California adopted a Low Carbon Fuel Standard in 2009, with the goal of the performance-based regulation to reduce the carbon intensity of the state’s fuel mix by at least 10% by 2020. Parties obligated to comply with the standard include the state’s oil producers and importers.
This spring, the Institute of Transportation Studies with the University of California, Davis, issued their second “Status Review of California’s Low Carbon Fuel Standard,” focusing on the success in achieving the per year greenhouse gas emission reduction goals, which are back loaded. During the first two years of required compliance, the UC Davis authors found obligated parties easily met the 0.25% and 0.5% reduction goals, respectively, while also accumulating enough credits used by the program to meet half of 2013’s 1.0% reduction credit.
The primary alternative feedstock used to achieve this goal in 2012 was ethanol, accounting for 78% of the generated credits for the program. Natural gas and bio-based gases produced 12% of the credits, biodiesel and renewable diesel combined to generate 9%, with the remaining 1% in credits from electricity.
The LCFS also works alongside the state’s Cap-and-Trade program for carbon allowances, providing obligated companies a potential market from which to buy credits to satisfy this need. The state conducted its first auction in November 2012. Distributors of gasoline and diesel fuel and natural gas providers are covered by the Cap-and-Trade program starting in 2015.
There are challenges going forward, with the authors noting some of the banked 2013 credits might need to be used to offset deficits in 2011 and 2012 from higher carbon petroleum fuels. Moreover, the program grades sugar-based ethanol primarily derived from Brazil higher than corn-based ethanol from the US Midwest, which could prompt “fuel shuffling” to meet the LCFS. While this activity is showing success early in the program with the easier achievement targets, fuel shuffling “may not reduce emissions and may even increase emissions from transport of the fuels” if the state’s policy does not “ultimately encourage the production of more low carbon fuel and less high carbon fuel,” said the authors.
Critics of these programs also note higher production costs and consumer prices for fuel manufactured or sold in the state, while some suggest the state’s oil refiners might limit their production of gasoline and diesel for export out-of-state to reduce compliance costs. It’s important for policymakers to consider unintended consequences when creating energy regulations, and the ongoing review by UC Davis and others will hopefully head off any such reality.
For those in the energy field, clearly these are regulations that require astute energy risk management, which could mean adjusting product and feedstock slates or investing in low carbon technologies sooner rather than later. The potential for higher production costs and lower profit margins might be another concern for some companies, while an opportunity for others in the oil and gas and transportation industries.