shifts in the landscape of global oil production

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Policies and political affairs affecting transportation supply and demand

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In This Issue

Faced with short- and long-term uncertainty, oil markets rolled on unfazed.  Prices rose gently, as Iranian sanctions and grim news from Venezuela and Canada were balanced by continued Trump efforts to drive prices down, and the adoption by India, China and the EU of demand destroying electrification mandates and incentives. The Saudis seemed ready and able to resume their swing producer role.

At major global gatherings in Davos and Houston, the oil industry conceded that change was coming. “How do you get the hearts and minds of investors back? That is a real challenge for our industry,” said John Hess, the founder of independent U.S. producer Hess Corp. Oil’s political sway was fast eroding. U.S. Republican and Democratic states alike stood against the Trump administration’s drilling and pro-oil agenda. Meanwhile, China, the EU and India planned their electric vehicle futures.

But other industry leaders insisted everything was under control. Their boldest plans to deal with shriveling demand, unstable market dynamics, and potential climate mobilization harked back to St. Augustine: “Lord let us be low carbon, but not too soon.”  

Outsiders and investors were much less confident. The deep, dark question was this: didn’t the odds favor a world, not so long from now, with a much smaller appetite for oil, one largely filled by low-cost Persian Gulf producers?

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Clean Mobility

Electric Light-Duty Trucks, SUVs Are on the Roll

In the race to electrify the light-duty vehicle fleet, trucks and SUVs have lagged sedans. No longer. Ford announced plans in January to electrify its F-Series pickup trucks. An all-electric F-Series truck is expected to hit the market in 2020. A would-be competitor, Rivian, likely forced Ford’s hand. The Amazon-backed startup showed off concept models at the LA Auto Show of both an all-electric truck and SUV, each with a range of up to 400 miles.

VW plans to reach a 40% share of EVs in the VW Group fleet by 2030.

Also in January, GM confirmed it, too, is looking to add all-electric trucks and SUVs to its lineup, with higher-end models to be electrified first. In March, GM said it would spend $300 million to build a new EV at its Orion Assembly Plant. Cadillac previewed an all-electric SUV at the Detroit Auto Show. The crossover SUV is the first of a range of vehicles expected to be built on GM’s new “BEV3” electric vehicle platform. Fiat-Chrysler announced a $4.5-billion investment in Michigan manufacturing facilities in a push to electrify the entire future Jeep lineup. A new Jeep Grand Cherokee plug-in hybrid should debut in early 2021. In March, Tesla unveiled its long-teased Model Y. The 300-mile, seven-seat crossover SUV could ship by the end of 2020.

Volkswagen is stepping on the accelerator for EV production. On March 12, the automaker said the number of new electric models it plans to build over the next decade would jump from 50 to 70, with 22 million electric cars across its brands by 2028, a sharp increase from its earlier estimate of 15 million. The objective is to reach a 40% share of EVs in the VW Group fleet by 2030. VW also signed an agreement to form the European Battery Union with Northvolt.

Making Deals for Cost and Speed

Alliances are becoming the norm, as no automaker wants to shoulder alone the multi-billion-dollar investment required to transition to electric, automated fleets. In January, Ford and VW signed an MOU to collaborate on electric vehicles, autonomy, and mobility services, and could join forces in North America, South America, Europe, or China. VW later invested $1.7 billion in Argo, Ford’s self-driving car subsidiary, and announced plans to license its EV chassis to competitors.

In Germany, Daimler and BMW signed a $1 billion-plus deal to expand their partnership to develop AV technology. The automakers are also reportedly exploring joint development of an EV platform. Negotiations also continue regarding a proposed “mega alliance” between, BMW, Daimler, and VW, along with suppliers such as Bosch and Continental, to develop automated vehicles. According to VDA, Germany’s car lobby, German automakers will invest $68 billion over the next three years in EVs and automation. In a sign of diesel’s demise, VW threatened to leave the VDA over the lobby’s hesitance to fully commit to e-mobility. The CEOs of BMW, Daimler, and VW later agreed to release a “consensus paper” on the automakers’ commitment to EVs.

NYC Racks Up EV Savings

Based on nine years of data, NYC study found that PHEVs delivered a ~20% total-cost-of-ownership savings compared to the gas-powered counterparts in the fleet.

New York City recently released a first-of-its-kind analysis of the maintenance savings generated by the city’s light-duty plug-in vehicle fleet. 2018 maintenance costs ranged from just $205 for the all-electric Chevy Bolt and $344 for the all-electric Nissan Leaf to $1,311 for the Ford Fusion hybrid and $1,805 for the gas-powered Ford Focus. The study also found, based on nine years of data, the Nissan Leaf ($32, 580) and Toyota Prius hybrid ($33,644) delivered a ~20% total-cost-of-ownership savings compared to the gas-powered Fusion ($41,328).

Chinese EV-makers Go Global

Analysts at Macquarie bank say potential cuts to EV subsidies in China this year could slow the growth in global EV sales in 2019. Even if the subsidy cuts take effect, China will likely remain the world’s largest EV market by far, as sales of combustion vehicles continue to fall, and automakers and energy companies clamor to get a foothold in the market. Tesla broke ground in January on a Shanghai factory expected to eventually produce up to 500,000 Model 3 sedans and Model Y crossover SUVs annually. Soon after, VW announced it would build, with local partners, a network of EV fast-charging stations across China. BP likewise jumped into EV charging in China with an investment in startup PowerShare, which links EV drivers to charging stations.

China is still the world’s largest EV market by far.

Chinese EV-makers, meanwhile, are starting to look outside their home market. State-owned EV-maker BAIC is preparing to launch in South Korea. The company will release its Green Town electric bus there first, with the EU5 sedan, developed in partnership with Mercedes, and X3 SUV to come later. Electric automaker Kandi Technologies Group said it wants to export two models to the U.S. this year. The company plans to deliver up to 5,000 units in 2019, with the cars expected to retail for around $20,000.

Amazon Mainstreams Clean Delivery Services

Amazon is taking ownership of the carbon footprint from its ubiquitous home deliveries. Under a new “Shipment Zero” initiative, the online retailer will make 50% of Amazon shipments net zero carbon by 2030 with an eventual goal of 100% carbon-neutral shipping. Amazon cited renewable energy, electric vehicles, aviation biofuels, and reusable packaging as means to achieve the net zero carbon goal. Amazon will share its company-wide carbon footprint later this year. The company has also started hauling some cargo in self-driving trucks on interstate highways. In related news, IKEA announced that as of this year all of its deliveries in Shanghai are now made by EVs.

Uber and Lyft: Almost Public but Far from Electric

America’s ride-hailing giants, Uber and Lyft, entered 2019 jockeying to see who would be the first to go public. Lyft got there first, filing its IPO on March 1, aiming for a market valuation of up to $25 billion. The filing revealed both Lyft’s revenue (doubling to $2.2 billion) and losses (up 32% to $991 million) surged in 2018. Lyft warned investors it may not be able to “achieve or maintain profitability in the future.” Lyft now holds 39% of the U.S. ride-hailing market and boasts, as of Q4 2018, 19 million active riders.

Uber is expected to file its IPO in April. The U.S. ride-hailing leader’s revenue hit $11.4 billion in 2018 against losses that, while down 15%, still hit a staggering $1.8 billion. Uber’s valuation is expected to hit $120 billion. The IPO is anticipated to be the largest in 2019 and one of the five largest filings of all time.

Both ride-hailing giants, according to the ICCT, are lagging on public adoption of electric vehicles. Despite a pledge to “lead the transition towards a zero-emission future,” less than 1% of vehicles on the Lyft and Uber platforms were electric in 2018.

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Oil Markets

Never-Never Land in Houston

This year’s CERA Week oil summit in Houston showed the schizophrenic face of today’s oil industry. BP’s Bob Dudley said, “We need to demonstrate that we share the common goal of a low-carbon future and that we are in action toward it…” but his company’s “rapid transition” scenario for such a world showed only a tiny reduction in emissions in the transport sector and only modest reductions in demand for oil, even though BP’s short-range forecasts of growth in demand had been cut by 25%. The head of Saudi Aramco warned that the industry faced a “crisis of perception” which could turn the finance industry against oil – but simultaneously Aramco launched its first-ever global effort to find new oil reserves.

Industry clearly has tricks up its sleeve to find and produce cheap hydrocarbons – even if shale dwindles, the Saudis keep finding new and easy-to-pump oil, old fields are resurrected, and offshore exploration is far from played out. Finding enough customers to make money selling expensive crude – like the $80 barrels the Saudis keep seeking – may be pie in the sky.

Listening carefully, three long-term threats loom over the industry:

  1. Electrification is rapidly getting cheaper across a greater diversity of market segments. Shared and autonomous vehicles could cut demand for oil even faster than EVs alone. New technologies are emerging even in harder to decarbonize sectors.
  2. More and more significant players are seriously committed to decarbonization – Amazon announced it would cut its 2030 delivery footprint by 50%, only a few months after Maersk pledged to eliminate its climate emissions by 2050. VW continues to increase its commitment to electric drive trains with over $90B in planned investment. India’s entire rail network is now moving onto electricity.
  3. Resistance to imported fuel bills is growing. Except for the U.S., all of the major oil importers have stepped up their ambitions to slash fossil fuel imports.

Analysts concur that all three of these trends will be accelerated by a spreading, trade-hostile, mercantilist policy environment yielding a much smaller global markets for oil.

EVs to date have only clipped global demand by a mere 350,000 mbd.

Short term, trailing indicators appear deceptively promising to the industry: (1) EVs to date have only clipped global demand by a mere 350,000 mbd, most of that from electric buses, (2) U.S. consumers are flocking to larger, gasoline thirsty SUVs, and (3) flattening demand in the U.S. and Europe is being made up by growth in the Middle East, Africa, and Asia. Long-term leading indicators, on the other hand, are signaling a dramatic retreat from the 100 mbd global oil market of today: (1) U.S. gasoline consumption has already stalled; (2) a shrinking fraction of eligible U.S. teenagers bother to get drivers licenses; (3) attitudes towards internal combustion vehicles in Australia have shifted sharply negative; (4) peak oil demand in China may come as soon as 2025, with rail and EVs chipping away at the combustion market, (5) and combustion auto sales are already falling sharply in China.

Can Big Oil Become Paris Compliant?

Investors, governments and the public – particularly European ones – are actively pressuring oil companies to develop diversification strategies that would take them “Beyond Oil.” (Norway’s sovereign wealth fund, for example, divested from small oil and gas exploration companies but held shares in large producers that pledged any form of Paris compliance.) Despite past growth, oil and gas have not done well by investors over the past 30 years, falling from 29% of the S&P 500 in 1980 to just 5.3% in 2018, the lowest level in more than 40 years. These two factors have helped give the oil divestment movement far more traction than climate concerns alone might have mustered.

But nothing serious has been adopted, and all public moves by oil companies are still just white noise, that includes: Chevron and BP pledging they would meet Paris internal carbon intensity goals, but declined to cap emissions from their products in response to shareholders; Shell’s “Sky” scenario still shows sustained, long-term global reliance on natural gas and oil – keeping Big Oil in the game; and Sky is not a Shell commitment, just a scenario; BP’s peek into solar to power its U.S. operations – accounting for a fraction of its carbon footprint; Shell’s bid to reinvent itself as the world’s largest electricity generator by committing $2 billion a year to the effort. Real low-carbon diversification is a bridge too far for oil, and analysts are rightly skeptical of oil’s venture into ultra-cautious, low yield power sector investors.

Real low-carbon diversification is a bridge too far for oil and analysts are rightly skeptical of oil’s venture into ultra-cautious, low yield power sector investors.

In reality, since the Paris Agreement, international oil companies have spent 10 times as much on new fossil fuel infrastructure as they have on diversification. This year, just 3% of capital spending will be on low-carbon technologies. Oil companies have vigorously opposed policy changes that support the needed low-carbon investment strategies required for a real transition. BP, for example, endorses a $40 U.S. carbon tax, but spent more than anyone else campaigning to defeat a Washington state carbon tax, damaging the prospects of its own nominal favorite solution.

Weighing natural gas more heavily remained oil companies’ favorite hedge – Chevron was the first down this road, followed by Exxon, BP, and Shell. Total has now announced that by 2040 it would be only 30% oil, and 50% gas. Voices in Houston repeatedly referred to natural gas not as a “bridge fuel” but as a “forever fuel.”

This strategy however, glosses over the reality that LNG, the form in which most global gas will be marketed, is essentially no cleaner in carbon and climate terms than oil. Power generation, the intended market for much LNG, is the first fossil fuel sector likely to be entirely phased out. Gas is also extraordinarily trade dependent – indeed in BP’s various scenarios, demand for gas falls faster from a decline in free trade than from more rapid decarbonization.

The pathway other investors – at least short-term ones who move share prices – seem to want is for the oil majors to pump out their legacy reserves, and return the currently handsome profits based on today’s prices to shareholders. But that road would acknowledge that the oil business is fading, and that companies like Exxon and Shell should gradually dwindle away as their reserves shrink – not something CEOs and boards are likely to embrace.

U.S. Energy: Dominance or Dependence?

News about growing U.S. exports dominated the quarter, with the Gulf Coast becoming a genuine net exporter for the first time in decades, and gross exports threatening to exceed those of Saudi Arabia by year end. Yet counter to popular belief, the U.S. will still be a major oil importer under all these scenarios. On the Gulf Coast alone, an additional 3 million barrels a day are going to be seeking export facilities in a few years – creating a fierce competition among potential terminal builders. But what happens if these global export markets fail to materialize? Even the short-term steps taken by the Trump administration on trade have reduced U.S. oil and gas exports to China. With cheaper electrified transportation and a global emphasis on decarbonization, major questions remain about whether the U.S. can count on growing exports at profitable prices.

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Oil Production

The quarter opened with producers warily watching U.S. policy on Iranian sanctions and the Saudi/Russian riposte to keep prices high enough to prevent catastrophe but low enough to prevent profitability for shale and other swing production plays, a zone one Houston commentator called “purgatory.”

Industry signaled the austerity budget phase had passed and exploration spending would rise.

Oil majors posted solid profits in 2018 with BP and Exxon outpacing independents’ profits given their more restrained investment in exploration for new fields, combined with higher average crude prices for the year. But industry signaled the austerity budget phase had passed and exploration spending would rise – an announcement which drove Exxon share prices down.

OPEC Will Come After the Lion’s SHARE

Another looming threat to the economics of private oil companies: evidence that Persian Gulf oil producers at some point, may decide they have larger reserves than shrinking future oil markets would demand. At that moment, volume sold would become more important than price maintained. New estimates confirmed that Saudi reserves alone exceed 260 billion barrels, figures about which markets had been skeptical. (Decisions by the Saudis to look for new oil finds outside their own boundaries and invest in a $10 billion refinery in Pakistan seemed to contradict the Kingdom’s stated reform goal of being less dependent on oil.) Saudi’s low-pumping-cost reserves alone would supply OPEC’s share of today’s oil market for a quarter of a century, and if oil market shrank by half, the Saudis alone could meet all of OPEC’s current market share for 50 years! Throw UAE, Iran and Iraq into the mix, with a soupcon of recovery by players like Libya, and the likelihood that the Persian Gulf will be content to constrain production to its present share of a shrinking oil market seem highly dubious.

Blue Water, New Oil

Offshore oil reserves continued to be the primary exploration focus outside the shale patch.

Offshore oil reserves continued to be the primary exploration focus outside the shale patch. Exxon announced still further new discoveries off Guyana. Using new seismic technology, BP announced it had discovered two new and major Gulf of Mexico oil fields, and an addition billion barrels of reserves in existing fields. The Interior Department announced its intent to offer a mega-lease sale in August, 78 million acres, half of the entire Gulf of Mexico OCS area, and all the remaining acreage legally open to drilling not yet leased. The mega-lease if it proceeds, will like earlier Trump lease sales likely enable speculators to obtain control of public oil reserves at fire-sale prices. Similar worries were expressed about a three-quarters of a million acre BLM lease offering in Wyoming.

Dark Clouds Over Heavy Oil Producers

Heavy oil producers continue to struggle. Venezuela’s governance situation is catastrophic – if not oil market related. Mexico’s lower production is driven by poor historic management of PEMEX, the national oil company. The country reluctantly committed $7 billion from a special fund to help pay the troubled national oil company’s growing debt obligations. Canada’s tar sands industry floundered yet again over its incapacity to identify publicly acceptable and commercially viable strategies for getting its heavy crude pipelined to market. Lawsuits, regulatory uncertainty and construction delays on the three major pipeline projects drove investors away, lowering estimates of production and postponing new development projects. Even the painful decision by the Alberta provincial government to impose production constraints failed to stop the hemorrhage. It’s unclear whether the political crisis facing the Trudeau government would ease or exacerbate tar sands’ challenges.

Shale Still an Enigma

After a decade of pumping without a profit, U.S. shale remains a mystery. The oil majors continued to shift their investment priorities towards shale’s more nimble, quick in and out timetables. Chevron announced that half of its exploration budget would be spent on short-cycle shale investments, and forecasters estimated that by 2022 the Permian alone would amount to 1 in every 5 barrels produced by the majors. Exxon partnered with Microsoft to use big data to drive down its shale drilling costs, aiming for $15 a barrel break even.

After a decade of pumping without a profit, U.S. shale remains a mystery.

Oil majors are moving to dominate the shale plays, which more than compensates for capital spending cuts by the previously crucial independent players. Thus forecasts for U.S. shale production continue to rise, particularly if shale can free ride on $60+ prices guaranteed by OPEC+ production constraints. Indeed, shale was projected to account for 70% of short-term production growth. Longer term, however, shale production was expected to peak and decline in the early 2020s.

Investors remained concerned that just as the first, independent dominated shale phase was oil rich and profit threadbare, a second, major funded phase might simply shift capital losses from smaller to larger players.

One reason: As BP CEO Bob Dudley put it, the U.S. shale market was “without a brain,” responding mechanically to short-term price signals, unlike the longer-term strategic production strategies of national oil companies like Aramco. That “brainless” quality, threatening to shale investors, allowed Saudi Arabia to reclaim its traditional role as the swing producer.

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Policy & Politics

Europe, India and China are Weaning off Oil

As we wrote in our Flash Brief, the EU agreed in late December to new vehicle emissions standards which would require that 30%-40% of the EU’s vehicle sales in 2030 be electric vehicles. The EU went on to add a similar target to its first-ever truck emission standard.

Berlin committed a hefty $2 billion Euros a year to improve its mass transit.

Crowding in around these EU-wide new emission standards were a host of low-carbon transport initiatives by EU member states and their cities. Sweden passed legislation to ban ICE sales after 2030. Berlin committed a hefty $2 billion euros a year to improve its mass transit. Denmark moved to accelerate its own transition by committing to phase out access to its major cities for older – and hence dirtier – combustion engines. Oslo completed its massive crack-down on parking, attempting to create a virtually car-free downtown, leading Brussels to consider free public transit for all.

India’s budget release featured acting finance minister, Piyush Goyal, a long time EV advocate, proudly introducing the budget by proclaiming: “India will lead the energy revolution in the world with electric vehicles.” Prime Minister Modi was captured signaling his approval as Goyal went on, “This India will drive on electric vehicles. We would not have to import oil and will produce electricity on our own domestically.” The budget created a $1.4 billion incentive program for electric vehicles, and a set of supportive policies – still stopping short of implementing a much-discussed feebate system for consumers or ZEV credit system for manufacturers.

India unveils a $1.4 billion incentive program for electric vehicles and a set of supportive policies.

In a few short years, China’s EV industry and market have become globally dominant, largely driven by China’s supportive policy environment. China supports EVs through industrial policy, fiscal incentives, and regulatory and license requirements at the national and local level. The country now has at least 47 factories making EVs; the rest of the world 39. (More on China’s momentum in the Clean Mobility section.) Massive new investments designed to reduce China’s dependence on oil while accelerating its global dominance continue. The new budget increased funding for new rail lines by 40% from last year – including 3,200 new miles of high-speed rail – at a cost of $125 billion. And Hainan province – a relatively “small” island with 9 million residents – banned the sale of new combustion vehicles as of March 1, 2019.

State and Local Governments vs Trump

The Trump administration is on a very different pathway from the world at large, striving to maintain the era of oil and U.S. production as long as possible. But local resistance is growing, from an increasing number of states, cities, and companies, the new Democratic House, and even some coastal Republicans. When Joe Balash, assistant secretary of the interior, told an oil conference the Trump administration would almost certainly lease the offshore Atlantic for the first time in 50 years, he was promptly forced to take back the remarks for fear of the backlash from Southeastern states. The entire Florida congressional delegation – Ds and Rs – wrote to Interior urging it to cancel leases off the state coast. Nine coastal state congressional delegations put in bills to block drilling off their coasts; South Carolina’s attorney general sued to stop seismic testing and drilling. Coastal state resistance was intensified by the Interior Department’s casual attitude towards drilling safety; the department had issued 1,700 waivers of safety regulations put in place after Deepwater Horizon, most often by waiving safety standards for blow-out preventers – the very technology whose failure caused that catastrophe.

Even Shell urged the White House to tighten, not weaken, the Obama administration rule’s limiting methane flaring and leaking. (BP, however, in spite of publicly pledging to support methane clean up policies, was revealed to have secretly led an industry effort to persuade the Trump administration to roll-back Obama administration methane control rules.)

The Oregon House passed a 10-year ban on fracking of both gas and oil, in an attempt to head off the spread of drilling to the state.

In Colorado, where voters in November rejected an initiative to limit oil and gas drilling, the new Democratic majority in the Legislature moved to greatly strengthen regulation and the power of local communities to limit drilling. Energy behind this effort was strengthened when the Colorado Supreme Court overturned lower court decisions which had required oil and gas regulators to take public health and environmental concerns into greater account; the Supreme Courts ruled that existing Colorado law gives greater deference to the need to allow development of oil and gas resources.

In the congressional fight to extend and expand the current purchase tax credits for EVs, lobbying filings made it clear that utilities are placing bets on innovative electrification technologies. 

In the congressional fight to extend and expand the current purchase tax credits for EVs, lobbying filings made it clear that – unlike the oil industry – utilities were placing more and more of their bets on innovative electrification technologies that would both lower carbon and increase demand for power. The Trump budget, however, proposed to eliminate the credits altogether. Some Republican senators agreed. And the oil industry prevailed over utilities in a fight at the American Legislative Exchange Council – showing again the power the oil lobby has with conservatives.

The Trump administration said its negotiations with California regarding a possible compromise over emissions rules for cars were over, and that Trump would simply proceed to weaken the Obama rules and likely attempt to strip California of its independent standard setting power.

But the administration also conceded it was having trouble meeting its own deadline for the roll back. It met with the auto industry and tried to persuade them to support the administration’s strategy, but for the most part the industry stuck to its preference for avoiding a prolonged legal battle with California and the growing number of states allied with it, a battle that could leave U.S. automakers in limbo about what kinds of fleets to produce after 2022. The legal battles were already brewing.

And states again showed that for every Trump sally, they were ready to raise the stakes.

Legislation in the California State Senate would require a 40% reduction in diesel truck carbon emissions by 2030, and 80% by 2050. The state also moved to implement the new low-carbon standards required for TNC’s like Uber and Lyft by last year’s legislative session. Nine northeast states plus D.C. banded together in the Northeast Transportation Climate Initiative, announcing they would develop a regional plan to cap transport greenhouse gas emissions and many of them were already acting. Colorado adopted the California ZEV mandate.

NYC is America’s first congestion pricing experiment.

In Massachusetts, optimism grew as the state considered carbon pricing in the transportation sector. Maryland authorized 5,000 new EV charging stations; NY authorized $32 million for EV charging infrastructure.

And the long-standing roadblock in the Empire State against congestion pricing in Lower Manhattan – suburban opposition in the State Assembly – finally crumbled, setting up NYC as America’s first congestion pricing experiment. Los Angeles, not to be stuck in traffic, seemed to be offering itself up as the second test case to cut congestion, proposing tolls on freeways.

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