An Update on California’s Low Carbon Fuel Standard

Link to article: https://stillwaterassociates.com/an-update-on-californias-low-carbon-fuel-standard/

October 24, 2012

by Leigh Noda

On October 16th, oral arguments were heard before three justices of the Ninth Circuit Court of Appeals on the California Air Resources (CARB) appeal. The District Court for the Eastern District of California in December found that California’s Low Carbon Fuel Standard (LCFS) violated the Commerce Clause of the US Constitution that limits states from discriminating against interstate commerce. The District Court also ordered a stay on enforcement of the LCFS. This stay was lifted by the Ninth Circuit pending the appeal.

A ruling by the Ninth Circuit is expected the first half of next year. Unfortunately, the ruling will not establish certainty of the LCFS as we know it since the ruling by the Ninth Circuit, either upholding or striking the District Court Ruling, is expected to be appealed to the Supreme Court. A number of states have weighed in on both sides of this case. Those in support of LCFS are considering adoption of an LCFS themselves and have a vested interest.

While the appeals have been working in the courtroom, CARB has modified portions of the LCFS regulations and submitted them to the Office of Administrative Law. The Office of Administrative Law has until November 26 to act. The significant modifications to the regulations fall into four areas:

1. Change to the baseline crude carbon intensity (CI) calculation
2. Application of the crude CI calculation with annual calculation of the California average crude CI
3. Addition of crude CI credits where “innovative” crude production technology is used
4. Revision to the regulated parties for electricity and requirements for use of credit proceeds

In addition, there are numerous ministerial changes to clarify or tighten up the regulation.

Change to the Baseline Crude Carbon Intensity (CI) Calculation

The CI for the crude oil inherent in the CARBOB and CARB Diesel CI calculations was changed to reflect the CI of the actual crude delivered to California refineries in 2010. This raised the CI of CARBOB from 95.86 gCO2e/MJ to 99.18 gCO2e/MJ, about a 3.5% increase. CARB diesel increased a similar amount. The 2013 to 2020 Compliance Average CI were changed to reflect the higher baseline. The compliance targets moved increased to reflect the higher baselines.

Figure 1 illustrates the new and old compliance schedule for gasoline and gasoline substitutes.

This change in baseline makes compliance for any year slightly easier since the CI for the gasoline and diesel subsidies were unaffected. How much this is can be illustrated by calculating the required ethanol CI to make today’s 10%v EtOH CARB RFG gasoline meet the compliance schedule.

Figure 2 illustrates this calculation applied to 2013 to 2020. Year 2018, 2019 and 2020 require a zero or negative CI ethanol.

As can be seen, a small amount of relief is provided by this change. However, the change is not large enough to change conclusions about the impacts of LCFS.

Application of the Crude CI Calculation with Annual Calculation of the California Average Crude CI

The High Carbon-Intensity Crude Oil provision has been removed. The original provision that would require individual refineries to add to their CI calculations if their crude mix CI were greater than the baseline is eliminated from the proposed modified regulation. Instead, the average crude CI is applied to all California refineries and each year the average crude oil CI is calculated. If the calculated crude CI exceeds the baseline, the CI of CAROB and CARB Diesel is adjusted, affecting all refineries. There is no change if the actual crude CI is less than the baseline.

To get a sense of where different crudes line up as to CI, the Table 1
has some selected examples. A few values may be a surprise.

Addition of Crude CI Credits Where “Innovative” Crude Production Technology is Used

A provision has been added that allows for a credit for innovative crude production technology using carbon capture and sequestration, or solar steam generation. Written application for approval of the method is required with some specific requirements required for approval.

Revision to the Regulated Parties for Electricity and Requirements for use of Credit Proceeds

The section on credits for electricity used in EVs and PHEV has been rewritten. The new draft strengthens the regulated utility as the opt-in party for residential and the default or elected party where business, charging stations and fleets are specified. Businesses can elect for the credit depending on ownership and arrangement. One significant addition to the regulation is that revenue generated by credit proceeds must be used for direct benefit of current EV users, and/or educate the public in benefits of EVs and/or provide rate options to encourage off-peak charging.

LCFS Status

In whole details have changed, but the basics of the LCFS have not changed. In January we reported on two studies that provide views different than ARB Staff’s assurances that LCFS goals can be met.  The first is by the California Energy Commission and a presentation summarizing is available here.  The second study is by Sierra Research, Inc. for the Western States Petroleum Association (WSPA) and is available here.

These studies have a number of conclusions in common:

• The LCFS program becomes infeasible in the 2015-17 timeframe. The ARB analysis in many scenarios depends on credits “banked” in the early years to compensate for deficits in the later years.
• The cost for the LCFS program will be high 6% to 15 billion per year in 2020 not including infrastructure or vehicle costs. The Sierra study quantifies the cost of LCFS compliance could be as much as $54 billion between now and 2020.

The primary differences between these and the ARB analysis are the assumptions used, primarily the availability of low CI fuels to California.

To meet the goals of LCFS, it is clear that the supply of renewable fuels must be increased significantly through technology and implementation of that technology in investment. Additionally, the carbon intensity of current renewable fuels and processes need to be improved. The LCFS needs to be a program that provides a framework, as it does, to account for carbon intensity on a level-playing basis with administrative provisions that will give confidence to the investors, assurance that there will not be disruptions in the renewable fuels markets and that assures a reasonable cost to the California consumer.

The technical keys to the LCFS program remain the accelerated development of commercially available low CI alternatives and accelerated sales of EVs in California. Both of these definitely have not proceeded at the anticipated pace. Complicating the future of LCFS is the uncertainty brought by the District Court ruling and appeal. If the Ninth Circuit is appealed to the Supreme Court, the uncertainty will continue.

Stay tuned – there probably will be many more chapters to the LCFS story.

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