Clean fuels shaping up as fight of the year in Sacramento

Source: By Laurel Rosenhall, CALmatters, San Francisco Chronicle • Posted: Sunday, March 6, 2016

 A pending fight over low-carbon fuel standards could hinge on how they affect the state’s cap-and-trade system for carbon emissions. Photo: Ted S. Warren, AP
Photo: Ted S. Warren, AP. A pending fight over low-carbon fuel standards could hinge on how they affect the state’s cap-and-trade system for carbon emissions.

SACRAMENTO — A Harvard economist known globally for his work on climate change policy sat in the Sacramento office of the oil industry’s lobbying firm recently, making the case that California is fighting global warming the wrong way.

The state has a good cap-and-trade system, Robert Stavins said, but some of its other environmental policies are weakening it. He pointed to a rule known as the low-carbon fuel standard, which is supposed to increase production of clean fuels.

Environmental advocates consider it a complement to the cap-and-trade program that makes industry pay for emitting carbon. Stavins had other words.

“It’s contradictory. It’s counterproductive. It’s perverse,” he said. “I would recommend eliminating it.”

California’s low-carbon fuel policy is shaping up as a major fight this year for the state’s oil industry, an influential behemoth that spent more than $10.9 million lobbying Sacramento in 2015, more than any other interest group.

“There’s a storm coming,” biofuels lobbyist Chris Hessler told a roomful of clean-energy advocates at a recent conference on low-carbon fuels. “If we don’t meet this attack vigorously, we’re all going to be in a lot of trouble.”

The oil industry was front and center in the biggest fight to hit the state Capitol last year: a proposal to cut California’s petroleum consumption in half over the next 15 years to slow the pace of climate change. The industry won its battle when lawmakers stripped the oil provision from SB350.

But California’s larger oil war is far from over, and the newest battle lines are beginning to emerge.

Gov. Jerry Brown is plowing ahead with plans to cut vehicle oil use in half through executive orders and regulations like the low-carbon fuel standard. The standard requires producers to cut the carbon intensity of their fuels 10 percent by 2020.

To reach the standard, refineries will have to make a blend that uses more alternative fuels — like ethanol — and less oil. The program was adopted in 2009, but was locked in a court battle for years. California regulators prevailed, and took action last year to resume the program.

Case against plan

Now producers must start changing the way they formulate their fuel or buy credits if their product is over the limit. That has led to higher costs for fuel makers, which they are passing on to consumers at a rate of about 4 cents per gallon, according to the California Energy Commission.

But the price is likely to keep increasing, the oil industry warns, as it gets tougher to meet a standard that rises over time. Which is where Stavins’ argument comes in.

It goes like this: The cleaner fuels required by the low-carbon fuel standard will emit less greenhouse gas. That will reduce the need for fuel producers to buy permits in the cap-and-trade system, which makes industry pay for emitting climate-warming pollution, and create additional emissions by allowing other manufacturers to buy the pollution permits. Less demand will also depress prices on the cap-and-trade market.

Stavins is the director of Harvard’s Environmental Economics Program and part of the Intergovernmental Panel on Climate Change, a group of experts who review research for the United Nations. He’s also an adviser to the Western States Petroleum Association, which paid him to make the trip to Sacramento, where he talked with reporters before a day of meetings with lawmakers and business leaders.

Environmental advocates and California clean air regulators reject his view. They say the fuel standard works in harmony with other carbon-reducing programs and is an important piece of California’s effort to achieve its climate change goals.

“One of the major goals of the low-carbon fuel standard … is to drive innovation of new and alternative low-carbon fuels,” said Stanley Young, spokesman for the California Air Resources Board. “The cap-and-trade program on its own cannot do that.”

Hessler, the biofuels lobbyist, defended the fuel standard by saying the regulation limits the price of the credits, and said the cost to consumers will be kept down as some fuel producers make money by selling credits to others.

Looking north

A fight last year over a low-carbon fuel standard in the state of Washington may provide clues to how the debate will play out in Sacramento. In Washington, Democratic Gov. Jay Inslee proposed a low-carbon fuel standard but didn’t gain enough support for it in the Legislature. The fuel standard became a bargaining chip for Republicans in negotiations about funding for transportation infrastructure.

California lawmakers and Brown are also negotiating a plan to pay for a backlog of repairs to state roads and highways. The governor has pitched spending $36 billion over the next decade with a mix of taxes and other revenue sources. Republican votes are necessary to reach the two-thirds threshold for approving new taxes.

So far, Republicans have balked at the plan, with some suggesting that the fuel standard should be included in the negotiations.

It’s a message echoed by the president of the Western States Petroleum Association, which advocated against the low-carbon fuel standard in Washington. Catherine Reheis-Boyd said she wants California lawmakers to “take a very hard look” at the standard as they consider the future of climate change policies and the desire to repair the state’s roads.

“All those things interplay,” Reheis-Boyd said. “That’s a big conversation. I think people across the state are willing to have it, and I think we’re at a pivotal point to have it this year.”

CALmatters is a nonprofit journalism venture dedicated to explaining state policies and politics. For more newsanalysis by Laurel Rosenhall, go to