The Promise (and Potential Pitfall) of VW Settlement Funding

July 10, 2019

Last year’s grant season was as busy and diverse as any, buoyed by the influx of Volkswagen Settlement Funds. From California’s $150 million Zero and Near Zero Emission Freight Facility Program (“ZANZEFF”) to dozens of state-level programs, there is hardly a locale without an opportunity to secure incentives for clean vehicles and equipment.

This year promises even more opportunities—the amount of funds available later in 2019 dwarf what we’ve seen so far. Four states with the most Volkswagen Settlement Funding, California, Texas, Florida, and New York, are opening up their first rounds of Volkswagen Settlement programs this year. However, potential pitfalls associated with these funds lurk in the not-so-distant future. States need to not only recognize these potentials risks, but also structure their incentive programs to take full advantage of market conditions. Only then will states be able to stretch their funding dollars further and effectively accelerate the deployment of clean transportation technologies.

Recent Winners Highlight Array of Sectors and Fuel Types, but Diesel Still Dominates

A recent sampling of the first $92 million Volkswagen Settlement Funds to be awarded shows a diversity of project and fuel types. School and transit buses alike were of high priority, but trucks and airport equipment also secured incentives.

Meanwhile, medium- and heavy-duty electric vehicle projects have emerged as the front-runner. This, however, is due to two considerable outlying states. New Jersey and Washington used a combined $36.4 million in Volkswagen Settlement Funds to exclusively fund battery electric vehicle projects. Excluding those states’ efforts, the remaining results may be surprising. Although the Volkswagen Settlement Funds were designed to mitigate diesel emissions, diesel projects still received 52% of the funds.

This analysis of the first $92 million awarded is not necessarily an indicator for how the remaining Volkswagen Settlement Funds will be used. It is, however, a snapshot of project preferences in Colorado, Connecticut, Iowa, Maine, Nebraska, New Jersey, Ohio, Oklahoma, Pennsylvania, Tennessee, and Washington.

Pennsylvania recently announced the winners of its first round of VW funding, which was conducted under Governor Tom Wolf’s Driving PA Forward initiative. The first round of winners included CNG refuse trucks; diesel-powered construction equipment, street sweepers, and school buses; and the installation of idle reduction equipment on six locomotives.

Connecticut’s announcement of ten awards valued at over $12 million showed a diversity in project and fuel types. While diesel vehicles and engines received the highest amount of funding (in terms of units deployed), the state also funded several high-profile alternative fuel projects, including $4.9 million allocated to the state’s Department of Transportation to purchase 12 electric transit buses and charging infrastructure, $1.2 million to deploy 17 ultra-low NOx CNG refuse haulers, and $1.4 million for the University of Connecticut to purchase two electric shuttle buses and install the required charging infrastructure.

Nevada’s first round of VW funds, $6.6 million in total, is slated to replace 185 existing pieces of diesel equipment and vehicles. Airlines, notably, were featured award winners, with Allegiant Air, Southwest Airlines, and United Airlines each receiving funds to replace diesel-powered ground support equipment with zero emission solutions. Other winners included school districts, transit operators, and refuse haulers.

The Design of Funding Programs Could Unfortunately Minimize Benefits

Market indicators point to increasing deployments of zero and near-zero emission technologies. However, the current structure of many incentive programs utilizing Volkswagen Settlement Funds may, in fact, be impeding the deployment of the cleanest transportation technologies available.

When the Volkswagen Settlement was published in 2016, the original terms established specific requirements for who could apply and for what types and ages of vehicles. For example, in states funding on-road trucks and buses, applicants could only secure funds to deploy new vehicles to replace existing diesel vehicles. These existing diesel vehicles must have engine model years from 1992-2009 (or up to 2012 if the applicant is in California).

Such a stipulation is a limiting factor for fleets that turn over their equipment more frequently than every 10 to 27 years. Because of their demanding mileage-intensive operations, these fleets already phase out vehicles quickly and replace them more often. This means high mileage fleets that must regularly replace their vehicles will not have an eligible vehicle with which to apply.

These high-mileage fleets are also the ones with the most diesel emissions to mitigate. The math is simple—higher mileage equals more fuel consumed and more fuel consumed equals more harmful emissions generated. Because of the Volkswagen Settlement’s engine model year stipulations, the vehicles generating the most miles, and therefore the most emissions, are not eligible for Volkswagen Settlement funding.

An Innovative Solution

A creative solution is needed to simultaneously deploy the most advanced transportation technologies and remove older diesel vehicles from operation. An incentive concept now being used in California could be that solution. The 3-way exchange, as it is known, involves three vehicle types—new vehicles, middle-aged vehicles, and older vehicles. This incentive concept has most recently been used in California’s Carl Moyer Program and the San Joaquin Valley’s Truck Replacement Program to successfully deploy alternative fuel trucks, buses, and equipment.

In the 3-way exchange model, a fleet first deploys a new truck to replace a “middle-aged” truck with diesel engine model year 2010-2014. The “middle-aged” truck then goes on to be put into service in another fleet, forcing out an even older truck with diesel engine model year 2006 or older. The oldest truck in the 3-way exchange would, then, ultimately be scrapped.

This structure creates a flexible pathway to both achieve substantial diesel emissions reductions and deploy the newest technologies to fleets that demand them most. Unfortunately, the current use of the Volkswagen Settlement funds in many states quite effectively excludes fleets that would benefit from clean transportation technologies the most—the fleets with the highest mileage, the most emissions, the quickest turnover, and high-caliber maintenance protocols.

That is not to say that the projects funded so far do not have value; by no means is that true. There is, and should always be, a place for such projects and there is certainly enough funding to go around. However, to accelerate large-scale deployments of the cleanest transportation technologies available, funding agencies can look to the 3-way exchange model as a means of cost-effectively generating air quality benefits now while also supporting innovation.