California’s Low Carbon Fuel Standard hit the Energy Sector

This policy brief, which will be followed by two companion pieces, was commissioned by Oxford Analytica. The two other pieces, one dealing with the impact on Alberta’s oil sands and the other on Brazil potential ethanol exports will be posted in the next few days.

SUBJECT: The impact of the California Air Resources Board’s new fuel lifecycle assessment rules on the energy industry in North America.

 SIGNIFICANCE: The new regulations are an ambitious attempt to assess and reduce the direct and indirect emissions of ‘greenhouse gases’ associated with the full fuel cycle of transportation fuels. However, they have created a tremendous amount of uncertainty for the energy industry in California and the broader North American energy market — and details on implementation, compliance and enforcement remain vague.

 ANALYSIS: On April 23, the California Air Resources Board (CARB) approved Resolution 09-31, which imbedded a Lifecycle Assessment (LA) for all fuels into Low Carbon Fuel Standard (LCFS) legislation:

  • By 2020, the new rules seek to achieve a 10% reduction (relative to 2010 levels) in average carbon intensity of transportation fuels used in California.
  • The process is a groundbreaking attempt to establish a scientific methodology to assess emissions for a variety of fuels including biofuels and hydrocarbons.

Yet its real world implementation is likely to create a host of unintended consequences, which will increase costs for both the North American energy industry and consumers, and could even indirectly lead to an increase in global greenhouse gas (GHG) emissions implicated in global warming.

Key insights

  • California’s ambitious attempt to reduce CO2 emissions from transportation fuels will change the entire North American energy market, as eleven other US states and two Canadian provinces have pledged to follow suit.
  • The new rules seek to measure the ‘greenhouse gas’ equivalent emissions produced during the entire fuel cycle from production to use (‘well to wheels’ in the case of gasoline derived from fossil fuels or ‘seed to wheels’ for biofuels) and gradually reduce the use of fuels with the largest ‘environmental footprints’.
  • However, the proposed new regulations, while well-intentioned, evidence serious flaws and are likely to have unintended consequences — perhaps including increased dependence on imported biofuel from Brazil.
  • Canadian oil producers — particularly those involved in the energy intensive oil sands industry — could face the most significant challenges.

California’s objectives. The objectives of the California LCFS are to:

  • address climate change concerns;
  • reduce California’s “dependence on petroleum”;
  • create a market “for clean transportation technology”; and
  • boost “the production and use… of low-carbon fuels”.

Broader impact. These are ambitious goals, and could potentially have a significant impact well beyond the state’s borders. Although the new rules will only affect suppliers to the California market, currently comprising seven large oil companies who supply about 90% of the gasoline sold there, the state is considered trendsetter and ‘incubator’ for innovative policies that eventually serve as the basis for federal standards:

  • A regional consortium of eleven north-eastern and mid-Atlantic states has committed to developing a similar LCFS.
  • Two Canadian provinces, Ontario and British Columbia, have also pledged to coordinate their approaches with California.

Therefore, the LCFS could have a profound, North America-wide impact.

Beyond federal legislation. The California LCFS is designed to complement, and go beyond, current federal legislation:

  • Federal standards. A renewable fuel standard (RFS) was adopted by Congress in 2005 and strengthened (‘RFS2’) in December 2007 as part of the Energy Independence and Security Act (EISA). RFS2 mandates use of 36 billion gallons of biofuels by 2022, of which 21 billion must be ‘advanced’ lower carbon fuels and 15 billion gallons can be corn-based ethanol.
  •  The state’s dissatisfaction. Significantly, the federal legislation grandfathered in a substantial amount of corn-based ethanol, which is relatively energy-intensive to produce — a factor that CARB uses to support its assertion that the federal RFS2 delivers only 30% of the GHG reduction benefits proposed in California’s LCFS.

California’s new standards. The regulation establishes that reformulated gasoline, mixed with 10% corn-based ethanol and low sulphur diesel fuel, are the baseline fuels available at the state’s gasoline station pumps. To reduce GHG emissions gradually, it considers the use of ethanol, biodiesel, renewable diesel, compressed natural gas, liquefied natural gas, hydrogen and electricity low-carbon fuels. Over the long term, it assumes that development of advanced fuels and the penetration of plug-in hybrid electric vehicles, battery electric vehicles, fuel cell vehicles, and ‘flex-fuel’ vehicles will allow for much more drastic emission reductions than what is currently possible.

However, to encourage and accelerate the pace of carbon reductions, it imposes a complex regulatory structure:

  1. Carbon intensity measurement. The carbon intensity of fuel is expressed in terms of grams of carbon dioxide (CO2) equivalent per mega-Joule (g/MJ) of direct and indirect GHG emissions associated with each of the steps in the full fuel cycle, from production to use (‘well-to-wheels’ for fossil fuels and ‘seed-to-wheels’ for biofuels).

The baseline carbon intensity for the state’s gasoline is known as ‘CARBOB’ (based on the average crude  oil delivered to California refineries). CARBOB’s composition was based on the 2006 California crude mix supplied by producers that constituted at least 2% of the total supply (by volume). According to the California Energy Commission records, aside from California and Alaska crudes, the baseline mix includes crude from:

  • Saudi Arabia (13.27%);
  • Ecuador (10.86%);
  • Iraq (8.57%);
  • Brazil (2.74%);
  • Mexico (2.36%); and
  • Angola (2.29%).

For other fuels included in any provider’s mix, the carbon intensity value to be applied is provided in the state’s Carbon Intensity Lookup Table. If a refiner introduces a new source of supply into its mix that is not listed on the California table, it will have to prove the carbon intensity of the product by using one of two state-mandated methods.

In addition to the intensity pathways in the state’s Lookup Table, there are a number of alternative fuel sources the state is assessing, including:

  • ethanol from sugar cane using mechanised harvest and generating electricity from bagasse;
  • ethanol from cellulosic material;
  • several different biodiesel feedstocks as well as renewable diesel;
  • compressed natural gas;
  • crude derived from Canadian oil sands and from oil shale; and
  • liquefied natural gas.

 

California: Estimated carbon intensity values for gasoline and substitutes (abridged)

Fuel Pathway description Carbon intensity (g CO2 emitted / MJ generated)
Direct emissions Indirect emissions Total
Source: State of California Air Resources Board (CARB)
Gasoline CARBOB – based average crude oil delivery and efficiency of California refineries 95.86 0.00 95.86
Ethanol from Corn Midwest average; 80% Dry Mill; 20% Wet Mill; Dry DGS 69.40 30.00 99.40
Ethanol from Sugarcane Brazilian sugarcane using average production processes 27.40 46.00 73.40
Compressed Natural Gas North American NG delivered via pipeline; compressed in California 68.00 0 .00 68.00
Electricity California average electricity mix 124.10 0 .00 124.10
Hydrogen Compressed H2 from central reforming of NG (includes liquefaction and regasification steps) 142.00 0.00 142.00
  1. Emissions reduction. The initial carbon intensity standard for CARBOB is 95.86 g/MJ and 94.71 g/MJ for Diesel and Fuels Substituting for Diesel. Producers and importers must adjust the mix of fuels they supply in 2011 to deliver a reduction of 0.25% from this initial standard, followed by slightly more substantial cuts in subsequent years, to achieve the mandated 10% emissions reduction by 2020.
  2. Trading intensity credits. Producers and importers must report the carbon intensity of all transportation fuel quarterly and annually and compare it — on an annual basis — to that year’s requirements. Fuels below the standard receive a credit, or alternatively, generate a deficit if their emissions are above the threshold. The total amount of credits (which can be bought or sold) must equal or exceed the deficit incurred. Shortfalls under 10% can be reconciled the following year. Deficits greater than 10% will be subject to penalties “commensurate with the size of the violation”.

Only credits generated within the California LCFS can be bought by producers or importers needing to offset deficits. In contrast, credits generated through this system can be sold to other programmes outside the California LCFS — perhaps in participating north-eastern states and Canadian provinces.

  1. Review process. The first formal review must occur by January 1, 2012. During the review, the development status of advanced low carbon fuels, the compliance schedule, updated technical information and progress on the development of measurable indicators for sustainable production of low carbon fuels will be reviewed. Additional reviews are expected to be conducted every three years thereafter.

Potential problems. While the objective of the regulations — cutting emissions — is straightforward, the means chosen by the state could be very problematic. As with any legislation that breaks new ground, the LCFS contains arbitrary measures, which will be seen by some stakeholders as discriminatory (particularly in the oil and gas industry), and leaves a multitude of relevant issues undefined:

  1. No demand focus. Similar to every measure taken by federal and state governments in the United States in the last few decades, the LCFS approach deals with the energy challenge from a supply perspective. Focus on energy demand and measures to change the prevailing automobile culture are absent.
  2. Conflicting priorities. California had difficulties reconciling the espoused objective of mitigating climate change with other goals, such as diversifying the state’s sources of transportation fuel and reducing fuel imports. As written, the new rules are unlikely to achieve either of these objectives — in fact, they could massively increase the attractiveness of Brazilian sugarcane-based ethanol.
  3. No diesel option. The option of converting the state’s passenger vehicle fleet from gasoline to diesel — which would have translated into higher efficiency and lower fuel consumption — was disallowed. (Diesel is much more efficient that gasoline, but increasing diesel consumption does not fit the state’s goal of reducing its petroleum dependence.)
  4. Biofuel focus. Given the decision to reject the diesel option, and the lack of other alternative fuels — in the initial period before other transportation technologies have been developed and the appropriate infrastructure put in place — the state has focused heavily on existing and second generation biofuels, particularly ethanol and cellulosic ethanol.

However, these energy sources and technologies are also very problematic:

  • Corn-based ethanol. US corn-based ethanol production jumped from 1.4 billion gallons in 1998 to 9.0 billion gallons last year. While many political leaders from farm states hailed this development as the answer to both the country’s climate change worries and its energy security concerns, the impact of the increase in corn production on other agriculture commodities and on food prices suggested that corn ethanol would contribute little climate change mitigation. In fact, when LA analysis (including indirect land use impacts) was conducted, most of the first wave of Midwest production had larger emissions than hydrocarbons.
  • Cellulosic technology? Ethanol’s boosters point to the potential of cellulosic ethanol technology, which does not consume food crops. However, even the most optimistic advocates of the technology do not anticipate significant commercial cellulosic production until 2014, and then at considerable cost in terms of plant infrastructure and feedstock collection and transportation.
  • Brazilian alternative? In contrast, even the ‘dirtiest’ Brazilian sugarcane-based ethanol involves emissions of just 73.4 g/MJ — lowest of all liquid fuel options. If Brazilian producers stand to win, others are just about certain to lose. Encouraging a massive increase in US imports of Brazilian ethanol was hardly the intent of California’s regulators. However, as the rules now stand, it could be a key unintended consequence.
  1. Lifecycle analysis shortcomings. Perhaps the most serious concern involves the implementation of fuel lifecycle analysis (FLA) in the state rules. California lack the tools needed to measure emissions with precision:
  • Questionable estimates. Of particular concern is the inclusion of measures of indirect land use (ILU) into fuel lifecycle analysis calculations. ILU seeks to measure the effect on emissions and climate change of increasing agricultural acreage devoted to biodiesel crops in developed countries — which, in turn, is believed to contribute to deforestation in the developing world by increasing the amount of land dedicated to food production.
  • Imprecise science. While direct emissions from oil and gas production, transportation and refining can be mitigated by using an array of tools that have been developed over the last several decades, the science underpinning ILU calculations is in its infancy. The difficulties in conducting fair and scientific assessments are already being felt in the determination of indirect emissions of certain biofuels pathways.

Employing such imprecise methodology to measure emissions is likely to complicate and delay the implementation, verification and certification phases of the new rules.

Industry fears. The fact that California is determined to diversify away from hydrocarbons worries the energy industry. Concern is perhaps most acute in Canada, particularly Alberta, a province that is counting on developing its massive oil sands reserves to serve the US market. (Oil sands production has a particularly heavy environmental footprint.) While current sales from Alberta to California are paltry and represent less than 1% of the state’s total supply, Alberta producers were counting on the future potential of that market. California is the largest gasoline consumer in the United States and the state’s own oil production, as well as that of Alaska — its other key domestic supplier — are both in decline.

Outlook. The CARB still has a tremendous amount of work to do before the new rules come into effect, including establishing the mechanics of trading markets and fines for non-compliance. This work is supposed to be finished in time for the CARB’s December 2009 board meeting. However, it is unlikely that CARB staff — who are currently unable to work overtime because of California’s ongoing fiscal crisis — will be able to draw up the necessary guidelines by the deadline.

CONCLUSION: California’s new fuel rules are exceptionally complex, fail to address demand, involve scientifically questionable fuel lifecycle analysis (particularly indirect land use calculations) and over-emphasize biofuels. They are likely to be delayed by a combination of litigation and the state’s current lack of regulatory capacity (due to the budget crisis) — but could ultimately have a profound impact on the North American energy market.

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3 Responses to California’s Low Carbon Fuel Standard hit the Energy Sector

  1. […] This policy brief is the last of three companion pieces commissioned by Oxford Analytica. The first piece, explainded the legislation. The second, focused on the impact of the California legislation on […]

  2. Quality Information Thanks!

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  3. […] the California LCFS. It follows what we expected, as posted in the three companion pieces: “California’s Low Carbon Fuel Standard hit the Energy Sector”, “California LCFS: new hurdles for Canada’s Oil Sands” , and “California […]

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