A critical look at the Low Carbon Fuel Standard

In the movie Thelma and Louise, the two hapless heroines clasp hands and hurl their turquois Thunderbird over a cliff and into an abyss of certain death.  It’s become an iconic moment in American film, a noble if extreme solution when all hope is lost.

California is about to hurl itself over a cliff of its own making.  In pursuing a fatally flawed effort to create a valuable investment opportunity for a few, the Air Board is insisting on moving forward with a regulation that will put the fuel supply for millions of Californians at risk.  Unlike Thelma and Louise, the sound track does not soar and the credits don’t roll before the car crashes to the ground.

This is a disaster movie in the making and we all get to witness the carnage when the car hits the ground.  Indeed, if you live in California and drive a vehicle, chances are you will get to play a part in this unfortunate drama.

By insisting on moving forward with the Low Carbon Fuel Standard, California is imposing regulatory requirements on fuel producers they almost certainly will not be able to meet.  With not enough low-carbon biofuel and other non-petroleum technology available, refiners and importers may have no choice but to cut back on the amount of fuel they produce for California drivers in order to comply with the Air Board’s regulation.

If there isn’t enough fuel to meet demand, prices could rise dramatically and/or some form of fuel rationing could be imposed.  This is what’s called a Fuels Cliff.

According to an exhaustive study by the Boston Consulting Group, California is rapidly approaching a Fuels Cliff and could go over the edge as soon as 2015.  That’s because the LCFS regulation requires refiners and importers to reduce the carbon intensity of fuels each year for 10 years.  Each year, the standard gets more and more difficult to meet because of the limited supply of low-carbon biofuels.  When there isn’t enough to go around, it’s goodbye Thelma and Louise.

In addition to warning about fuel shortages and possible gas price spikes, the BCG report also said the LCFS is likely to result in four to six of the state’s 13 refineries being forced to close.  Once gone, those refineries aren’t likely to return.

But unlike Thelma and Louise, this ending isn’t the only out.  California has options it could take to avoid this Fuels Cliff but it needs to act soon.  The California electricity crisis of 2000 and 2001 taught us that regulatory tampering with dynamic energy markets can have catastrophic consequences – consequences that can take decades to reverse.

California already supports numerous programs that are diverting public funds into alternative fuel and technology development.  The pace of research and development of alternative fuels and technologies isn’t going to be quickened by crashing our fuel supply markets and punishing fuel consumers.  If the state believes more dollars invested in these R&D programs will more quickly reduce our dependence on petroleum energy, it should be honest and find a more creative solution that does not compromise the supply of fuels for California.   The success of this policy will ultimately be measured not  by whether an investment opportunity was ensured for a few but whether fuel supplies for millions was compromised in the process.

The LCFS was designed to create a demand for non-petroleum fuels that have not yet been developed and aren’t going to be developed in the timeframe required by this regulation.  By insisting on enforcing this infeasible regulation, we are knowingly propelling the Golden State into a dark and dangerous abyss.  It’s time to open our eyes and fess up to the facts – the LCFS is a disaster in the making.

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Ed’s Note: Catherine Reheis-Boyd is president of the Western States Petroleum Association.