California Stationary Source Cap and Trade Benchmark
August 8, 2018, updated February 28, 2019
California’s Global Warming Solutions Act of 2006 (AB 32) put in place a series of policies and programs across all major sectors with the goal of returning California emissions to 1990 levels by 2020. The California Air Resources Board (CARB) is tasked with developing regulations and market mechanisms to meet this goal. To help achieve the greenhouse gas (GHG) reduction targets set out in AB 32, CARB crafted a Cap and Trade Program (C&T) which caps GHG emissions for mobile and stationary sources. These mobile and stationary provisions are referred to here as Fuels Under the Cap (FUC) and Stationary Source Cap and Trade (SSC&T), respectively. FUC requires C&T allowances for supplying gasoline and diesel in California while the SSC&T provision requires C&T allowances to operate a stationary source – such as a petroleum refinery – which produces gasoline and diesel fuels. In 2017, AB 398 extended C&T to 2030 and increased the emission reduction goal to 40% below 1990 levels.
California’s C&T is designed to achieve cost-effective emissions reductions across the capped sectors. The Program sets maximum statewide GHG emissions for all covered sectors each year (the “cap”) and allows covered entities to buy and sell allowances (the “trade”). An allowance is a tradable permit that allows the emission of one metric ton of carbon dioxide equivalent (CO2e) emissions. California holds a quarterly auction to sell allowances, and allowances are traded at prices which are reported daily by entities such as the Oil Price Information Service (OPIS). Additionally, since the inception of the program, CARB has allocated a certain amount of allowances to covered emitters who are “trade-exposed,” and to electricity and natural gas distributors and certain public institutions, reducing their cost burden. From 2013 through 2016, allowances allocated to refiners covered about 80% of refinery emissions, but in 2017 and further in 2018 CARB reduced these allowance allocations. For 2018, refiners were allocated just over 19 million tons of allowances – approximately 55% of refinery emissions.
Costs associated with California’s Low Carbon Fuel Standard (LCFS) and the FUC provision of C&T are generally transparent – identified in transactions along the supply chain and passed through to consumers. SSC&T costs, however, have not been identified discretely; instead, these costs are either born by refiners or included as a general operating cost in the refiner’s margin.
STILLWATER’S SSC&T BENCHMARK
Stillwater has calculated a benchmark estimating the SSC&T cost born by refiners using annual GHG Facility and Entity Emissions (published by CARB), annual Allowance Allocations (offsets distributed by CARB), CARBOB gasoline and CARB diesel volumes supplied (obtained through the LCFS Reporting Tool), and a daily assessment of allowance trading (reported by OPIS). We also adjust the calculation with a “correction factor” to exclude emissions and allowances included in CARB’s petroleum refining grouping but not associated with the manufacturing of transportation fuels.
The resulting calculation, shown below, represents our benchmark cost of SSC&T currently incurred by refiners for the supply of CARBOB gasoline and CARB diesel.
CURRENT COST & HISTORICAL TRENDS
For 2016 – given actual emissions and allocations – the annual cost of SSC&T to all covered refineries was $101 million or 0.59 cpg of CARBOB gasoline and CARB diesel. Given CARB’s reduced allowance allocations in 2019, that cost has now risen to more than $190 million, or 1.13 cpg.
Click here for a full explanation of our methodology.
Click here to see Stillwater’s daily benchmark.