Listen to the latest episode of Convenience Matters where Alex Marcucci discusses how the California Low Carbon Fuel Standard impacts the fuel market.
Alex Marcucci // Sr. Engineer // Trinity Consultants
The California Low Carbon Fuel Standard (LCFS) has been in effect for nearly a decade and is intended to reduce the carbon intensity (CI) of transportation fuels used in the state. CI is stated in terms of grams of lifecycle CO2 equivalent greenhouse gas (GHG) emissions per mega-Joule of fuel energy (gCO2eq/mJ). The regulation initially required a CI reduction of 10% in gasoline and diesel over the period from 2010 through 2020. Compliance is achieved by blending lower-CI alternative liquid fuels, such as ethanol, biodiesel, or renewable diesel, and/or buying LCFS credits generated by alternatively fueled vehicles, including those that operate on electricity, hydrogen, and renewable natural gas.
Since its inception, other jurisdictions and states have closely monitored California's LCFS program. Following California's lead, Oregon implemented its “Clean Fuels” program in 2016. Currently, the State of Washington is considering adopting a similar program, and Environment Canada released a regulatory design paper for a national Clean Fuel Program in late 2018. Given this, and worldwide interest in reducing GHG emissions, other U.S. states and foreign jurisdictions may follow suit.
As the state with the oldest and most stringent program, California has become the leading market for low-CI liquid fuels and alternatively-fueled vehicles due to incentives the LCFS offers in terms of high fuel premiums and credits that can be monetized. From sugarcane ethanol imported from Brazil to renewable diesel from Singapore, low-CI alternative fuel producers have been eager to find ways to supply the lowest-CI fuels to the state. This phenomenon, known as “fuel shuffling,” has produced a ripple effect on the national and global transportation fuel markets. In addition, deployment of alternatively fueled electric and hydrogen fuel cell vehicles that manufacturers are required to sell under California's Zero-Emission Vehicle (ZEV) mandate has been accelerated to some degree by the fact that the energy used to power these vehicles generates LCFS credits.
Revised LCFS Regulation Provides Additional Incentives for Zero-Emission Vehicles
In 2017, the California Air Resources Board (CARB) began working on revisions to the LCFS regulation. These efforts resulted in the adoption, on September 30, 2018, of LCFS amendments that relaxed the required CI reduction from 10% to 7.5% by 2020 but set a new requirement of achieving a 20% CI reduction by 2030 relative to 2010 levels. In addition, CARB adopted new “infrastructure crediting” provisions that allow owners of Direct Current (DC) fast-charging and hydrogen stations that provide energy to ZEVs to receive LCFS credits based on the station's capacity, rather than actual sales. These provisions are intended to provide incentives for the development of fast-charging and hydrogen stations by allowing owners and investors to generate a faster return on their investment. They are also intended to help eliminate the “chicken and egg” issues associated with ZEVs by increasing the availability of public recharging/refueling facilities. It is important to note that this is the first time that CARB has allowed LCFS credit generation in the absence of a “real” GHG reduction.
As noted above, the LCFS program provides credits for the use of electricity in electric ZEVs. Currently these credits are generally assigned to the electric utilities that service the areas where the ZEV owners live. However, in light of the higher purchase cost of electric vehicles relative to conventional vehicles, the revised LCFS regulation also established a mechanism to transfer some of the funds from utilities to consumers by providing vehicle purchasers with “point of purchase” rebates when they buy an electric vehicle. The main purpose of infrastructure credits and “point of purchase” rebates is to provide incentives for the purchase and use of ZEVs in California in order to meet the State's ambitious goal of having five million ZEVs on the road in California by 2030, which was set by former Governor Jerry Brown through Executive Order B-48-18.1
Automakers Support LCFS Changes in Efforts to Comply with the ZEV Mandate
Automakers are welcoming the changes to California's LCFS program because the point-of-purchase rebates will lower the effective purchase cost of ZEVs for consumers and an expanded public electric and hydrogen recharging/refueling infrastructure will help to reduce consumers' anxiety over running out of fuel and being stranded. Overall, the revisions to the LCFS program appear to represent a significant step forward by California to assist automakers in complying with the ZEV mandate. However, it is also important to note that, pursuant to Section 177 of the Clean Air Act, ZEV mandates have been adopted by Connecticut, Maine, Maryland, Massachusetts, New Jersey, New York, Oregon, Rhode Island, and Vermont, and Colorado is considering adoption. At present, only Oregon has adopted a program like the LCFS and, as of now, that program does not include the infrastructure credits or point-of-purchase rebate provisions adopted by California. Obviously, the lack of LCFS-related incentives to increase ZEV infrastructure and reduce ZEV prices in Section 177 states will increase the difficulties that automakers face in complying with the ZEV mandates in those states. Automakers also face other uncertainties with respect to compliance with ZEV mandates as the Trump Administration's proposal to freeze the light-duty GHG standards at 2020 model-year levels through 2025 includes a threat to revoke California's authority to enforce its ZEV mandate and therefore the ability of other states to do so through Section 177.
LCFS Spikes Fuel Costs in California and Affects National and Global Fuel Market
The LCFS also encourages a shift from conventional fuels based on fuel price signals to consumers. To date, California consumers have seen fuel price increases as high as 13 cents per gallon (cpg) for gasoline and 9 cpg for diesel fuel due to the LCFS program.2 Given the limited supplies of very low CI liquid fuels for blending and the challenges faced by auto-makers in selling vehicles dedicated to operating on low-CI fuels like electricity and hydrogen, the cost premiums paid by California consumers due to the LCFS are likely to increase, perhaps dramatically, as the program's CI reduction targets continue to tighten between now and 2030.However, these price increases in California are a direct result of the design of the LCFS program, which was intended to provide producers of higher-cost, lower-CI fuels with a mechanism to recover those higher costs.
Although the California LCFS is only a state program, it has significant implications for the transportation fuel market at both the national and global level. Low-CI alternative fuels that otherwise might be used where they are produced are now being shipped to California in order to realize the price premiums created by the LCFS program, while higher-CI fuels are sold in non-LCFS areas. For instance, ethanol prices in California are approximately 7 cpg higher than in Arizona, a state without an LCFS-type program in place. In addition, it is well-known that producers of alternative fuels like ethanol and biodiesel consider their ability to make money via the LCFS through plant modifications that lower the CI values of the fuels they produce. Finally, a reduction in the demand for conventional gasoline and diesel in California may result in increased exports of these fuels to other states and countries.
Although a mechanism has been put in place to limit LCFS-related price premiums in the event of a major shortfall in the supply of low-CI fuels, the potential exists for the LCFS to create even larger discrepancies in the cost of transportation fuels in California relative to other states. In addition, as more LCFS programs are implemented, states and even countries will compete for the lowest-CI fuels, which in turn will make compliance with one individual LCFS program difficult. In response, fuel producers and investors are already looking into new potential feedstocks for transportation fuel production, as well as expanding existing plant capacities.
Although much remains to be seen about the true success of the LCFS in reducing carbon emissions, one thing is for certain: it is here to stay, at least in California. For more information, click here or contact Alex Marcucci, Managing Consultant of Trinity's Mobile Source and Fuels team, at email@example.com or (916) 273-5133.
1https://web.archive.org/web/20180608182428/ ; https://www.ca.gov/archive/gov39/2018/01/26/governor-brown-takes-action-to-increase-zero-emission-vehicles-fund-new-climate-investments/index.html
2Oil Price Information Service (OPIS) West Coast Spot Market Report, December 20, 2018.