Views from Napa Valley: A Peek at California’s Low Carbon Fuels Program

By Michele Rubino, Special to The Digest

A few years ago, when it was fashionable to consider California a failed State with a bankrupt, dysfunctional government and outrageously high taxes (only the latter is actually true), the State of Nevada started running ads in different California media markets to convince businesses to relocate. The response was swift. Within days, counter-ads were on air stating “What happens in Vegas, stays in Vegas. What happens in California makes the world spin”

It is with the same sense of excitement that I am once again witnessing California’s global leadership in energy and environmental policies and markets. With the backdrop of Napa’s rolling hills and spectacular wineries, a diverse group of professionals – ranging from carbon traders to power companies, gas utilities, integrated oil companies, independent refiners and petroleum distributors and retailers, technology and project developers across energy production, distribution and efficiency – got together this week to discuss the future of California’s sprawling climate change policy. The event: the Argus California Carbon and LCFS summit.

AB32 sets the stage

The topic is a complex one. It all started with AB 32, the Global Warming Solutions Act of 2006. AB 32 is now implemented covering the entire economy in California. Markets for carbon allowances and offsets are established and in full swing. The law is unmistakably driving change and investment in the private sector, creating and shifting revenues, profits and wealth, redefining winners and losers across multiple industries. It is also generating billions of dollars in cap-and-trade auction proceeds into the Greenhouse Gas Reduction Fund (GGRF).

Predictably, lobbyists representing a multitude of industries are making their claims to these funds (and the biofuels industry needs to make its own). As is always the case in energy and environmental matters, industry is also impacted by different, overlapping – and sometimes conflicting – state and federal policies.

As an example, the power sector is also subject to the State’s Renewable Portfolio Standard (the RPS, which requires increasing renewable content in the electricity supply), the governor’s Executive Order (EO) to wind down contracts for out-of-state supply of coal-generated electricity as well as a host of practical regulations resulting from the recently issued EOs from the Obama administration – known as the Clean Power Plan. EPA has indicated that it will be aggressively pursuing enforcement to support its Program

… and now to the LCFS

Of interest to our community is the evolution of AB32’s offshoot into transportation fuels known as the Low Carbon Fuels Standard (LCFS). This program does not exist in isolation. The federal Renewable Fuels Standard (RFS) Program, LCFS’ older brother struggling to get decent grades, is casting its – mostly negative – influence. Other policy and market considerations also play into clean fuel efforts – think of California’s maniacal obsession with NOx emissions (VW knows something about that!!).

The excitement, to put it mildly, in the advanced biofuels and low carbon fuels community attending was palpable. The price of LCFS Carbon Intensity (CI) credits (the Program’s compliance currency) is steadily increasing. It currently stands at $75/ton of CO₂; for sake of example, this price point results in a premium of approximately $0.40/gallon for cellulosic or cane ethanol with a CI of 20 gCO₂e/MJ and $0.65/gallon for renewable diesel with a similar CI (see ICF’s Phillip Sheehy’s predictions in terms of the CI and timeline for participation in the LCFS marketplace of different technologies / feedstock).

This is just the beginning: current targets are still not aggressive, which makes the market long on credits. As the “compliance curve” really goes into high gear in the coming years and with the current supply of low carbon fuels, the market is expected to become short on credits by 2017 and 2018. A strong, sustained price signal is starting to occur and will only continue. It feels like this policy has teeth and will provide much needed certainty to attract investors back to our industry.

Issue and Concerns

To be sure, there is no shortage of issues and concerns with how the California Air Resources Board (CARB), the State agency that has been charged with the initiative, is designing and implementing the LCFS

The recent re-adoption of the program was certainly positive news for our industry in that the 10% carbon intensity reduction target by 2020 was reaffirmed despite having “lost” a few years of implementation as the Program worked itself through lawsuits and resulting adjustments (see graph). This establishes a much steeper compliance curve to catch up on the slow start. It also opens the program up to the “phantom fuel” argument, the well-rehearsed complaint by Obligated Parties that regulations impose unachievable targets which ultimately result in a tax on consumers in exchange for no real benefit.

A “Cost Containment” measure was adopted. This was an unavoidable compromise but, in my opinion, still leaves the program vulnerable to the “phantom fuel” argument down the road. The issue is not the cost ceiling for CI credits, which, at $200/ton CO₂, sends the right signal. Rather the problem is that deficits can be accumulated over years to the point that Obligated Parties will declare the policy unachievable. The provision is certainly better than what happens with the RFS, where the EPA has the authority to rewrite volume obligations (the equivalent of carbon intensity reduction obligations in the LCFS) on a yearly basis. However, it potentially just kicks the can down the road.

The LCFS is designed to be technology agnostic – although we all understand that California has a soft spot for Electric Vehicles (and for Renewable Diesel! see graph with one compliance scenario put forth by CARB itself) . So there is no guaranteed volume for biofuels. But this is the kind of competition our industry should welcome. Increased use of biofuels – and advanced biofuels in particular – makes economic and practical sense as part of a sustainable low carbon transportation fuels policy.

The latest requirements and procedures to get fuel pathways certified to generate CI credits are probably more cumbersome than we would all like. CARB has also indicated the intention to put in place sustainability certification requirements that will add to the administrative burden industry players will be subjected to. These are all things that a reputable industry, claiming to provide substantial societal benefits, has to deal with.

The Pushback

The opponents of the LCFS put on display a narrative we have heard time and time again, sans the (artificial, and honestly, embarrassing) argument of blend wall constraints! The LCFS in fact does not attempt to mandate ethanol or biodiesel blending. The tactics that will be used to try to derail the Program are known. First, there is the phantom fuel argument. Second, it was stated that policies should be based on practical, available solutions rather than be aspirational in nature. Actually, ambitious policies need to be aspirational.

The latest pushback heard “on the floor” states that the LCFS puts requirements on Obligated Parties that go beyond the supply chains they fully control (think Electric Vehicles). Here is my response: “Dear Obligated Parties, welcome to a world where an entire key sector of the economy is not in the hands of an oligopoly. Deal with it.”

Some opponents of the LCFS Program have also been quietly raising the possibility that, in absence of an adequate supply of low carbon fuels, Obligated Parties might be “forced” to comply with the policy by reducing sales of fuels, thus creating a shortage in the California marketplace. This is just the latest version of the narrative by which these policies will dramatically raise fuel prices. It won’t work.

The Silver Lining

Here is my prediction. Unlike what is happening in DC, policymakers in California will not back down on their commitment to decarbonize the economy and understand that transportation needs special attention. The LCFS is better than the RFS but that is not the point; the point is that California’s policymakers and regulators have a spine. But there is more. California is leading the way in low carbon fuels. The State has well-established credentials as a trendsetter in energy and environmental policy. Oregon and British Columbia are already following – and more regions will come. There will certainly be setbacks and bumps on the road to a future of low carbon fuels. It is unclear what technologies and companies will emerge as winners but the biofuels industry can and will be relevant. Good times ahead!

ABLC

The LCFS and its implications will be a hot topic at the upcoming Advanced Bioeconomy Leadership Conference (ABLC) taking place is San Francisco from November 2^nd to November 4^th. The event brings together leaders across our industry to discuss some of the more critical themes in the Bioecenomy, from policy to technology, markets, business models and more

The Low Carbon Fuels Coalition

One organization that stands out for being on the front line of this “battle” is the Low Carbon Fuels Coalition. Graham Noyes, the acting executive director and a longtime biofuels professional and relentless industry advocate, is every day in the trenches fighting to ensure that the policy’s design and implementation accounts for the needs of the biofuels sector. Our entire industry should support him.

To all the other organizations working to shape a strong policy environment for the biofuels industry:  Go West! The battleground is in Sacramento.

Michele Rubino is an independent consultant with experience across renewable fuels, bio-based chemicals and, more broadly, biotech and cleantech. His email address is [email protected]