The California Low Carbon Fuel Standard

Several U.S. states or regions, as well as at least one Canadian province, have adopted, or considered adopting, some form of regulation to promote the use of transportation fuels having more favorable carbon intensity (i.e., reduced greenhouse gas emissions) than fuels currently in use. These are typically called “Low Carbon Fuel Standards” (LCFS), and they differ in several ways from the provisions of the U.S. Renewable Fuel Standard, described in previous blog entries, most notably in applying to all transportation fuels, not only biofuels, and also in that they don’t rely on tiered categories of fuels, but instead each fuel is assigned a regulatory and economic value based on its carbon intensity, calculated through life cycle analysis. In this blog entry, I’ll describe the LCFS law currently being implemented in California. In a subsequent blog post I’ll write about LCFS laws on the books or proposed in other states or regions, as well as a proposal to establish a national LCFS that would replace or modify the existing RFS.

The State of California maintains Low Carbon Fuel Standard (LCFS) regulations as of a result of a sweeping climate change initiative known as Assembly Bill 32 (“AB32”) adopted in 2006, that set an absolute statewide limit on greenhouse gas emissions. The LCFS regulations took effect in January 2010, and can be found at 17 CCR §§ 95480-95490.Under these regulations, fuel providers (i.e., sellers of fuel) are required to reduce the carbon intensity of the fuels they sell, with the goal of achieving a 10% reduction in carbon intensity by 2020 relative to the “baseline” level of 2010 carbon intensity. When used in the context of regulations such as the LCFS, “carbon intensity” is defined as the net mass of carbon dioxide gas (or its equivalent) that is released over the life cycle of the fuel, taking into account the energy and materials needed to produce the fuel. Carbon intensity is usually measured in units such as grams of carbon equivalent per megajoule of energy. In regulations such as the LCFS, carbon intensity of a renewable fuel is usually measured against a baseline, i.e. the carbon intensity of the fuel it is meant to replace.

Fuel providers must determine and report to the California Air Resources Board (CARB) the carbon intensity of all the fuels they provide, with the carbon intensity of some fuels found in a “lookup” table based on life cycle analyses conducted by the staff (Tables 6 and 7 in §95486(b)(1) of the regulations), and the carbon intensity for other fuels established through a petition process that is described below. Because of the size of the market in California, these regulations are expected to create a significant incentive for the use of renewable fuels with favorable carbon footprints that will have an impact on national markets.

The LCFS regulations require regulated fuel providers to submit quarterly reports to CARB summarizing the carbon intensities of the fuels they sell, in reference to the yearly standard for GHG reduction relative to the 2010 baseline.  Providers can meet each year’s standard by providing fuels whose total carbon intensity is lower than the standard, and/or by using purchased or banked LCFS credits. LCFS credits are created when a regulated party overcomplies with the carbon standard in any given year, and credits can be traded between regulated parties (but not between regulated parties and entities that are not regulated parties). The market for LCFS credits has just recently begun to emerge, as is discussed below.

The first set of fuel carbon intensities in the lookup table were developed by CARB staff, but it is the responsibility of fuel providers to establish and obtain certification for the carbon intensities of fuels not found in the lookup table. Regulated parties may use one of two methods to determine the carbon intensities they report under the LCFS. Under Method 1, a regulated party can select carbon intensity values from the fuel carbon intensity lookup table as described above, if its pathway reasonably matches a pathway found in the look-up table. Under Method 2 (which features two alternatives, 2A and 2B), any person or group, whether a regulated party or not, may seek Board or Executive Officer approval of additional fuel pathways or subpathways. If a proposed pathway or subpathway is approved, it is added to the lookup table, and becomes available to all regulated parties.

The LCFS regulations and other information on the CARB website provide reasonably good guidance as to how to submit a Method 2A or 2B application to have a new renewable fuel accepted under the LCFS program. These applications require that a life cycle analysis (LCA) must be performed for each fuel pathway using the California-approved CA-GREET model. During their review of the petition, CARB staff will use the GTAP model to assess whether the pathway involves land use change or other indirect effects. Such indirect effects include the impact of displacing land or resources for fuel manufacture that would otherwise be used for different purposes. Consideration of land use change, particularly indirect land use changes, is often controversial within the biofuels industry, but such a review is required under the California LCFS regulations.

Significant data must be submitted along with each Method 2A or 2B application. This includes a detailed description of the manufacturing process for the fuel and the data from which the LCA was derived, along with the results of the LCA itself. Applications must include operating data from a production facility, to substantiate the mass and energy balances that formed the basis of the LCA. For a proposed application to be approved by the Executive Officer, the regulated party must demonstrate that the method is “scientifically defensible”, which is defined in the regulations to mean that the method has been demonstrated to the Executive Officer as being at least as valid and robust as Method 1 for calculating the fuel’s carbon intensity. To state it a little differently, the guidance document says “that a new pathway is deemed to be scientifically defensible if the carbon intensity value it yields is at least as robust as the values currently in the lookup table.” Proof that a proposed method is “scientifically defensible” may rely on, but is not limited to, publication of the proposed Method 2B data in a major, well-established and peer-reviewed scientific journal. CARB’s guidance documents strongly suggest that applicants consult with CARB staff before submitting an application.

The California LCFS standards potentially provide an important market driver in view of the size of the California market. However, the future of this regulation is somewhat in doubt. On December 29, 2011, enforcement of the LCFS was temporarily halted by a court order as a result of a lawsuit maintaining that the standards imposed unconstitutional constraints on interstate commerce. This claim arises because one result of the CA-GREET LCA analysis is to consider corn ethanol manufactured in the U.S. Midwest to have a less favorable carbon intensity than fuels manufactured elsewhere in the country, and the lawsuit’s proponents allege that this creates a constraint on commerce between California and other states that violates the U.S. Constitution. In the wake of the court order, CARB continued to administer some aspects of the program, particularly petitions for new fuel pathways, and on April 23, 2012, the injunction was lifted by the Ninth Circuit U.S. Court of Appeals, so that CARB can continue to implement and enforce the entire LCFS pending the outcome of the trial on the lawsuit. On October 16, 2012, a three-justice panel of the 9th Circuit U.S Court of Appeals heard arguments on the constitutionality of the California LCFS, with arguments focusing on whether the law unfairly discriminates against out-of-state fuel producers by factoring fuel transportation and other considerations into the required life cycle analysis of carbon intensity. No timetable has been set for the Court’s ruling. It is hard to speculate on the possible outcome of this lawsuit, but my personal opinion is that the State might be able to prevail if it can demonstrate that the treatment of out-of-state fuel production facilities was based on a reasonable and tangible scientific rationale, rather than a policy which could be seen as just an arbitrary penalty for operating out of state. Inasmuch as there is such a scientific basis, the State might well have a good chance of prevailing. Failing that, the State might lose the lawsuit, which would likely mean that the regulations would have to be amended in a way that avoids creating any implication that out-of-state fuel production was treated differently than in-state production, for example by possibly removing any consideration of the energy costs of transporting fuel to California from its originating plant.

In some recent news about the LCFS:

CARB issued a quarterly data summary on November 1, 2012, showing that about 310,000 metric tons (MT) of credits  and about 240,000 MT of deficits were generated under the LCFS in the 2nd quarter of 2012. Ethanol accounted for about 80% of the credits, with most of that amount attributed to corn ethanol having carbon intensities above 80 gCO2/MJ. The November 2012 data summary also reported that there were nine trades of LCFS credits in the first half of 2012, and that the credit price in these trades (actually 6 of the trades where prices were reported) was in the range of US $10-30 per metric ton. These are the first public trades of LCFS credits, and so this begins to establish the economic value of these credits.

A group of oil companies and fuel providers, at a private meeting in January 2013, decided to take steps to oppose the LCFS regulations. The meeting was convened by a trade group Fueling California, whose membership includes fuel producers and large fuel consumers. Opposition to the LCFS reportedly arose from concern that there would not be sufficient low-carbon fuels available in the market to meet the law’s targets through 2020. No specific actions were reported, and meeting attendees apparently also discussed concerns about other state programs such as its cap-and-trade program to control industrial air emissions.

D. Glass Associates, Inc. is a consulting company specializing in government and regulatory affairs support for renewable fuels and industrial biotechnology. David Glass, Ph.D. is a veteran of over thirty years in the biotechnology industry, with expertise in industrial biotechnology regulatory affairs, U.S. and international renewable fuels regulation, patents, technology licensing, and market and technology assessments. Dr. Glass also serves as director of regulatory affairs for Joule Unlimited Technologies, Inc. More information on D. Glass Associates’ regulatory affairs consulting capabilities, and copies of some of Dr. Glass’s prior presentations on biofuels and biotechnology regulation,  are available at www.slideshare.net/djglass99 and  at www.dglassassociates.com. The views expressed in this blog are those of Dr. Glass and D. Glass Associates and do not represent the views of Joule Unlimited Technologies, Inc. or any other organization with which Dr. Glass is affiliated. Please visit our other blog, Biofuel Policy Watch.

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