States Look to Stretch VW Settlement Billions

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By Patrick Ambrosio

States are set to receive nearly $3 billion for environmental improvement projects under the Volkswagen diesel emissions scandal, but officials are already working to identify the most cost-effective projects and additional funding sources as a way to make that money go even further.

The 2016 settlement over Volkswagen’s 2.0-liter diesel engine cars established a $2.7 billion mitigation trust fund, which may soon be supplemented with an additional $225 million under a yet-to-be-approved settlement over the company’s larger diesel engine vehicles. The mitigation trust fund represents a massive investment in projects to upgrade older, higher-polluting diesel engines found in vehicles and equipment ranging from school buses and heavy-duty trucks, as well as an opportunity to invest in electric vehicle infrastructure.

States won’t get access to their share of the money until sometime later this year, but they are already working on preliminary plans outlining how they intend to spend their trust fund allotment. Several state agencies are placing an emphasis on projects that will achieve the greatest emissions reductions for the dollar, improve air quality in areas that struggle with pollution problems or leverage additional public and private funding, according to a Bloomberg BNA review of available state plans.

For example, Washington state is looking to model its VW settlement plan on a successful state diesel program that relied on cost-sharing and matching funds, while Ohio is proposing to give priority to projects in areas that don’t meet national ozone standards.

The settlement allows states to spend up to 15 percent of their mitigation trust allocation on zero-emissions vehicle infrastructure, such as publicly-available electric vehicle charging stations. Officials in Washington and Virginia said they intend to take advantage of that flexibility, which could offer an opportunity for states to coordinate their efforts with another aspect of the Volkswagen settlement: an agreement by the automaker to invest $2 billion over 10 years into zero emissions vehicle projects that don’t benefit specific companies.

High Demand for Diesel Funding

The mitigation trust fund is intended to fully offset the environmental damage attributed to Volkswagen’s use of illegal technology known as defeat devices in hundreds of thousands of diesel vehicles sold in the U.S. over a period of several years. The defeat devices made it possible for the VW diesels to pass emissions tests, even though they emitted far more nitrogen oxides pollution than allowed under normal driving conditions.

The nearly $3 billion available for environmental remediation under the VW settlements is far more than the federal government made available over the past nine years under the popular Diesel Emissions Reduction Act grant program, which offers grants to support the replacement of higher-polluting diesel engines that haven’t yet reached the end of their useful life. Congress provided almost $670 million to the DERA program from fiscal 2008 through fiscal 2016, including a $300 million injection of cash through the American Recovery and Reinvestment Act of 2009.

The DERA program, which was unsuccessfully targeted for cuts by the Obama administration and is reportedly on a draft list of programs to be cut in President Donald Trump’s first budget request, funded tens of thousands of engine retrofits and replacements over the past decade. However, the grant program’s funding level hasn’t been adequate to fill the demand for federal aid in upgrading older diesel technology: funding requests have exceeded grant availability by a ratio of seven-to-one, according to a 2016 EPA report to Congress.

Funding for diesel upgrades hasn’t been limited to DERA: the EPA also has obtained additional funding for diesel fleet upgrades in settlements to resolve Clean Air Act enforcement actions and some diesel projects have been funded by the Transportation Department’s Congestion Mitigation and Air Quality (CMAQ) grant program.

Historically, federal grant funding has been mostly used on projects to upgrade long-haul trucks and school bus fleets. Even within that space, there are still a lot of older diesel engines in service: about three out of four heavy-duty trucks in service don’t meet stringent model year 2010 nitrogen oxides emissions standards, according to Ezra Finkin, director of policy and external relations at the Diesel Technology Forum. The trade group represents General Motors Co., Caterpillar Inc. and other manufacturers of diesel vehicles and equipment.

Finkin told Bloomberg BNA that those trucks are generally eligible for funding under the VW mitigation trust, offering an opportunity for states to help replace older diesel technology with near-zero emissions engines.

It Sounds Like a Lot, But..

While the VW trust fund is more than four times larger than the total amount made available under the DERA program during its first eight years, states are looking for ways to stretch that money even further.

In Virginia, which will receive more than $93 million from the VW mitigation trust, a draft plan developed by state environmental regulators includes several priorities, including a focus on large projects that are most cost-effective, projects that require a cost-share or can leverage other funding and projects in areas that have historically faced difficulty in meeting federal standards for ozone and fine particulate matter. The state is still working on a set of scoring criteria that will help officials weigh those different priorities to assess the project proposals they receive, according to Michael Dowd, director of the Virginia Department of Environmental Quality’s Air Division.

“We’re trying to get the best, biggest environmental improvement we can for the bucks,” Dowd said. “$93 million sounds like a lot of money … but some of these projects that I’m hearing about are really big-ticket items.”

While replacing an older tugboat used at a port or a switcher locomotive used at a railyard is more expensive than upgrading a school bus or truck, those types of projects can reduce a lot of pollution. Replacing an old, uncontrolled tugboat engine with the latest diesel technology can reduce 96,000 pounds of nitrogen oxides per year, equivalent to taking about 74,000 gasoline powered cars off the road, according to Finkin.

Looking for the most cost-effective projects, those that provide the most pollution reduction for the dollars spent, is one guiding principle many states are considering as they develop their VW settlement plans. Several states, including Virginia, Connecticut and New Hampshire, are looking to build on that by using the Volkswagen mitigation trust to leverage even more funding for air quality improvement projects.

Tennessee is taking a number of variables, including the opportunity to leverage other funding sources, into consideration in developing its plan to spend the $45 million it will be allocated under the VW settlement, according to Kim Schofinski, a spokeswoman for the Tennessee Department of Environment and Conservation.

Sources of additional environmental mitigation funding could include additional public funding from federal grant programs, as well as private investment from companies interested in sharing the cost of diesel engine upgrades and replacements.

Matching Dollars, ‘Bonus’ Money

While the settlement allows mitigation trust dollars to fund up to 100 percent of the replacement cost of government-owned vehicles, it requires a cost share for privately-owned fleets. That means getting private companies involved could help stretch settlement dollars because the companies would be covering some of the cost, according to Dan Welch, a transportation fellow at the Center for Climate and Energy Solutions who wrote a white paper on what cities should know about the settlement.

The federal government also could be a source of available funding for diesel projects: The settlement includes a “DERA option” that allows states to use mitigation trust dollars in conjunction with DERA grants. That could help states obtain “bonus” funding from the EPA, which offers a matching incentive of 50 percent for projects where voluntary matching funds are obtained. Using $200,000 from the VW trust fund as a voluntary match could result in an additional $300,000 in funding: a base of $200,000 from DERA and an additional EPA bonus of $100,000, according to a January 2017 EPA factsheet.

“That [DERA option] certainly stretches the dollar a little bit,” Welch told Bloomberg BNA.

A focus on leveraging additional funding has helped make a state diesel program in Washington a success over the past 15 years, according to Camille St. Onge, a spokeswoman with the Washington Department of Ecology. St. Onge told Bloomberg BNA the state program looks for cost-sharing opportunities or the availability of matching funds from other sources in funding diesel projects.

“That’s really helped us to stretch the limited dollars we’ve had in the past,” St. Onge told Bloomberg BNA. “We intend to approach the [VW] settlement dollars similarly: how can we stretch the dollars? Where can we find matching dollars?”

States Focus on Problem Areas

Another strategy that states are considering to maximize their share of the Volkswagen settlement is focusing on projects in areas that have air pollution problems.

In Ohio, which is due to receive about $75 million under the settlement, state officials have identified several counties where eligible environmental remediation projects should get first priority based on available funding, Ohio EPA spokesman James Lee told Bloomberg BNA.

A proposed map of Ohio’s priority areas show the state aims to give priority to projects in the Cleveland, Cincinnati and Columbus metropolitan areas, all of which were identified as areas unlikely to meet the 2015 ozone standards in a Bloomberg BNA survey of state agencies.

Alabama, which is allocated about $25 million under the VW trust, is still working on a “rating system” that will weigh projects on a number of factors, according to Ron Gore, chief of the Alabama Department of Environmental Management’s Air Division. Gore told Bloomberg BNA that while Alabama is in compliance with all federal air standards, the state will likely give priority to urban areas where air quality is most affected by diesel pollution.

Opportunity for VW Coordination

States interested in investing a portion of their mitigation trust fund also can consider coordinating with Volkswagen’s Electrify America, a stand-alone organization in charge of implementing a provision of the settlement that requires the automaker to spend $2 billion on zero emissions vehicle infrastructure and outreach programs.

Electrify America will make those investments in a series of four 30-month investment cycles, the plans for which must be approved by the EPA and California regulators.

Washington, in a joint plan with Oregon, wants to see some of that VW investment come to the Pacific Northwest to help build a corridor of electric vehicle chargers from California to British Columbia. The states asked Electrify America to consider investing in publicly-available chargers to help fill gaps on Interstate-5 and other widely-used highways in the region.

Washington doesn’t know whether it will receive any investments from Electrify America, but Gov. Jay Inslee (D) instructed the state’s Department of Ecology to spend the maximum amount it can out of its mitigation trust on zero emissions vehicle projects, according to St. Onge. With Washington set to receive about $113 million combined under the two VW settlements, that could mean about $17 million could go toward zero emissions vehicle projects in that state.

Virginia also has “every intention” of spending the maximum 15 percent of its settlement dollars on zero emissions vehicle projects, according to Dowd of the state’s Department of Environmental Quality.

The Metropolitan Washington Council of Governments, a regional planning organization consisting of officials in Virginia, Maryland and the District of Columbia, did submit a proposal to Electrify America seeking investment in the D.C. region.

Dowd said if Electrify America’s investment plans includes areas in Virginia, the state could look to use its mitigation trust dollars to address any “further needs” in building out infrastructure.

To contact the reporter on this story: Patrick Ambrosio in Washington, D.C. at PAmbrosio@bna.com

To contact the editor responsible for this story: Larry Pearl at lpearl@bna.com

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