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How fossil fuels won round one of North Carolina’s Volkswagen settlement payout

Legislative politics, industry influence, and financial pressures from an aging bus fleet helped shape spending.

So much about riding the school bus has been the same for decades: the dread or thrill of choosing a seat, the din of the engine humming and classmates chattering, the smell of old vinyl and diesel exhaust mingled together.

But for a tiny fraction of the 800,000-odd kids who regularly take the bus in North Carolina, there’ll soon be a slight change: No more exhaust, no more rumbling engine. They’ll be riding buses powered entirely by electric batteries.

The six electric school buses, announced earlier this summer, are thanks to the billions Volkswagen paid to atone for its diesel emissions cheating scandal from 2015. They come along with a handful of electric transit buses and three dozen or so fast-charging stations for electric cars. 

For clean energy advocates, they’re welcome advancements toward electrifying the transportation sector, the largest source of global warming pollution in North Carolina and across the country.

But the investments are outweighed by the new fossil fuel-powered vehicles that will also be purchased with Volkswagen funds, including 85 diesel school buses that meet tailpipe exhaust limits enacted a decade ago.

To be sure, these buses will cause less smog-forming pollution than the dinosaurs they’re replacing. But they represent little deviation from standard practice: Public schools already buy hundreds of such vehicles every year. 

And without a change to state law that requires these new purchases to stay on the roads for at least 20 years, the buses will continue to spew air pollutants and greenhouse gases into the atmosphere just as climate scientists say emissions should be sharply curtailed. 

The school bus purchases also highlight what could have been: Last year, Duke Energy had offered to pay the difference between electric and diesel versions using Volkswagen funds, buying 85 electric school buses in all. The utility’s proposal is still pending with regulators.

North Carolina’s fossil fuel-titled awards are hardly an outlier nationwide. But they conflict with the rhetoric of Gov. Roy Cooper, a Democrat who has made tackling the climate crisis and transitioning to clean energy a priority of his administration.

What happened? Over a dozen interviews and a review of hundreds of pages of public comments show a confluence of factors: A Republican legislature determined to cut costs and control money flowing into the state; a public-school system saddled with a fleet of costly buses too young to replace under the normal budget process; and the enduring influence of a multifaceted transportation industry centered on burning fossil fuels.

‘Long term vs. short term’

For six years, more than a dozen models of Volkswagen diesel vehicles released smog-forming nitrogen oxides up to 40 times the legal limit, thanks to computer software designed to fool emissions inspections. After regulators caught and sued the automaker, they extracted a $3-billion mitigation fund meant to curb that same pollution from a range of diesel vehicles, from buses to passenger cars. States receive a share according to how many illegal cars and trucks they unknowingly registered.

From the outset, clean energy advocates saw the mitigation fund as a chance to tackle the climate crisis along with smog-producing air pollution. Diesel school and transit buses could be replaced with electric versions with zero tailpipe emissions. As more carbon-free energy like wind and solar supplied the electric grid, smokestack pollution from power plants would approach zero, too. 

Though the funds wouldn’t be enough to completely transform any state’s fleet of school or transit buses, they could be used for high-profile projects that could set an example and pave the way for electrification. In North Carolina, they would also support local bus manufacturer Thomas Built, which had just unveiled its own electric school bus.

“It’s the number one target for protecting our kids’ health,” said Stan Cross, director of electric transportation policy for the Southern Alliance for Clean Energy, of electrifying school buses. “It’s a public health win. It’s an economic win. It’s a climate win.”

But the diesel, propane, and natural gas industry eyed an opportunity to sell more vehicles, especially to cash-strapped states struggling to replace old buses and garbage trucks. They stressed the crux of the settlement: reducing pollution that leads to smog, which can cause and exacerbate lung disease, especially in children. Industry trade groups like the Diesel Technology Forum urged states to get “more clean air for the VW settlement dollar.” 

Even by this standard, electric transit buses that log some 35,000 miles a year still come out looking better than combustion models. But for school buses that travel only about 15,000 miles annually, the upfront cost-effectiveness metric heavily favors fossil fuels. 

According to data from the North Carolina Department of Environmental Quality, replacing an old diesel school bus with a new one costs less than $90,000 and will curb 1,300 pounds of nitrogen oxides over its lifetime. A bus powered by propane or compressed natural gas on the road will cost a bit more but reduce more pollution. An electric school bus and its charging plug cost about four times that of a new diesel bus, but only prevent 40% more smog-forming pollutants. 

These figures don’t take into account fossil fuel vehicle emissions of carbon dioxide or of methane, a greenhouse gas many times more potent. They don’t incorporate the reality that electric buses cost less than half as much to operate as their diesel counterparts. And they ignore the fact that, unlike diesel and gas versions, electric buses will deliver progressively more cuts to smog pollution over time, as carbon-free energy powers more of the electric grid.

“We’re thinking long-term versus short-term,” said Matt Casale, director of environment campaigns for the U.S. Public Interest Research Group. “You can have some emissions reductions today versus a zero-emissions transportation future.” 

While the industry bills diesel buses meeting current tailpipe pollution standards as “clean diesel” or “new technology diesel,” they are hardly cutting edge. Today’s standards were first conceived in 2001 and took effect in 2010, rendering new vehicles exponentially cleaner for smog-forming emissions than their predecessors. But, said David Pettit, senior attorney with the Natural Resources Defense Council, “they’re not at zero, which is the goal.”

Indeed, there’s now a push from public health advocates to ratchet down smog-forming pollutant limits from these large diesels another 90%. California regulators are on the verge of doing just that, said Santa Monica-based Pettit, and the federal government could eventually follow suit.

Still, many states have so far used most of their Volkswagen funds for these soon-to-be-outdated diesel vehicles. A new report from the Diesel Technology Forum shows that among 40 states who’ve begun distributing Volkswagen grants, 71% of school bus replacement funds so far have been used for diesel. Similarly, 71% of all replacement vehicles — from buses to garbage trucks to ferries — will be diesel-powered.

Those data align with a scorecard of state plans published last year by the U.S PIRG Education Fund and Environment America Research and Policy Center, which gave the majority of states a D or F grade for not prioritizing electrification. Many allocated the maximum allowable amount for electric vehicle charging infrastructure — 15% — but allowed fossil fuel vehicles to suck up the rest.

Virginia got a D for its plan, but has since risen above it, so far allocating the vast bulk of its $94 million share to electric vehicles and charging stations. Casale, who authored the scorecard, said a new governor, a new legislature, and an electric school bus program pushed by Dominion Energy all came into play in the commonwealth after the blueprint was first crafted. “They took what they had and refocused it to meet their new priorities,” he said.

The Tar Heel State also got a D. But unlike that of its northern neighbor, North Carolina’s plan doesn’t just allow for the majority of funds to be consumed with fossil fuel investments — it practically guarantees it. Covering a third of the state’s $92 million allotment, the state’s Phase I strategy called for 35% to be devoted to diesel, propane and natural gas school buses. Another 20% of the monies were reserved for waste trucks and off-road equipment for which electric versions are scant or non-existent.

The awards North Carolina announced this summer hew closely to these benchmarks. Nearly two-thirds of the Phase I funds will go to fossil fuel replacements and 38% will go toward electric buses or electric vehicle charging stations. Of the vehicle replacement funds, more than half will support diesel. 

Especially where school buses are concerned, the diesel purchases are nothing special. North Carolina public schools already buy roughly 700 new diesel buses each year, as older models reach the end of their useful lives. “There are some propanes,” said Tom Schaaf, vice president and general manager of Greensboro-based bus dealer Carolina Thomas. “Virtually everything else is clean diesel.”

North Carolina Gov. Roy Cooper. (Photo by NCDOTcommunications / Flickr / Creative Commons)

‘Legislative eyes were on this process’

As in Virginia, in the months since Cooper’s Department of Environmental Quality crafted its Phase I Volkswagen plan, clean energy politics have shifted. The governor announced a new focus on the climate crisis, unveiling an executive order aimed at cutting greenhouse gas pollution in line with the targets of the Paris Agreement. His administration later followed that up with a Clean Energy Plan that would cut utility smokestack pollution 70% by 2030. In the midterm elections, Democrats gained enough seats in both the House and Senate to sustain Cooper’s vetoes.

But these dynamics weren’t enough to loosen the reins Republican lawmakers placed on the state’s Volkswagen windfall in the early years of Cooper’s first term. While they still retained veto-proof majorities, GOP leaders required the governor’s Department of Environmental Quality to get legislative approval of its spending plan, and they mandated that Volkswagen awards be appropriated through the normal budgeting process. 

The effect of these laws was to slow the entire process down. Cooper sued over the provisions, lost, appealed, and is still fighting one of them in court. Last year, when Democrats gained enough seats to sustain the governor’s veto, talks broke down over larger budget matters, and the Volkswagen awards were left hanging. Lawmakers finally appropriated money for the first phase of the state’s plan this summer — about a year and a half behind schedule.

Observers say the General Assembly undoubtedly influenced the substance of North Carolina’s Volkswagen spending, not just its timing. “Legislative eyes were upon this process,” said Cassie Gavin, the chief lobbyist for the North Carolina Sierra Club. “Certainly, that had to be a consideration.”

In the summer of 2017, the state Senate adopted budget language requiring the state’s Volkswagen plan to prioritize “new diesel or alternate fueled engines” and “parts manufactured in the state.” Lawmakers later changed the provision, but a flag was planted.

The state’s manufacturing and fuel supply sector is robust. Led by a Cummins facility in Rocky Mount, North Carolina makes more diesel equipment than any other state, according to the Diesel Technology Forum. Thomas Built in High Point is among the nation’s leading school bus manufacturers. The state’s alternative fuel market includes a 200,000 square-foot Agility Fuels Solutions plant in Salisbury. And the propane industry says it has more retailers and bulk plants than any other state in the country.

Many of these industries made their case to the Cooper administration when environmental officials first began taking comments on the Volkswagen plan. But they also appealed directly to lawmakers. In a March 2018 presentation to a joint oversight panel on energy policy, the North Carolina Propane Gas Association detailed in a series of slides why Volkswagen funds should be used for propane school buses.

One key point: Propane buses could reduce smog-forming emissions to “near zero” for a third of the cost of an electric school bus. That argument seemed to resonate with at least one powerful lawmaker, Rep. Dean Arp, Republican of Union County, who co-chairs the House Energy Committee. 

The next month, Arp quizzed Cooper environmental officials presenting their draft Volkswagen plan, which set aside 35% of funds for buying new school buses of all types — from electric to diesel. He honed on a chart showing propane school buses could reduce the nearly as much smog-forming pollution as electric buses for less than half the price.

“I’m trying to understand the relative costs of propane versus electric buses,” Arp said. “It’s one of the questions I think is critically important.”

To be sure, the Department of Environmental Quality was already planning to prioritize maximizing smog-forming pollution reductions for every upfront dollar spent, much to the consternation of clean energy advocates. “It had nothing to do with climate change,” said Terry Lansdell, former program director with Clean Air Carolina. “It was about ‘how do we reduce the tailpipe emissions across the state, and who would get the most bang for the buck,’ when they put it out there.”

He added, “the competitive process was really about a numbers game.”

Yet by August, when officials released their final plan for the first $31 million of the Volkswagen funds, they removed some of the competition in the school bus category, which they raised to 40% overall. A quarter of the Phase I funds would be devoted to buying diesel school buses. A tenth would go to propane school buses, and just 5% would be used for electric school buses. 

Asked why the school bus categories were set, Zaynab Nasif, a spokesperson for the Department of Environmental Quality, gave only a general answer over email. “The targeted percentages come from various discussions with the public, tribes, local governments, state agencies, the business community, and public interest groups to weigh in on which of the eligible vehicle and equipment categories they think the state should invest in.”

school buses(Photo by christian r / Wikimedia Commons)

‘We keep the buses here so long’

The state agency with perhaps the biggest imprint on North Carolina’s Volkswagen plan is the Department of Public Instruction, encompassing the state’s 115 school districts and overseen by an elected superintendent (currently, Republican Mark Johnson.)

The Department of Public Instruction didn’t make anyone available for an interview for this article, despite repeated requests. But information it submitted to Cooper officials show the school system saw the Volkswagen funds as a unique opportunity to rid itself of hundreds of defective but still operable buses.

Across the country, school buses last 15 to 16 years on average, according to a survey by the trade publication School Bus Fleet Magazine. But in North Carolina, schools can only use state funds to replace buses after they have been on the road for 20 years or logged over a quarter of a million miles. It’s the longest bus replacement cycle in North America, says Schaaf of Carolina Thomas, leaving half of the state’s 14,000 buses a decade old or more.

The criteria were made law in 2013, when Republicans took control of the governor’s office and the legislature for the first time in over a century. The new policy also gave districts cash incentives for using buses for up to 23 years.

The rules evened out new bus purchases from year to year and reduced them overall. Rough figures from Schaaf show they dropped from an average of 950 over the seven years prior to about 610 over the seven years afterward. Likewise, average annual spending from the state’s School Bus Replacement Fund decreased nearly $12 million in actual dollars in the five years after 2013, compared to the five years prior, according to data supplied by nonpartisan fiscal analysts at the General Assembly.

“They really undermined funding of textbooks and school buses when they took over the budget,” recalled Rep. Pricey Harrison, a Democrat who’s represented part of Greensboro since 2004.

Kevin Harrison (no relation), the transportation services chief for the Department of Public Instruction, writes in a 2017 memo that most buses can last 20 years, but in the last decade a notable exception has emerged: A fleet of 815 buses equipped with a Navistar International VT365 engine.

Mostly bought in model year 2006, these buses are too old to meet current emissions standards and too young to replace using state funds. But they are less fuel-efficient and in more frequent need of repair than other comparable buses, Harrison writes, costing 20 cents more per mile to operate and using 190 more gallons in fuel each year. 

A School Bus Fleet Magazine message board gives a flavor of the VT365’s infamy. “Has anyone had good luck with this engine?” asks one user. The first reply: “We don’t have any in our fleet, thank God!” A second chimes in: “Oh, don’t get me going …” 

Schaaf, one of three major bus dealers for the public schools, knows the complaints well. “This has been a thorn in their side, this engine.” Though it has caused problems throughout the country, he said, “it’s magnified in North Carolina because we keep the buses here so long.”

‘Good basis for learning’

Getting rid of the faulty buses early would spare the state money in operating funds immediately, Harrison wrote. In several years, when the VT365 buses would normally be cycled out of the fleet, the School Bus Replacement fund would also see savings. Harrison proposed using nearly all of North Carolina’s share of Volkswagen funds for replacing the 815 buses, which he expected would cost $79 million. Ten would be electric, the rest a mix of diesel and propane.

The state’s Phase I target of $12 million for school buses, covering about 100 vehicles, falls far short of that request. But the emphasis on diesel buses is aligned with that 2017 memo. That focus, many familiar with the process said, wasn’t just due to the relatively high upfront cost of electric vehicles. It also reflected the will of local school districts and the reluctance of many to try something new — even buses that simply burn a different fuel.

“If we had our way, all the buses would have been propane,” said John Jessup, president of the North Carolina Propane Gas Association, with a small laugh. “We knew we weren’t going to get that. We were just hoping to get as much as we could by our efforts to talk to the school districts, see which ones were interested.”

In the end, the Department of Public Instruction was awarded funds for 20 propane buses in four districts and electric buses in five different districts, from the rural mountains of Transylvania County to the coastal city of Wilmington. The Eastern Band of Cherokee Indians, which operates its own school district on the Tennessee border, also got an award for an electric bus.

Even if regulators had given the green light to Duke Energy’s proposal to buy 85 electric buses using some of the Volkswagen windfall, it’s not clear the public schools would have taken up the offer. The first wave of electric school buses, released about five years ago, faced problems. Especially compared to transit agencies, school districts tend to be more cautious. Asked if they were interested in Duke’s plan, the Department of Public Instruction sidestepped the question over email.

“We are very excited to have been awarded all five electric school bus replacements which we requested,” wrote spokesperson Graham Wilson. “These five school buses, across five diverse districts in the state, will provide a good basis for learning about the vehicles, powertrains, and other new technologies in different school transportation operating environments.”

Not long before Cooper officials awarded $10 million of Volkswagen money for fossil-fuel powered buses, lawmakers also transferred $18 million out of the School Bus Replacement Fund. With so many schools shut down this year, legislators had argued, buses would travel fewer miles and fall short of the criteria for retirement. The likely result: more 20-year old buses will stay on the roads longer.

“That was a red flag for me,” said Lansdell, who now heads the nonprofit Bike Walk North Carolina. “It makes our aging busing infrastructure even more entrenched as we move forward to the next decade.”

‘It’s time for North Carolina to make a decision’

While North Carolina may have whiffed on its Phase I Volkswagen spending, advocates say, it still has a chance to change course with its remaining funds, about $60 million. If the GOP loses control of either chamber of the General Assembly (considered possible) and Cooper wins reelection (considered likely), his administration could craft the next plan with less or no fear of legislative reprisal. 

Though the first plan gave only a passing mention to climate change, the next iteration could give greater weight to Cooper’s Executive Order 80, aimed at reducing the state’s climate pollution 40% from 2005 levels in the next five years.

If regulators ultimately approve Duke Energy’s proposed pilot, that will also provide a chance for electric buses to proliferate. Irrespective of the Volkswagen monies, the utility could still pay the difference between a new diesel bus purchased from the state and a new electric bus. “We stand ready to deploy this program,” said Lang Reynolds, director of electric transportation for Duke. “We would love to get it done.”

No matter what, said Cross, the goal should be an all-electric bus fleet in 20 years, and that every new bus purchase is crucial. 

“We’re either creating a 20-year solution or a 20-year problem,” Cross said. “We’re at a moment — whether you’re using settlement funds or general funds — we’re going to kick the can down the road or we’re going to stop kicking it down the road. It’s time for North Carolina to make a decision about that.”

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