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California’s Clean Air Act waiver may not be long for this world.
Nobody quite knows where Donald Trump stands on electric vehicles these days. While he’s reportedly coming for the $7,500 consumer EV tax credit and previously characterized the switch to EVs as a “transition to hell,” once Elon Musk threw his support behind Trump, the once and future president’s rhetoric has softened. But if past is prologue, Trump’s policies could still hammer one of Tesla’s primary income sources: the emissions compliance credits the EV giant sells to other automakers.
That windfall comes from California’s Zero-Emission Vehicle Program, which sets ambitious ZEV production and sales mandates that other states can then voluntarily adopt. Automakers earn credits based on the number and type of ZEVs they produce; they can either put those credits toward meeting their annual targets under the law or, if they have an excess, sell them. Since Tesla is a pure-play EV company, it has always generated more credits than it needs, while most other automakers need to buy credits to meet their emissions targets. Last year, selling credits represented about 12% of Tesla’s net income, and so far this year, it comprises a whopping 43%.
Underpinning this whole regime is California’s Clean Air Act waiver, granted by the Environmental Protection Agency, which allows the state to set stricter vehicle emissions standards than those at the federal level due to the “compelling and extraordinary circumstances” it faces when it comes to air quality. During his first term, Trump sought to rescind portions of this waiver related to greenhouse gas emissions and the ZEV mandate, and his campaign stated that he will do so again. While the federal government’s comparably weaker emissions standards ensure that the credit market won’t disappear completely, eliminating the waiver would cause it — and Tesla — to take a major hit.
“Given that Tesla has no new major high-volume product that they’ve announced, not having access to these credits is only going to be harmful,” Corey Cantor, an EV analyst at BloombergNEF, told me.
Tesla understands this — or at least it used to. The company strongly opposed the first Trump administration’s efforts to decrease penalties for automakers that fell short of federal fuel economy standards. “Tesla was in there in all those lawsuits arguing that the Trump administration was wrong and the penalty should be increased,” Ann Carlson, a professor of environmental law at UCLA, told me. As she explained, this is “evidence of how important that market is to them.” The higher the emissions penalties, the more automakers will rely on credits to avoid them.
Right now, California’s emissions targets are quite ambitious, and they’re poised to get even more so over the next decade, which would cause the credit market to heat up, too. With the introduction of California’s Advanced Clean Cars II program, 35% of all 2026 models sold must be ZEVs. These new vehicles, which include passenger cars, trucks, and SUVs, will start hitting production lines next year. The targets ramp up quickly from there — 68% of 2030 models must be ZEVs, while a full 100% of 2035 models must be zero-emissions. Besides California, 11 other states, plus Washington D.C. have signed onto these regulations.
Under Trump, all of these goals are likely gone — though it’s probable that they wouldn’t have been met anyway. Based on total retail sales so far this year, no states are selling a large enough percent of EVs and hybrids to comply with California’s forthcoming standards — not even California itself, which CNBC reports is sitting at 27% EV and plug-in hybrid sales. Toyota came out and called these standards impossible to meet, but there’s no indication that California is backing down.
The first time a Trump administration rescinded the state’s waiver, a number of automakers, including BMW of North America, Ford, Honda, Volkswagen Group of America, and Volvo agreed to abide by California’s original standards anyway, in exchange for an extra year to meet emissions targets and increased flexibility overall. The waiver ordeal ultimately got tied up in courts, and California’s regulations ended up being inactive for just two-and-a-half years, until Biden reinstated the waiver in 2022. Litigation is still ongoing, however, with a suit from an Ohio-led coalition of red states expected to end up in the Supreme Court.
Carlson told me we should know whether the court decides to accept this case in the next few months. At the heart of the argument is a question about whether California’s “compelling and extraordinary circumstances” extend to limiting climate change-causing greenhouse gas emissions and not just smog-causing air pollutants such as nitrogen oxides or particulate matter.
“All states are affected by climate. [California]’s not unique in the way that it had unique air pollution problems,” Carlson told me, explaining the argument Trump and red state allies will likely make. “California is going to retort by saying, We have very compelling and extraordinary circumstances. We have drought, we have higher temperatures, our ozone pollution is going up. We have wildfires, we have water supply issues.”
While we know that the conservative Supreme Court is relatively hostile to aggressive greenhouse gas regulation, which side of the debate Tesla winds up on is anyone’s guess. Now that Musk is within Trump’s inner circle, he apparently has a number of personal business interests that he’d like to pursue. These include federal funding for SpaceX and Starlink, but perhaps most importantly regulations around Tesla’s autonomous driving system, which he views as the future of the company. Despite findings that these systems have caused hundreds of crashes and a number of fatalities, Musk said on an October earnings call that he is seeking a federal approvals process for autonomous vehicles. This could expedite the current system, which requires lengthy applications for every state.
Cantor thinks it’s possible that Musk might be making strategic decisions about what fights to pick. “I wonder if there’s been so much focus on the autonomous vehicle regulations at the national level that it’s like, EV stuff be damned, I don’t really care, as long as I get my national AV authorization.“
After all, Tesla isn’t kicking up a fuss about Trump’s plan to go after the consumer EV tax credit, which Musk seems to think would cement the company’s dominant market position, on the assumption that less-experienced-makers will suffer more from the subsidy’s repeal. While looser emissions standards for Tesla’s competitors and reduced income from compliance credits seem like more of a clear-cut loss for Musk, perhaps it’s a hit he’s willing to take in pursuit of his broader goals.
At any rate, Carlson told me that an enduring rollback of California’s waiver will depend on competent administrators that are familiar with the complexity of the legislative process — not something Trump appointees are exactly known for. “The one thing that I can’t quite wrap my mind around is what the effect of Lee Zeldin combined with Project 2025 means,” Carlson said. Zeldin, Trump’s pick to lead the EPA, has no experience running a government agency and little expertise in environmental policy.
“The effect of an inexperienced administrator, combined with potentially freezing out or even firing some of the most competent and skilled economists, scientists, etc, could totally undermine the ability to do this in a way that is legally sustainable and fast,” Carlson told me.
If you squint hard enough, maybe that’s the silver lining, here.
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Current conditions: In the Atlantic, the tropical storm that could, as it develops, take the name Jerry is making its way westward toward the U.S. • In the Pacific, Hurricane Priscilla strengthened into a Category 2 storm en route to Arizona and the Southwest • China broke an October temperature record with thermometers surging near 104 degrees Fahrenheit in the southeastern province of Fujian.
The Department of Energy appears poised to revoke awards to two major Direct Air Capture Hubs funded by the Infrastructure Investment and Jobs Act in Louisiana and Texas, Heatmap’s Emily Pontecorvo reported Tuesday. She got her hands on an internal agency project list that designated nearly $24 billion worth of grants as “terminated,” including Occidental Petroleum’s South Texas DAC Hub and Louisiana's Project Cypress, a joint venture between the DAC startups Heirloom and Climeworks. An Energy Department spokesperson told Emily that he was “unable to verify” the list of canceled grants and said that “no further determinations have been made at this time other than those previously announced,”referring to the canceled grants the department announced last week. Christoph Gebald, the CEO of Climeworks, acknowledged “market rumors” in an email, but said that the company is “prepared for all scenarios.” Heirloom’s head of policy, Vikrum Aiyer, said the company wasn’t aware of any decision the Energy Department had yet made.
While the list floated last week showed the Trump administration’s plans to cancel the two regional hydrogen hubs on the West Coast, the new list indicated that the Energy Department planned to rescind grants for all seven hubs, Emily reported. “If the program is dismantled, it could undermine the development of the domestic hydrogen industry,” Rachel Starr, the senior U.S. policy manager for hydrogen and transportation at Clean Air Task Force told her. “The U.S. will risk its leadership position on the global stage, both in terms of exporting a variety of transportation fuels that rely on hydrogen as a feedstock and in terms of technological development as other countries continue to fund and make progress on a variety of hydrogen production pathways and end uses.”
Remember the Tesla announcement I teased in yesterday’s newsletter? The predictions proved half right: The electric automaker did, indeed, release a cheaper version of its midsize SUV, the Model Y, with a starting price just $10 shy of $40,000. Rather than a new Roadster or potential vacuum cleaner, as the cryptic videos the company posted on CEO Elon Musk’s social media site hinted, the second announcement was a cheaper version of the Model 3, already the lower-end sedan offering. Starting at $36,990, InsideEVs called it “one of the most affordable cars Tesla has ever sold, and the cheapest in 2025.” But it’s still a far cry from Musk’s erstwhile promise to roll out a Tesla for less than $30,000.
That may be part of why the company is losing market share. As Heatmap’s Matthew Zeitlin reported, Tesla’s slice of the U.S. electric vehicle sales sank to its lowest-ever level in August despite Americans’ record scramble to use the federal tax credits before the September 30 deadline President Donald Trump’s new tax law set. General Motors, which sold more electric vehicles in the third quarter of this year than in all of 2024, offers the cheapest battery-powered passenger vehicle on the market today, the Chevrolet Equinox, which starts at $35,100.
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Trump’s pledge to revive the United States’ declining coal industry was always a gamble — even though, as Matthew reported in July, global coal demand is rising. Three separate stories published Tuesday show just how stacked the odds are against a major resurgence:
As you may recall from two consecutive newsletters last month, Secretary of Energy Chris Wright said “permitting reform” was “the biggest remaining thing” in the administration’s agenda. Yet Republican leaders in Congress expressed skepticism about tacking energy policy into the next reconciliation bill. This week, however, Utah Senator Mike Lee, the chairman of the Senate Committee on Energy and Natural Resources, called for a legislative overhaul of the National Environmental Policy Act. On Monday, the pro-development social media account Yimbyland — short for Yes In My Back Yard — posted on X: “Reminder that we built the Golden Gate Bridge in 4.5 years. Today, we wouldn’t even be able to finish the environmental review in 4.5 years.” In response, Lee said: “It’s time for NEPA reform. And permitting reform more broadly.”
Last month, a bipartisan permitting reform bill got a hearing in the House of Representatives. But that was before the government shutdown. And sources familiar with Democrats’ thinking have in recent months suggested to me that the administration’s gutting of so many clean energy policies has left Republicans with little to bargain with ahead of next year’s midterm elections.
Soon-to-be Japanese prime minister Sanae Takaichi.Yuichi Yamazaki - Pool/Getty Images
On Saturday, Japan’s long-ruling Liberal Democratic Party elected its former economic minister, Sanae Takaichi, as its new leader, putting her one step away from becoming the country’s first woman prime minister. Under previous administrations, Japan was already on track to restart the reactors idled after the 2011 Fukushima disaster. But Takaichi, a hardline conservative and nationalist who also vowed to re-militarize the nation, has pushed to speed up deployment of new reactors and technologies such as fusion in hopes of making the country 100% self-sufficient on energy.
“She wants energy security over climate ambition, nuclear over renewables, and national industry over global corporations,” Mika Ohbayashi, director at the pro-clean-energy Renewable Energy Institute, told Bloomberg. Shares of nuclear reactor operators surged by nearly 7% on Monday on the Tokyo Stock Exchange, while renewable energy developers’ stock prices dropped by as much as 15%
Researchers at the United Arab Emirates’ University of Sharjah just outlined a new method to transform spent coffee grounds and a commonly used type of plastic used in packaging into a form of activated carbon that can be used for chemical engineering, food processing, and water and air treatments. By repurposing the waste, it avoids carbon emitting from landfills into the atmosphere and reduces the need for new sources of carbon for industrial processes. “What begins with a Starbucks coffee cup and a discarded plastic water bottle can become a powerful tool in the fight against climate change through the production of activated carbon,” Dr. Haif Aljomard, lead inventor of the newly patented technology, said in a press release.
Last week’s Energy Department grant cancellations included funding for a backup energy system at Valley Children’s Hospital in Madera, California
When the Department of Energy canceled more than 321 grants in an act of apparent retribution against Democrats over the government shutdown, Russ Vought, President Trump’s budget czar, declared that the money represented “Green New Scam funding to fuel the Left's climate agenda.”
At least one of the grants zeroed out last week, however, was supposed to help keep the lights on at a children’s hospital.
The $29 million grant was intended to build a 3.3-megawatt long-duration energy storage system at Valley Children’s Hospital, a large pediatric hospital in Madera, California. The system would “power critical hospital operations during outage events,” such as when the California grid shuts down to avoid starting wildfires, according to project documents.
“The U.S. Department of Energy’s cancellation of funding for [the] long-duration energy storage demonstration grant is disappointing,” Zara Arboleda, a spokesperson for the hospital, told me.
Valley Children’s Hospital is a 358-bed hospital that says it serves more than 1.3 million children across California’s Central Valley. It has 116 neonatal intensive care unit beds and nationally ranked specialties in pediatric neurology, orthopedics, and lung surgery, among others.
Energy Secretary Chris Wright has characterized the more than $7.5 billion in grants canceled last week as part of an ongoing review of financial awards made by the Biden administration. But the timing of the cancellations — and Vought’s gleeful tweets about them — suggests a more vindictive purpose. Republican lawmakers and President Trump himself threatened to unleash Vought as a kind of rogue budget cutter before the federal government shut down last week.
“We don’t control what he’s going to do,” Senator John Thune told Politico last week. “I have a meeting today with Russ Vought, he of PROJECT 2025 Fame, to determine which of the many Democrat Agencies, most of which are a political SCAM, he recommends to be cut,” Trump posted on the same day.
Up until this year, canceling funding that is already under contract with a private party would have been thought to be straightforwardly illegal under federal law. But the Supreme Court’s conservative majority has allowed the Trump administration to act with previously unimaginable freedom while it considers ruling on similar cases.
Faraday Microgrids, the contractor that was due to receive the funding, is already building a microgrid for the hospital. The proposed backup power system — which the grant stipulated should be “non-lithium-ion” — was supposed to be funded by the Energy Department’s Office of Clean Energy Demonstrations, with the goal of finding new ways of storing electricity without using lithium-ion batteries, and was meant to work in concert with that new microgrid and snap on in times of high stress.
That microgrid project is still moving forward, Arboleda, the hospital’s spokesperson, told me. “Valley Children’s Hospital continues to build and soon will operate its microgrid announced in 2023 to ensure our facilities have access to reliable and sustainable energy every minute of every day for our patients and our care providers,” she added. That grid will contain some storage, but not the long-term storage system discussed in the official plan.
Faraday Microgrids, formerly known as Charge Bliss, didn’t respond to a request for comment, but its website touts its ability to secure grants and other government funding for energy projects.
In a statement, a spokesman for the Energy Department said that the grant was canceled because the project wasn’t feasible. “Following an in-depth review of the financial award, it was determined, among other reasons, that the viability of the project was not adequate to warrant further disbursements,” Ben Dietderich, a spokesman for the Energy Department, told me.
The children’s hospital, at least, is in good company. On Tuesday, a Trump administration document obtained by Heatmap News suggested the Energy Department is moving to kill bipartisan-backed funding for two direct air capture hubs in Texas and Louisiana. And although California has lost the most grants of any state, the Energy Department has also sought to terminate funding for new factories and industrial facilities across Republican-governed states.
Editor’s note: This story initially misstated the number of neonatal intensive care unit beds at Valley Children’s Hospital. It has been corrected.
Rob and Jesse break down China’s electricity generation with UC San Diego’s Michael Davidson.
China announced a new climate commitment under the Paris Agreement at last month’s United Nations General Assembly meeting, pledging to cut its emissions by 7% to 10% by 2035. Many observers were disappointed by the promise, which may not go far enough to forestall 2 degrees Celsius of warming. But the pledge’s conservatism reveals the delicate and shifting politics of China’s grid — and how the country’s central government and its provinces fight over keeping the lights on.
On this week’s episode of Shift Key, Rob and Jesse talk to Michael Davidson, an expert on Chinese electricity and climate policy. He is a professor at the University of California, San Diego, where he holds a joint faculty appointment at the School of Global Policy and Strategy and the Jacobs School of Engineering. He is also a senior associate at the Center for Strategic and International Studies, and he was previously the U.S.-China policy coordinator for the Natural Resources Defense Council.
Shift Key is hosted by Robinson Meyer, the founding executive editor of Heatmap, and Jesse Jenkins, a professor of energy systems engineering at Princeton University.
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Here is an excerpt from our conversation:
Robinson Meyer: Your research and other people’s research has revealed that basically, when China started making capacity payments to coal plants, in some cases, it didn’t have the effect on the bottom line of these plants that was hoped for, and also we didn’t really see coal generation go down or change in the year that it happened. It wasn’t like they were paying these plants to stick around and not run. They were basically paying these plants, it seems like, to do the exact same thing they did the year before, but now they also got paid. And maybe that was needed for their economics, we can talk about it.
Why did coal get those payments and not, say, batteries or other sources of spare capacity, like pumped hydro storage, like nuclear? Why did coal, specifically, get payments for capacity? And does it have to do with spinning reserve? Or does it have to do with the political economy of coal in China?
Michael Davidson: When it came out, we said exactly the same thing. We said, okay, this should be a technology neutral payment scheme, and it should be a market, not a payment, right? But China’s building these things up little by little. Over time we’ve seen, historically, actually, a number of systems internationally started with payments before they move to markets because they realize that you could get a lot more competitive pressure with markets.
The capacity payment scheme for coal is extremely simple, right? It says, okay, for each province, we’re going to say what percentage of our benchmark coal investment costs are we going to subsidize. It’s extremely simple. It does not account for how much you’re using it at a plant by plant level. It does not account for other factors, renewables, etc. It’s a very coarse metric. But I wouldn’t say that it had had some, you know, perverse negative effect on the outcome of what coal generation is. Probably more likely is that these payments were seen, for some, as extra support. But then for some that are really hurting, they’re saying, okay, well then we will maybe put up less obstacles to market reforms.
But then on top of that, you have to put in the hourly energy demand growth story and say, okay, well you have all these renewables, but you don’t have enough storage to shift to evening peaks. You are going to rely on coal to meet that given the current rigid dispatch system. And so you’re dispatching them kind of regardless of whether or not you have the payment schemes.
I will say that I was a skeptic, right? Because when people told me that China should put in place a capacity market, I said, China has overcapacity. So if you have an overcapacity situation, you put in place a market, the prices should be zero. So what’s the point? But actually, when you’re looking out ahead with all of this surplus coal capacity that you’re trying to push down, you’re trying to push those capacity factors of those coal plans from 50%, 60%, down to 20% or even lower, they need to have other revenue schemes if you’re not going to dramatically open up your spot markets, which China is very hesitant to do — very risk averse when it comes to the openness of spot markets, in terms of price gaps. So that’s a necessary part of this transition. But it can be done more efficiently, and it should done technology neutral.
And by the way that is happening in certain places. That’s a national scheme, but we actually see that the implementation — for example, Shaanxi province, we have a technology neutral scheme that would include other resources, not just coal.
Mentioned:
China’s new pledge to cut its emissions by 2035
What an ‘ambitious’ 2035 electricity target looks like for China
China’s Clean Energy Pledge is Clouded by Coal, The Wire China
Jesse’s upshift; Rob’s upshift.
This episode of Shift Key is sponsored by …
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A warmer world is here. Now what? Listen to Shocked, from the University of Chicago’s Institute for Climate and Sustainable Growth, and hear journalist Amy Harder and economist Michael Greenstone share new ways of thinking about climate change and cutting-edge solutions. Find it here.
Music for Shift Key is by Adam Kromelow.