Biofuels Law Conference: Discussion of Low Carbon Fuel Standards

On May 2, 2014, I presented a talk at the Energy Bioscience Institute (EBI) 6th Annual Biofuels Law and Regulation Conference at the University of Illinois, summarizing a number of key legal, policy and regulatory issues affecting the development of the biofuels industry in the U.S. and internationally. The slides from that presentation can be found here. In this series of posts in Biofuel Policy Watch, I’m elaborating on the issues I discussed in the presentation.  These posts are not meant to provide comprehensive summaries of the issues at hand, but instead to highlight some key aspects of my presentation and other discussions at the EBI conference. For most of these policy issues, you can find background information in other posts on this blog and my Advanced Biotechnology for Biofuels blog, and I’ll provide links such previous posts where possible.

The previous entry discussed the U.S. Renewable Fuel Standard, administered by the Environmental Protection Agency, that provides an escalating series of mandated volumes of renewable fuels that must be sold in the U.S through 2022, and specifies the criteria under which fuels can be certified as renewable. The RFS has been a powerful incentive for the biofuels industry since the law’s inception in 2005, but its impact has been supplemented by a similar, but differently-structured program in place in California, the state with the largest single economy in the U.S. This is the Low Carbon Fuel Standard (LCFS), put in place as a result of Assembly Bill AB 32, a broad-based climate change bill enacted by the California legislature in 2006. I have described this program in detail in a post last year in Advanced Biotechnology for Biofuels, but the following is a summary of some key points.

Implemented by an Executive Order pursuant to AB 32, the LCFS, issued on January 18, 2007, requires producers of petroleum-based fuels to reduce the carbon intensity of their products by 10% by 2020, beginning with 0.25% in 2011. The parties obligated by this requirement, such as petroleum importers, refiners and wholesalers, can meet these obligations either by developing their own low carbon fuels, incorporating other companies’ fuels in their products, or by buying LCFS Credits from other companies. The LCFS is administered by the California Air Resources Board (CARB).

The key to the LCFS is that renewable fuels qualifying under the program are assigned values corresponding to their carbon intensity. “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, usually measured against a baseline, i.e. the carbon intensity of the fuel it is meant to replace. When the regulations were established, the carbon intensities of certain renewable fuels were determined by CARB staff and entered into a look-up table. For those fuels not covered by an entry on the look-up table, the developing company needs to submit a petition to CARB calculating the carbon intensity through a life cycle analysis, and upon approval of the petition, the fuel and its carbon intensity are entered into the look-up table. The carbon intensity of the fuel determines the economic value of the credits each fuel is entitled to under the program.

The LCFS and programs like it differ from the RFS, because under the RFS, each fuel is assigned to one of four categories defined by minimum carbon intensity (or GHG emission reductions) and there is no added value to the company if the carbon intensity of that fuel is later improved – all fuels above that minimum are lumped together. Under LCFS schemes, the economic value of the fuel (i.e. the credit to which it is entitled) is determined by the carbon intensity, so fuels with incrementally better GHG emission reductions have a greater economic value.

The following are some of the issues relating to low carbon fuel standards that I discussed during my presentation as being important for the growth of the biofuels industry.

Ensure continued enforcement of California LCFS and overcome pending court challenges. To date, the California LCFS seems to be working well in encouraging the use of renewable fuels in the state. The statistics that CARB reports each quarter show that the number of LCFS credits generated has been growing substantially, and a market for the trading of credits has emerged over the past two years or so. However, the program continues to face challenges. As I’ve reported in previous posts on this blog, the State of California has been fighting two court challenges. One suit is in federal court, alleging that the program violates the Interstate Commerce clause of the U.S. Constitution because, in taking the costs and emissions of transporting the fuel into account, it places fuels produced out of state at a disadvantage to fuels produced in-state. The other suit is in state court, alleging that CARB made various administrative errors in promulgating the rule.

Although CARB has had some setbacks in both cases, the courts have allowed the agency to continue administering the program while the suits progress, and at this writing the overall program seems not to be threatened by either lawsuit. However, two industry groups and twenty-one states have recently filed petitions with the U.S. Supreme Court, asking the Court to review the Court of Appeals ruling that was favorable to CARB in the federal suit, so the possible impact of continuing or new litigation cannot be discounted. I should note that there are differing opinions on the California LCFS within the biofuels industry: several Midwestern corn ethanol producers are among the groups that have challenged the LCFS in federal court, due to the way out-of-state fuels are treated under the rules.

Adopt sensible revisions to the LCFS petition process. CARB is also currently considering several revisions to its regulations, one of which affects its petition process for new fuel pathways. Like the RFS, the LCFS includes the requirement for developers of new fuels not covered by existing pathways to submit petitions for approval of and assignment of a carbon intensity to their pathway. Similarly to EPA, CARB has seen a far greater number of petitions than they had expected, even from applicants producing first-generation biofuels extremely similar to fuels already approved. I believe this is, in part, an outgrowth the structure of the LCFS – because developers are entitled to credits that correspond to their carbon intensities, this creates an incentive for companies to file new petitions rather than to rely on the “look-up” value of the similar fuel, hoping to qualify for a credit that is a few points better than that shown on the look-up table. CARB’s proposal, which is now out for public comment, would attempt to solve this problem by assigning first-generation biofuels (e.g. corn ethanol, renewable biodiesel) into tiers – for example, assigning all fuels with carbon intensities of 80-90 in one tier with an assigned credit at the midpoint of 85. Many have voiced their opposition to this scheme, since it may accomplish a reduction in the number of petitions at the cost of losing the incremental advantage afforded by small improvements in carbon intensity. The timetable for adopting any such change is not clear, but it points out the challenges facing the state in administering a popular program at a time when more and more companies are developing or producing biofuels. These challenges may well affect decisions by other U.S. states or Canadian provinces to adopt similar LCFS regulations.

Extend LCFS regulations beyond California. Although California is the only U.S. state that is currently implementing and enforcing low carbon fuel standard regulations, similar laws have been adopted or have been considered in other states (an LCFS is in place in the Canadian province of British Columbia, which I won’t discuss here). I’ve discussed these other programs in detail in a post last year in Advanced Biotechnology for Biofuels. During my presentation, I briefly discussed the current status of these programs, as follows.

  • In Oregon, an LCFS has been enacted, and the state has begun implementation of the first phase of the program, which entails mandatory reporting by fuel providers of the renewable content of the fuels they sell. However, progress towards fuller implementation of the law faces two obstacles. The first is that the legislature has not yet authorized the executive branch to move beyond the first phasewhich would be to require fuel producers and importers to achieve a 10% reduction in carbon intensity by 2025; and the second is that the law itself is scheduled to expire (via a “sunset” provision) in December 2015. In recent weeks, Governor Kitzhaber has attempted to overcome the first obstacle by issuing an executive order authorizing the next phase of the program to begin, but as of yet he has been unable to have the state legislature agree to remove the 2015 sunset provision. Full implementation of the Oregon LCFS is dependent upon success on both fronts.
  • Washington State has, from time to time in recent years, considered the adoption of an LCFS, most recently in 2011 when a Department of Ecology report recommended adoption of a program with the goal of reducing transportation fuel carbon intensity 10% from 2007 levels by 2023. However, the state took no action on this recommendation until just recently – in April 2014, Governor Inslee issued an executive order for a feasibility study of a low carbon fuel standard as part of a larger program for reducing carbon emissions.

The interest in LCFS regulations by the three U.S. West Coast states, along with British Columbia, opens the possibility of there someday being a broad-based regional alliance having similar goals of reducing carbon emissions from transportation fuels through a low-carbon fuel standard. In fact, during my talk, I suggested that broader adoption of state or regional LCFS rules could be one way to overcome some of the shortcomings of the federal RFS without the need for Congressional action. Adoption of low carbon fuel standards in states representing a significant portion of the national economy could create a de facto national LCFS by providing the incentive to sell advanced renewable fuels nationwide. California itself represents about 12-13% of the nation’s economy and about 10% of gasoline consumption, and adding Oregon and Washington would bring the total closer to 20% of the economy and 13% of gas consumption, which would be a good start, if other states or regions could follow suit.

D. Glass Associates, Inc. is a consulting company specializing in government and regulatory 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. More information on D. Glass Associates’ government and regulatory 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 any other organization with which Dr. Glass is affiliated. Please visit our other blog, Advanced Biotechnology for Biofuels

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2 thoughts on “Biofuels Law Conference: Discussion of Low Carbon Fuel Standards

  1. End-of-Year News Wrap-up: Low Carbon Fuel Standards – Biofuel Policy Watch

  2. Update: Oregon Low Carbon Fuel Standard Approved – Biofuel Policy Watch

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