By: John Nikoloff
With much fanfare, the California Air Resources Board (CARB) finalized its Low Carbon Fuel Standard (LCFS), which is designed to reduce the carbon intensity of California's passenger vehicle fuels by at least 10 percent by 2020. The LCFS is the world’s first global warming standard for transportation fuels, and will require fuel providers in California to ensure that the mix of fuel they sell into the California market meet a declining standard for GHG.
On January 5, Pennsylvania joined the ten Mid Atlantic and Northeast States in seeking to develop a similar Low Carbon Fuel Standards in the region. ERG has talked with state and regional officials and learned that the Northeast States hope to draft a plan by the time they establish a MOU in late 2009. They have told ERG that they are “trying to be consistent with the system recently announced in California,” which has come under public fire.
The US House’s Waxman-Markey draft proposal would incorporate a LCFS into federal policy, an issue which is already generating opposition among Congressional rank and file.
Lack of a consistent policy for planning purposes could create havoc in the state’s refining, blending and distribution industries and markets, which are already facing unfunded mandates that require major capital expenditures to meet the needs of state and federal mandates for biofuels.
With a low carbon fuel standard, the government is trying to reduce GHGs in transportation fuels using a system equivalent to the state’s Alternative Energy Portfolio Standard for electric generation, using credits as equalizers. The net effect will likely be to promote biodiesel, cellulosic ethanol, renewable diesel from oilseeds, CNG, LNG and other advanced biofuels over ethanol.
But the LCFS is based on concepts that remain controversial, and scientists as well as the biofuels industry are pushing back, already getting concessions from CARB.
Under California’s LCFS, fuel refiners, importers, and blenders are required to ensure that the mix of fuel they sell meets, on average, a declining standard for GHG emissions measured in CO2-equivalent grams per BTU. CARB told Energy Resources Group that it expects this will decrease GHGs from transportation fuels by 10 percent by 2020, and would replace 20 percent of on-road gasoline and diesel consumption with lower carbon fuels.
To accomplish this, each fuel provider has to demonstrate, on an annual basis, that the fuel mix provided to the market met the established state standard, if necessary, by using credits purchased from others, similar to the cap and trade concept. Under the California LCFS, fuel providers will have at least three different options for compliance: blend or sell an increasing amount of low-carbon fuels; use previously banked credits; and purchase credits from fuel providers who have earned credits by exceeding the performance levels required.
Fuel providers have flexibility to choose what types of fuels in what volumes they sell as long as their sales-weighted average meets the standard. In this way, the theory is that the market will determine the least-cost and most consumer-responsive outcome for the fuel mix while ensuring decreasing GHG emissions.
However, there is significant concern in the biofuels industry about the standards that California adopted, and CARB’s use of the theory of indirect land use change (ILUC) in the carbon score of ethanol in particular to set the C02 equivalencies. With ILUC included in their regulation, average ethanol produced from corn goes from 30 percent fewer greenhouse gas emissions than gasoline to roughly equivalent.
The logic behind ILUC is that increased demand for corn for ethanol will lead, through increased prices, to more crops being planted elsewhere - and that the planting of these crops can cause land clearing and subsequent GHG release. These hypothetical crops are not part of the actual biofuels life cycle, but are part of the life cycle of other products. ILUC theory proposes that these crops become part of the biofuels life cycle.
The federal Energy Independence and Security Act of 2007 requires that life cycle methods be used to determine the GHG performance of renewable fuels. But these methods have strict standards regarding technical issues and the concept of ILUC may not meet these standards.
The California Air Resources Board acknowledged the significant uncertainty in their indirect land use change penalty, and did commit to more study using an expert panel that includes industry representatives, and agreed to assess the indirect effects of other fuels before the California LCFS goes into effect in late 2011.
When CARB looked at the direct effects of all fuels, it found that ethanol emits about 30% fewer greenhouse gas emissions than gasoline. CARB decided to look at only one indirect carbon effect and assesses it only on ethanol, while ignoring the significant indirect effects of all other fuels, including petroleum. When you include CARB's creative accounting, ethanol essentially has a carbon score equal to gasoline.
The new CARB regulation is expected to boost biofuels production and usage and is aimed at diversifying the variety of fuels used for transportation. CARB told ERG that to produce the more than 1.5 billion gallons of biofuels that will be needed, more than 25 new biofuel facilities will have to be built, creating more than 3,000 new jobs, mostly in the state’s rural areas. Seeking to enhance private sector and federal investment into alternative fuel production and distribution, California is also providing funding to assist in the early development and deployment of the most promising low-carbon fuels.
The policy is intended to drive the production of advanced biofuels, most of which are not through the pilot and demonstration process, and are unavailable to the commercial marketplace. This is a case of government regulating in anticipation of scientific and economic breakthroughs, which remains to be realized. We expect a significant battle with individual states should the Northeast consortium decide to include ILUC as part of their estimating process. That has yet to be determined.
ERG will continue to work with state and federal officials to monitor the development of legislation, regulations and standards, and will seek to establish consistency to avoid serious market dislocation.
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