Opinion: A reality check for California’s low-carbon fuel standard

The key to success in any endeavor – business, personal or political – is the ability and willingness to adjust one’s plans and expectations as conditions change.  Families and businesses in California have been painfully reminded of that reality as they struggle to survive the worst economic slump our state has seen since the Great Depression.

Unfortunately, this lesson does not seem to have been noticed by the California Air Resources Board, at least not in the case of the agency’s Low Carbon Fuel Standard (LCFS). One year into its implementation, the assumptions on which this well-intended plan to reduce greenhouse gas emissions and diversify our state’s transportation fuel supplies are proving to have been overly-optimistic.  Without some prudent and realistic adjustments, the LCFS has the very real potential to increase transportation fuel costs by billions and destroy jobs; and increase our dependence on imported oil and fuels – precisely the opposite of the outcome hoped for by Gov. Schwarzenegger when he issued the Executive Order initiating the rule in 2009.

At the time, the expectation was that adequate supplies of advanced low carbon biofuels and cellulosic ethanol would be available to supplement California’s conventional fuels at a competitive cost.  The petroleum industry  is working to prepare for and implement the requirements of the LCFS  but it appears that the inescapable conclusion is that this policy will become infeasible and unworkable well before the 2020 compliance date.

Concerns about the volume availability and cost of low carbon fuels have also been raised by the California Energy Commission (CEC) which recently questioned the validity of CARB’s staff’s projections, stating: the “primary concern is plausibility of the assumptions.” Among CEC’s chief concerns was CARB’s assumption that there would be significant expansion of the advanced biofuels and cellulosic ethanol markets, and that 50 percent of these fuels would be available for LCFS compliance in California.  

Perhaps more disturbing, especially in these economically troubled times, is CEC’s projection that costs of the LCFS program could reach as much as $5 billion in 2020 and increase to $9 billion by 2024/25 with even higher increases likely should other states adopt similar regulations (22 states are considering LCFS rules of their own at this time).

Another potential land mine in the LCFS is the proposal, to be taken up by the CARB board at its Dec. 16 meeting, to treat certain types of crude oil differently than others, penalizing so-called higher-carbon-intensive grades traditionally among those used in the production of California’s unique blend of gasoline, which is arguably the cleanest in the world.  This discriminatory treatment is likely to force California to import LCFS-compliant crude from other states and nations, and export California crude outside the state,  at an increased cost in terms not only of dollars but of greenhouse gas emissions – again contrary to the regulation’s stated purpose.

When fuel costs go up, the impact is felt not only by fuel providers but the state’s entire economy suffers. Higher costs almost invariably lead to business flight, downsizing or closure; elimination of jobs and therefore less disposable income for households, in other words, less of the economic activity our state so desperately needs.  

Couple that with the risk to our energy security presented by a regulation that would discourage in-state production and in effect invite increased imports from countries hostile  to the U.S., and the result is a policy that’s lost its way and needs common-sense adjustments to put it back on track.

There are some reasonable steps CARB should consider as it moves forward with LCFS implementation:

• First, develop a policy that treats all crude oils the same, thus eliminating the need for increased imports from unfriendly sources and reducing the risks to our energy security.
• Second, initiate a requirement for annual reviews and analysis of LCFS costs and feasibility, including appropriate “triggers” based on market concerns in order to keep the program on course by making necessary adjustments. This type of reality check is exercised by California businesses and families every day and is essential in the case of a policy with a multi-billion dollar price tag and severe negative consequences if not implemented responsibly.

• Third, we should actively develop and analyze approaches to reducing greenhouse gas emissions from transportation fuels that may be more cost-effective and feasible than the current policy.  To ignore this opportunity would by default lock us into a program that may have neither the environmental or fiscal outcomes its authors intended.

With demand for energy consistently increasing, California’s petroleum industry has long supported expansion and diversification of our state’s energy supplies. Working constructively with CARB and other stakeholders to fashion a workable implementation path for the LCFS continues to be an important element of that commitment.  

As CARB’s board prepares to consider the progress of and amendments to the policy, California’s environment and economy would be well-served by some objective improvements to avoid setbacks and create a regulatory framework in which the Low Carbon Fuel Standard has the best chance of success.