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California Moves to Reduce Greenhouse Gas Impacts from Transportation Fuels

January 16, 2008

Even as it battles EPA’s denial of a waiver request to adopt more stringent vehicle emission standards, California is moving ahead with a low carbon fuel standard (LCFS) for transportation fuels. The LCFS will require fuel providers in or importing into California to ensure that the mix of fuel they sell meets, on average, a declining standard for greenhouse gas emissions (GHGs).

Even as it battles EPA’s denial of a waiver request to adopt more stringent vehicle emission standards,[1] California is moving ahead with a low carbon fuel standard (LCFS) for transportation fuels. The LCFS will require fuel providers in or importing into California to ensure that the mix of fuel they sell meets, on average, a declining standard for greenhouse gas emissions (GHGs). The LCFS will measure the “carbon intensity” of a fuel on a “lifecycle” or “field to wheel” basis in order to include all emissions from fuel production and consumption that contribute to the global warming impact of transportation fuels. Requiring a reduction in the carbon intensity of fuels presents new regulatory challenges for fuel producers as well as new business opportunities for providers of renewable fuel sources that emit fewer GHGs over their life cycles. Low GHG-emitting sources for transportation fuels, ranging from switchgrass crops to low carbon hydrogen production, and the technology necessary to refine them into fuel are in the spotlight as federal and state programs drive the production of low carbon fuels forward.[2] As the first state to take action, California’s Air Resources Board (CARB) is expected begin implementing the LCFS by the end of 2008.[3]

Reducing the Carbon Intensity of Transportation Fuels

As one way to meet the emissions targets established by the Global Warming Solutions Act (“AB32”),[4] Governor Schwarzenegger ordered California to establish an LCFS, with an initial goal of reducing the carbon intensity of California’s passenger vehicle fuels by at least 10 percent by 2020.[5] CARB has identified the LCFS as an early action item with regulation to be adopted and implemented by 2010. An LCFS is markedly different from renewable fuel standard programs (RFS), which are in place at the federal level and in many states. While an RFS requires blending a certain percentage of renewable fuel with conventional petroleum-based fuels, it does not contain an environmental metric to address the GHG emissions of a particular fuel’s entire “life cycle.”[6] In contrast, California’s LCFS considers a fuel’s “life cycle” as an environmental metric that measures the “carbon intensity” of units of energy consumed in a particular fuel-and-vehicle combination.

Compliance

Complying with the LCFS will require fuel producers and blenders to ensure that the mix of fuel they sell into the California market meets, on average, a declining standard for GHG emissions measured in CO2-equivalent grams per unit of fuel energy sold.[7] As long as fuel providers’ sales-weighted average meets the standard, they will have flexibility to choose what types and volumes of renewable fuels they sell. CARB has proposed that as a means of achieving compliance with the LCFS, fuel providers will have the option to 1) blend or sell an increasing amount of low carbon fuels; 2) use previously banked credits; or 3) purchase credits from fuel providers who have earned credits by exceeding the standard.[8] CARB is currently in the process of developing a tracking, certification and auditing system for trading credits within the LCFS program.[9] This system will serve as a basis for reporting compliance with the LCFS.

Reporting “Carbon Intensity”

The LCFS will apply to all gasoline and diesel used in California for transportation, including freight and off-road applications. Accounting for the carbon intensity of a fuel will take place at the refineries themselves, and will initially be based on regional per-crop averages.[10] Reporting the quantity and carbon intensity of the fuels will be the responsibility of the parties that manufacture the finished gasoline or diesel in California, or import it into the state.[11] Initially, reporting based on per-crop averages will not be required as a means to comply with the LCFS, but will be required to allow regulators to determine the feasibility, accuracy and efficiency of such reporting and to provide industry with some experience in reporting. As a longer-term process, CARB is developing a framework to supplant the per-crop averages with specific values of a fuel’s carbon intensity.

Measuring “Carbon Intensity”

According to CARB and California Energy Commission studies conducted as part of establishing the LCFS, measurements of a specific fuel’s carbon intensity will use a “life-cycle assessment.”[12] This includes upstream emissions and land use changes from the extraction, production, distribution and use of the fuels.[13] As noted in these studies, determining the carbon intensity of a biofuel based on a particular biomass and produced in a particular way can vary considerably depending on the methodology used, because not all equations account for all impacts.[14] The studies also highlight that the distribution of biofuels also plays a part in the carbon intensity of a particular fuel – transporting raw materials and/or refined fuels over long distances by petroleum-powered vehicles increases the carbon intensity of a fuel, while maintaining a local distribution network powered by low carbon biofuels decreases carbon intensity. CARB anticipates that measuring the carbon intensity of transportation fuels will continue to evolve throughout implementation and enforcement of the LCFS.[15] Eventually, CARB proposes to integrate the more accurate and specific measurement scheme into the LCFS reporting requirements.

Sources of Low Carbon Content Fuels

Some renewable fuels, while providing alternatives to petroleum-based fuels, actually emit more GHGs over the course of their life-cycle than gasoline. In order to increase their options for complying with an LCFS, fuel providers are already looking for alternatives to high-carbon content renewable fuels, as well as petroleum-based fuels.

Corn-based ethanol has been criticized as a high-carbon content renewable fuel, due to the fertilizer inputs, acreage needs, and mechanization of the corn industry. Arguably, the cost of producing and, thus, purchasing, alternatives to corn-based ethanols presents considerable technical and cost hurdles. There are, however, several alternatives that may overcome these economic and technical concerns. Legislation is driving the technology to economically refine cellulosic biomass into low carbon content fuels. Sources of cellulosic biomass include crops such as switchgrass and poplar trees, agricultural biomass, including animal waste and residue from cultivation, and municipal solid waste.[16] These potential sources of low carbon content fuels stand to provide fuel providers with the alternatives necessary to meet the LCFS. Municipalities and agricultural operations that are able provide the renewable fuels market with cellulosic biomass should stand to profit from materials that were once considered low-value crops or waste.[17] Permitting regulations, however, will present new challenges as regulatory agencies grapple with the need to develop infrastructure and land-use regimes.

Biodiesel is already attracting enormous amounts of industry interest due to the relative ease of production and distribution. Infrastructure exists to transport, store and deliver biodiesel, and engine conversion is not required for recently-manufactured diesel vehicles. However, similar to corn-based ethanol, biodiesel production also faces carbon-intensity concerns. One example of efforts to reduce the carbon intensity and acreage needs of biodiesel involves using carbon emissions captured from the exhaust stack of power plants to grow large-scale amounts of algae as a source for biodiesel.[18] Other companies are focusing on growing canola as a source for biodiesel, particularly in states that are near the biodiesel market opportunities in California, but have less expensive land and better growing conditions for canola crops.[19]

Preemption Possibilities

The National Petroleum Refiners Association has criticized the promotion of biofuels through RFS programs, citing numerous concerns about the environmental impacts of increased production of corn-based ethanol and the potential for state RFS programs to interrupt the flow of the fuel supply.[20] Similar criticisms of state-level LCFS programs are anticipated, based upon concerns over market share and interruptions of fuel distribution under a patchwork of state regulations.

It is also possible that, similar to automakers’ concerns about state regulation of automobile emissions, the NPRA will raise federal preemption challenges to state low carbon fuel standards. The EPA has noted that, in general, state RFS programs are generally not adopted for purposes of motor vehicle emissions controls and are therefore not subject to preemption challenges under the Clean Air Act.[21] However, in contrast to an RFS, an LCFS inherently addresses transportation fuel emissions, at least at points along a fuel’s “life-cycle assessment,” if not directly at the tailpipe.[22] This may leave an LCFS open to preemption challenges similar to the current battles between California and the EPA.

A National Low Carbon Fuel Standard to Come?

In North America, Florida, Ontario and British Columbia have announced their intent to adopt an LCFS similar to California’s. Washington, Oregon, Minnesota, Arizona and New Mexico are all considering similar policies.[23] Washington’s Climate Advisory Team’s Transportation Technical Working Group recently released its draft high priority mitigation options, recommending the development and implementation of an LCFS for the state.[24] Proposals for the creation of a federal LCFS have surfaced on both floors of the House and Senate,[25] and the 2007 Energy Bill contains an aggressive push towards the production of lower carbon-intensity fuels. A number of programs throughout the Department of Energy, the EPA and the U.S. Department of Agriculture will accelerate the development of “advanced biofuels.”[26]

Conclusion

Suppliers of low carbon intensity biomass and fuel manufacturers that focus on developing clean fuels that power conventional vehicle engines stand to profit the most immediately from low carbon fuel standards. In addition to increased demand for clean fuels, innovative clean fuel providers can generate revenue by selling low carbon fuel credits to slower-moving fuel providers seeking to achieve near-term compliance with these standards. The expansion and development of the biofuels market will require understanding the regulatory regimes that govern each component of a fuel’s life-cycle and both the fuel and credit-trading markets. Fuel providers ranging from small co-ops in the Midwest to startups fueled by venture capitalists on the West Coast to global agribusiness companies have a particular interest in the low carbon fuel standards as legislative efforts to reduce the carbon-intensity of fuels will undoubtedly lead to new market opportunities.

For more information on the LCFS, contact any member of Marten Law Group’s Climate Change and Sustainability Practice Group.

[1] See “EPA Rejects California’s Waiver Request for State-Specific Vehicle Emissions Standards,” Marten Law Group Environmental News, available at http://www.martenlaw.com/news/?20071219-calif-waiver-rejected.

[2] Environmental Trends to Watch in 2008, World Resources Institute Journalist Briefing on Environment Trends for 2008, World Resources Institute, December 18, 2007. Available at http://www.wri.org/stories/2007/12/trends-to-watch-2008.

[3]“The Role of a Low Carbon Fuel Standard in Reducing Greenhouse Gas Emissions and Protecting Our Economy,” White Paper, Office of the Governor of the State of California, January 9, 2007, 7-8 (“LCFS White Paper”).

[4] The California Legislature passed AB 32, the Global Warming Solutions Act on August 31, 2006. This law charges the California Air Resources Board (CARB) with adopting regulations to control greenhouse gas (GHG) emissions by 2012. Further, CARB is authorized to take “discrete early action measures” that can be put into place by 2010.

[5] CA Executive Order S-01-07, January 18, 2007.

[6] LCFS White Paper, at n.7. For example, ethanol has about two-thirds of the energy content of conventional gasoline, leading to lower gas mileage as the percentage of ethanol increases in fuel blends. Further, ethanol can generate higher smog levels because it emits higher levels of acetaldehyde, a precursor to ozone. Finally, depending on the raw material and the power source used to process the ethanol, some forms of ethanol would actually increase greenhouse gas emissions. See “Biofuels – Risks and Opportunities,” United Kingdom Department for Transport, October 2007.

[7] Id.

[8] LCFS White Paper at 4.

[9] See Summary of Low Carbon Fuel Standard Policy and Regulatory Development Working Group 3 Meeting, December 20, 2007, available at http://www.arb.ca.gov/fuels/lcfs/lcfs.htm#background.

[10] “A Low-Carbon Fuel Standard for California, Part II: Policy Analysis,” University of California-Berkeley Transportation Sustainability Research Center, August 2, 2007 at 52.

[11] Id. at 47.

[12] “A Low-Carbon Fuel Standard for California, Part 1: Technical Analysis,” University of California-Berkeley Transportation Sustainability Research Center, August 2, 2007, 31-36.

[13] Id. at 8.

[14] “Greenhouse Gas Impacts of Expanded Renewable and Alternative Fuels Use,” EPA420-F-07-035, April 2007.

[15] “A Low-Carbon Fuel Standard for California, Part II: Policy Analysis,” University of California-Berkeley Transportation Sustainability Research Center, August 2, 2007 at 79.

[16] “A Low-Carbon Fuel Standard for California, Part 1: Technical Analysis,” University of California-Berkeley Transportation Sustainability Research Center, August 2, 2007 at 61.

[17] Id. at 91.

[18] “Bioenergy: The Cure for Our Oil Addiction?” Environment: YALE, The Journal of the School of Forestry & Environmental Studies, Fall 2007, Vol. 6, No. 2 at 12. According to New Energy Finance, a British research firm, venture capitalists have recently invested close to $40 million on a dozen startups that are bringing algae biofuels to market.

[19] For example, conditions in Snohomish County, Washington, are proving ideal for canola growing such that yields are outpacing European norms. The County invested $30,000 last year and will contribute another $125,000 over the next two years to fund the experiment with the goal of meeting both biodiesel needs and bolstering the local farming economy.

[20] See http://www.npra.org/issues/fuels/ethanol_mandate.cfm

[21] “Regulation of Fuels and Fuel Additives: Renewable Fuel Standard Program, Summary and Analysis of Comments,” 11-9, United States Environmental Protection Agency, April 2007.

[22] LCFS White Paper at n.8.

[23] http://www.ucsusa.org/news/press_release/when-carbon-counts-0079.html.

[24] See http://www.ecy.wa.gov/climatechange/cat_twg_trans.htm. Click on “Final Draft Priority Options Document, as of 11/28/2007.”

[25] Senators Barack Obama and Tom Harkin introduced legislation in May 2007 calling for a National LCFS. http://www.renewableenergyaccess.com/rea/news/story?id=48427.

[26] Clean Fuels Development Coalition, “Under Construction and New Legislation Pending,” available at http://www.cleanfuelsdc.org/renewable/renewable.html.

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