REGULATION:

Calif.'s pioneering low-carbon fuels rule could see multiple changes

California's landmark law requiring lower-carbon fuels is poised for a rewrite.

Advisers to the state's Air Resources Board yesterday detailed proposed revisions to the low-carbon fuel standard (LCFS), a first-in-the-nation regulation. Potential changes include allowing oil companies to earn program credits for making refinery upgrades that shrink greenhouse gas pollution.

That amendment would give businesses more options while still meeting goals of the program, ARB staff said. The projects also could lower the cost of complying with the state's cap-and-trade program for carbon emissions, said Mike Waugh, chief of ARB's transportation fuels branch.

"If you can reduce your GHG emissions at the refinery itself, you reduce your obligation under cap and trade, but legitimately, you reduce your emissions and your life cycle for the LCFS," Waugh said. "So you can do something that benefits both programs."

Representatives from oil companies, alternative fuels manufacturers, environmental groups and health associations crowded into a meeting room in Sacramento to hear about the changes. It became so packed that it violated a fire code limit of 90 people, forcing many to relocate to another site where they watched remotely.

Revisions to LCFS would go before the board for a vote later this year. Agency staff is recommending that ARB readopt the regulation, which was first approved in 2009. It's one of several rules rolled out after passage of the states' 2006 climate law, A.B. 32. Transportation accounts for about 40 percent of California's greenhouse gas emissions.

The proposed LCFS rewrite follows a 5th District Court of Appeal ruling that ARB when it approved the fuels law violated the California Environmental Quality Act (CEQA) and the state Administrative Procedures Act (APA). The court last summer said that the agency could continue to enforce LCFS while it worked to rectify the issues (ClimateWire, July 16, 2013).

The LCFS aims to cut the carbon content of fuels sold in California 10 percent by 2020. To meet that goal, a fuel blender must keep the average carbon intensity (or CI) in its total volume produced below an annual limit set by ARB. The mandate is frozen at 1 percent reduction because of the court ruling.

ARB staff said there are signs that the LCFS is working with regulated companies reporting 5.4 million metric tons of credits and 3.3 million metric tons of deficits through 2012.

But agency aides also are analyzing what low-carbon-intensity fuels are likely to be available for compliance by 2020 as well as the 2030 time frame "based on industry, academic, and government sources," it said in a concept paper. "Staff is also in the process of identifying which of these fuels are likely to come to California to be used for compliance with the LCFS."

Oil companies want changes

Many oil companies see the LCFS as unworkable. They repeated their concerns yesterday as ARB staff detailed the proposed changes.

"A limit on sufficient volumes of low enough CI fuels will occur prior to 2020, which will impact longer-term compliance," said Gina Grey, the Western States Petroleum Association's vice president for strategic policy for fuels. "The development of commercial-scale, ultra-low CI fuel, such as cellulosic ethanol, has been much slower than originally envisioned."

Although there will be some transition to lower-carbon fuels, she said, "staying the course with the current program design could result in disruptions in the marketplace. Our conclusion is that a program revision is needed."

Miles Heller, director of California fuels and regulatory issues at Tesoro, asked whether ARB would be allowing credit for improvement projects done since 2010, the base-line year for the LCFS.

Waugh said no firm decision has been made but that his initial response was that credits would only be given "henceforth."

Environmental groups said they wanted to prevent any revisions that would dilute the strength of the program. The 10 percent reduction by 2020 is "tremendously important," said Tim O'Connor, attorney with the Environmental Defense Fund. "I don't think that the court would have wanted ARB to back away from that."

"The uncertainty that's created when you do that sort of can become the self-fulfilling prophecy," he said. "You create the uncertainty, and then you don't get the fuels that can come and be online to meet the standard, so maintaining that commitment" to the 2020 goal is vital.

Simon Mui, director of the California vehicles and fuels program at the Natural Resources Defense Council (NRDC), said that there is room for oil companies to help meet their LCFS obligations through emissions reductions along the petroleum development chain.

An NRDC report last year found that improvements at refineries and at the crude oil production level could go toward 17 to 33 percent of the low-carbon fuel standard by 2020. Those could be done through refinery improvements that include energy efficiency, adding renewable power, and carbon capture and sequestration.

But if projects are allowed for credits, he said, green groups want assurances that the state is not "inadvertently creating anything that would create a backsliding mechanism for the other parts of the refinery. We really want to see a strong counting mechanism here."

Other revisions proposed

The ARB staff also is suggesting other revisions to the LCFS. Those include looking at different carbon intensity levels for 2015 through 2020. That's needed because the current level of 1 percent by 2015 would have been in place three years.

"Staff currently has no proposal to change the average carbon intensity target of 10 percent by 2020," the concept paper said. "However, staff believes that some post-2015 'curve-smoothing' will be appropriate." The study on projected fuel availability "will inform the 2016-2020 compliance targets."

ARB also will be looking at post-2020 targets that call for carbon intensity reductions above 10 percent.

In addition, staff is looking at adding a "cost-containment" provision. There are two possible options. One would be a "Credit Clearance Option," under which regulated parties would be allowed to carry over carbon cut deficits to the next compliance period. They would need to purchase their required share of credits, which would be made available during a "credit clearance" period.

"Deficits that are carried over would become part of that regulated party's cumulative compliance obligation and incur interest, to be repaid in subsequent compliance years," the concept paper said.

The other alternative would be a "Credit Window Option." Under that, if regulated parties were unable to obtain sufficient credits on the open market, they could buy compliance-only credits from ARB at a predetermined price. Proceeds would go into the Air Pollution Control Fund, unless directed differently by the Legislature.

One oil company executive questioned whether many of the proposed revisions would damage the LCFS and its market-driven promise.

"It actually circumvents the whole purpose of the LCFS," said David Stern, senior adviser on advanced fuels at Exxon Mobil Corp. The credit window and credits for emissions reductions at refineries are "off-ramps" from the program, he said.

"All options divert from the intended purpose of the LCFS, which is to try to encourage investment and development of low-carbon-intensity fuels," Stern said. Exxon Mobil has invested $600 million in algae biofuel technologies.

Waugh with ARB responded that the program is market-driven and that "having a healthy credit market -- and healthy means reasonable credit prices -- will drive investment."

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