California Environment, business groups join to stump for low-carbon fuels policies

Source: Debra Kahn, E&E reporter • Posted: Thursday, February 5, 2015

SACRAMENTO — Alternative fuels producers in California are banking on a planned policy update later this month to reinvigorate their industry, which has been left in the lurch by uncertainty on the state and federal levels.

State Senate President Pro Tem Kevin De Leon (D) spoke yesterday at a conference of clean fuels advocates, including ethanol, biodiesel and natural gas producers and state utility companies. He professed confidence in California’s climate policies, including those aimed at lowering the state’s use of petroleum-based transportation fuels.

“The new economy of California will be the new economy for the entire world,” De Leon said. “Especially because Washington, D.C., remains gridlocked on these issues, California is driving development of the new economy.” De Leon announced that he would be co-sponsoring a bill by state Sen. Fran Pavley (D), S.B. 32, that would require the state’s Air Resources Board (ARB) to approve a 2050 emissions target of 80 percent below 1990 levels and to set interim targets in 2030 and 2040, as well.

Alternative fuel producers yesterday stressed the importance of the state’s low-carbon fuel standard — especially given the status of ethanol policies on the federal level. The Obama administration at the end of last year withdrew a proposed adjustment to the renewable fuel standard for ethanol and advanced biofuels, leaving industry participants waiting for the new mandate (Greenwire, Nov. 21, 2014).

“Now, more than ever, it is important for states like California to double down on things like the LCFS and, frankly, try to teach Washington how to get their ducks in a row,” said Michael McAdams, president of the Advanced Biofuels Association. “They’ve done a miserable job.”

McAdams said being in California was “a wonderful breath of fresh air.”

“You have a for-real program, and you are delivering for-real results,” he said.

California’s program still faces obstacles, however. The fuel standard, which is intended to reduce the carbon content of transportation fuels by 10 percent by 2020, has essentially been stalled due to a 2011 lawsuit from ethanol producer Poet LLC. The California Court of Appeal ruled in 2013 that ARB had improperly completed its rulemaking before finishing a state-mandated analysis of the program’s environmental effects (ClimateWire, April 4, 2013).

As a result, the policy has been frozen at 2013 levels — fuel producers must only reduce the carbon intensity of their products by 1 percent currently — which has slowed trading in the credits that producers can buy to supplement their in-house emission reductions.

“Credits have been selling, but they’re at an all-time low,” said Russell Teall, president of California-based biodiesel producer Biodico. “With the lawsuit, everything’s on hold.”

The credits, which are generated by the state when fuel producers exceed mandated levels of emission reductions, are currently selling for an average of $26 per ton, which translates to a boost of about 20 cents per gallon for a fuel that has 20 percent lower carbon content than gasoline. “It’s better than a poke in the eye with a sharp stick,” Teall said.

A separate suit from oil refiners and corn ethanol producers, citing the rule’s effect on out-of-state fuel suppliers, is still pending in the Eastern District of California, where it was remanded after the Supreme Court declined to take the case (Greenwire, June 30, 2014).

Proposals to raise credit prices and fuel production

ARB has proposed readopting the policy at its Feb. 19-20 board meeting in order to satisfy the court that it complies with the California Environmental Quality Act. A number of changes are included, such as a credit price ceiling of $200 per metric ton of emissions to prevent price spikes.

The proposed amendments also “backload” the emissions reductions, easing interim targets in earlier years in favor of steeper reductions in later years. Rather than achieve a 3.5 percent reduction by 2016, for example, producers would only have to cut their emissions 2 percent. From 2018 to 2020, they would have to achieve a 5 percent reduction (ClimateWire, Jan. 5).

Environmental groups commissioned a report this week finding that the LCFS can stimulate production of alternative fuels in sufficient volumes to meet targets in 2020 and beyond — but only if credit prices increase to at least $100 per ton.

The report finds that supplies of cellulosic ethanol may not ramp up in time to meet the 2020 target, but that if credit prices shoot up, fuel suppliers should find it advantageous to reduce emissions at their own facilities, either through energy efficiency upgrades or through substituting biomethane for natural gas usage at refineries and crude oil facilities.

“[I]f credit values remain low — as we saw in the past year, due to regulatory uncertainty — then sufficient incentive will not exist for low-carbon fuel production, and compliance beyond 2020 will be unlikely to occur,” says the report, conducted by fuels consulting firm Promotum for the Natural Resources Defense Council, Environmental Defense Fund and Union of Concerned Scientists.

Another report, released last month by the Packard Foundation and the TomKat Foundation, politically active billionaire Tom Steyer’s foundation, found that California, Oregon, Washington state and British Columbia combined could find enough alternative fuel supplies to achieve a 20 percent reduction in carbon intensity by 2030.

The study didn’t estimate what credit prices would be needed to stimulate production but found that the scenario goes “well beyond business-as-usual industry and market activity and would likely be dependent upon some mix of direct regulatory and fiscal policy support.”

Some biofuel producers are focused on other policy avenues, as well. Teall is working on a legislative budget proposal to use $210 million in revenues from the state’s cap-and-trade system to boost in-state production of biodiesels, gasoline alternatives, and biological and synthetic gases. In-state producers would receive quarterly incentives based upon volumes and emissions content, as well as whether their facilities are located in economically or environmentally disadvantaged areas.