(Auto) Insurance laws are state-mandated. In most states, a car insurance company can't do anything (raise rates, lower rates, offer new discounts, do away with old discounts, etc.) without the state's approval.

Farmer's probably decided to test the discount in a state where they thought it would do *them* the most good -- they think they will get more profit for the premium they're giving up in California than if they did this in a less-green state.

By doing it in a state where there are probably lots of eligible vehicles, they'll also have more experience to judge whether or not to extend it to other states. If they offered it in a state with very few eligible cars, then the small number of vehicles getting the discount would not give them reliable data for future analysis.