Envisioning a West Coast LCFS 2017-05-18T23:08:31+00:00

Envisioning a West Coast LCFS, and Beyond

BY JOE GERSHEN, IAN THOMSON, KEVIN KUPER

September 29, 2016
California Biodiesel Industry Commentary

After the re-adoption of the Low Carbon Fuel Standard (LCFS) and the recent passage of SB 32 in California I took some time to review and ponder the implications of carbon policies, obligations and targets in the golden state and in the North American west coast region in general. After all, Oregon (OR) and British Columbia (BC) also have LCFS programs in place and there is growing interest in expanding these across the continent.

So what would that mean for the fuels, feedstock and credits markets? After my head stopped spinning, and I’m not certain it HAS stopped, it occurred to me that it might be interesting to explore what a west coast LCFS might look like.

When I first got involved with the fledgling biodiesel industry 16 years ago, we could only dream of current policies being implemented one day in the far off future. Well, it appears that future is upon us and those policies have taken hold and are spreading. Climate change is no longer being debated and it is widely recognized that action is needed – and is underway.

I’ve asked for some help in crafting a series of articles on this topic from two knowledgeable colleagues: Kevin Kuper with SeQuential in Oregon and Ian Thomson with Advanced Biofuels Canada in BC. In addition to California, Oregon and BC, Washington state has just recently passed a “Clean Air Rule” restricting carbon emissions, and in Canada, BC will push its LCFS out to 2030. There are also LCFS programs that have been or are being considered in Washington State, and both Ontario and the Canadian federal government have expressed their intent to regulate the GHG content of fuels (ie: LCFS).

In California, LCFS credit values along with the physical fuel they are often attached to rise and fall, sometimes precipitously, based on any number of market conditions, including the value of other credits such as federal RFS RINs and blenders’ credits. Distribution bottlenecks factor into logistical shortfalls and can exacerbate the problem, which ultimately impacts pricing. Not to mention imports of low-carbon biofuels from around the world.

Since climate change is truly a global issue it makes logical sense that if there are LCFS programs in other states, provinces or regions, then credits generated in one area should be tradable across state or even international borders. But that’s no small task. If that were to happen how might that impact values from program to program? There would need to be parity so it would likely need regulatory oversight. California has yet to approve offsets from those jurisdictions where it already has agreements, so this is not a straightforward or quick process. But assuming we could tackle these hurdles, it makes sense that this too would impact values – and that’s a two-way street.

Additionally, demand for feedstocks would rise, more so for lower carbon feedstocks. Demand for purpose-grown energy crops would grow and it’s likely that more sustainable crop production would result based on values at least partially incentivized by a growing LCFS market.

Low carbon fuel production facilities in states, provinces or countries that have LCFS programs would likely enjoy lower CI values for equivalent production based on logistics alone. And if feedstocks for those facilities were grown or gathered nearby that would also impact CI values. Imagine a program that worked as designed – sustainability at work! But we’re not there yet, with global biofuel trade flows showing the power of the LCFS market to drive feedstock-switching and innovative process changes. Vetting the acceptability of certificates will require everyone to agree on things as basic, but not as simple, as common definitions of ‘sustainable biomass’.

California, with its population of 40 million people and monster fuel market, has definitely taken a leadership position and set the bar. Oregon and BC are not far behind, as we’ll describe in the next two articles, but how California implements the 2030 targets it has set will be the real indicator of leadership. It’s an election year and the outcome will clearly have an impact on what happens around the world, as it always does. Perhaps one day we’ll see a carbon market spanning the entire west coast, or a federal LCFS, or even a North American LCFS. That would be a game changer.

October 10, 2016
California Biodiesel Industry Commentary

A decade ago, Washington State and Oregon were among the very first adopters of state wide biofuel mandates. Today the Pacific Northwest continues to be at the forefront of clean energy and carbon commitments, putting Oregon and Washington in good company with neighboring California and British Columbia.

So what does our climate and transportation future hold here on the west coast? While it may be easy to imagine a harmonious marketplace from San Diego to Yakutat Bay, the range of regional, political and private influences make that future much harder to manifest. The glass is half full, however, as steps in the same general direction are being taken by all of these sovereign states and provinces, and confluence may yet happen in a meaningful way. If not by design than perhaps by circumstance, or chance?

January will mark the effective beginning of Oregon’s Clean Fuel Program (CFP), which, in many ways mirrors the Low Carbon Fuel Standard (LCFS) program in California. These two policies, programs and resultant marketplaces were not designed to work in synch, meaning that they may vary by compliance and market signal for low carbon fuels. Still, the lessons learned from the first 5+ years of California’s LCFS will go a long way in informing what unfolds with the Oregon CFP.

In fact, the experience and understanding many obligated parties have from participating in the LCFS could create a much smoother takeoff for Oregon and allow a much more vibrant marketplace to develop in a shorter amount of time. The debut of the Oregon carbon market will act to further stimulate interest in low carbon fuels and feedstocks along the west coast, and reinforce global strategies pointing low carbon products to the pacific shores of north America.

Nearly a third of Oregon’s greenhouse gas emissions come from transportation, demonstrating the need for policy like the CFP. Similarly, in Washington state transportation accounts for close to half of all greenhouse gas emissions, which clearly advocates for similar policies in the Evergreen State.

Lawmakers in Washington State did take a long, hard look at an LCFS/CFP in recent years, but the heavily divided political landscape produced no action. Though a program similar to those in California, Oregon or British Columbia does not exist in the state today, Washington is clearly focused on the same overarching goals. In 2008 Washington State set emissions reduction targets aiming for 1990 levels by 2020 and a 50% reduction in those levels by 2050. This in turn prompted the recent introduction of the Clean Air Rule which goes into effect in the Evergreen State on October 17th of this year and will act to cap carbon emission from the state’s top emitters. Could there be a future where it’s possible for obligated parties in Washington State to buy ‘carbon credits’ from credit generators in other states? Or even other countries perhaps?

Proponents for an LCFS/CFP in Washington State have not gone away, as the Clean Air Rule is unlikely to reduce transportation emissions as effectively as direct regulation of fuels’ carbon intensity. Imported fuels come under the cap starting in 2022, and until then, it is not clear the extent to which low carbon fuels will be used for compliance by large emitters. But any action on an LCFS would have to see the removal of the current ‘poison pill’ in the state’s transportation bill, which would require something on the order of a legislative restructure or ballot initiative in 2018. As you may know, this “poison pill” requires, by statute, elimination of funding for transit and other programs should any state agency implement a fuel standard based on carbon intensity of fuel.

It remains to be seen how and whether these carbon markets will integrate into a more comprehensive west coast carbon future but we can all breathe a little easier knowing that the west coast states and British Columbia are all working towards a future with cleaner air.

October 27, 2016
California Biodiesel Industry Commentary

In May 2007, British Columbia (BC) and California signed a climate action MOU that set Canada’s westernmost province on the path to a California-style low carbon fuel standard. A decade later, the regulation that resulted may be poised to take Canada up a big notch in the climate action race.

Many know that the BC LCFS is not the only biofuels-related initiative in Canada. Its most populous province, Ontario, and two Prairie provinces, Saskatchewan and Manitoba, have had ethanol mandates since 2007, and in the 2010- 2011 period, the four western provinces all brought in biofuels mandates in diesel and gasoline. Also in 2010 and 2011, the federal government mandated renewable content in gasoline (5%) and diesel (2%) respectively, and by 2015, every province between Ontario and BC had a mandate for renewable content in diesel (ranging from 2-4%).

Canadian biodiesel producers responded by building sufficient capacity to meet the 170 million gallon per year (Mgpy) demand from provincial and federal mandates. But as is the case with Canada’s fossil fuels, cross-border trade in biodiesel and renewable hydrocarbon diesel (RHD) has been substantial. In 2015, US producers shipped 10 million gallons more of biodiesel into Canada than was imported from Canada to the US, and this trend is likely to be maintained.

The relative lull since 2011 in new regulation development appears to be ending. A number of factors are lining up to drive what could be a doubling or tripling of biofuel demand in Canada. The election in October 2015 of a pro-climate action federal government has renewed the call to expand and update renewable fuel standards. Unlike RFS2 and its GHG buckets, Canadian federal biofuel regulations have had no reduction thresholds or renewable biomass criteria.

An example of the pivot to including carbon intensity in biofuels regulations can be found in Ontario. It’s 2015 Greener Diesel regulation has a multiplier that allows obligated parties to use less of a lower carbon fuel, and the draft June 2016 Climate Change Action Plan is calling for a new regulation in the gasoline pool to reduce GHG pollution 5% by 2020. If that proposed Ontario regulation were expanded to the diesel pool from 2020 onward and deeper reductions set for 2025 or 2030, it would double or triple demand in a market with Canada’s largest fuel consumption.

There are also broad calls to update the federal RFS. Canada’s signing of the Paris climate agreement in October 2016 has refocused Ottawa’s hunt for significant GHG reductions. With transportation at 25% of Canada’s emissions, squeezing more reductions out of biofuels is likely to require GHG reduction criteria in regulations going forward. Whether this is in the form of a federal LCFS, or changes to existing biofuel mandates has yet to be determined.

Then we come all the way back to BC. In August 2016, the province announced that it will extend the LCFS to 2030, requiring a 15% reduction below 2010 levels (from the current 10% by 2020). And BC brings us to another trend in Canada: carbon pricing. BC has North America’s oldest scheme, a carbon tax that started in July 2008. Quebec has a cap and trade program, and Ontario has passed the legislation to implement one, with the regulation pending. Alberta has announced a carbon levy, and in October 2016, the federal government announced a carbon tax starting in 2018 that will hit $50/tonne by 2022.

A debate is currently underway in Canada as to the relative value of carbon pricing towards greater adoption of low carbon fuels. Analysis by Advanced Biofuels Canada and others show that carbon pricing’s current structure in Canada is having little impact on incenting lower carbon fuels, and in some cases is actually regressive on carbon (charging higher carbon taxes on low-carbon biofuels than on gasoline or diesel.) With lower-density fuels taxed volumetrically, consumers end up paying more carbon tax than for the fossil equivalent per distance travelled. And the structure of BC and Alberta carbon taxes sees B20 and E85 blends taxed at the same rate as diesel and gasoline. This clearly remains an area where regulatory change is required to align GHG reduction goals with the rules and tax codes to realize the reductions.

The months ahead will see decisions on the format of fuels policies, and their targets. Will Canada develop a RIN-style registry? Will it have a 2030 LCFS with CA-level targets? Provincial and federal governments will grapple with balancing support for a hard-hit upstream oil sector and support for renewables, and gaining agreement on shared actions across the confederation of provinces and territories with widely ranging economic realities and political orientations. Translating the surge in announcements on fuels-related climate action into stringent new regulations may drive new demand, but other actions are needed to ensure that Canada builds and operates competitive domestic production capacity in the face of US support for its biofuels industry. Keep an eye on Canada in 2017.

November 14, 2016
California Biodiesel Industry Commentary

Given the results of the recent election, the conclusion of this series on “Envisioning a West Coast LCFS” seems to have taken a decidedly different direction than anticipated by much of the country and the world. The apparent west coast alliance of emerging carbon economies, while very strong, is about to be challenged in ways we could not have anticipated a few short days ago. How will this new world we find ourselves in impact biodiesel markets, biofuels markets, feedstock markets and carbon markets?

Perhaps one of the most significant outcomes of last week’s American election will be the effect on climate policies across the US, North America and the entire world. There is a lot of political dust that needs to settle before the hard work of governing can begin, but one area that we may see early coordination on will be bi-partisan support for biofuels. After all, president-elect Trump was the only supporter of the RFS in the republican primary race – enthusiastically so. But he has not been supportive of carbon policies nor does he even acknowledge the existence of climate change. Early signs from his transition team indicate that this will become the policy of the land – but not without fierce resistance.

The silver lining for biofuels in general, and biodiesel in particular, is that a Trump administration with energy security and protectionist tendencies may potentially decide to cut support for RFS pathways for foreign producers in order to eliminate exporting US tax dollars while American domestic producers languish. They might also support a domestic producers’ credit rather than a blenders’ credit for the same reasons. Those with assets invested to work with a blenders credit, and some in the fuels sector, may muddy the waters on this, but it is clear that either or both of these changes would send strong signals simultaneously to Trump’s rural agriculture constituency and to foreign producers, that he is making sure tax dollars are put to work in America first while creating jobs for American workers. This would be an early statement reinforcing some of his campaign promises.

The good news is that it could provide the added benefit of reducing carbon. A pivot to more domestic production might have the side benefit of addressing concerns about high-carbon imported biofuels that are currently, and unintentionally, supported by current regulation structures. More low carbon North American feedstocks would reduce GHG emissions – another win for biofuels.

And where does that leave carbon policies such as the Low Carbon Fuel Standard (LCFS) and similar programs developing on the west coast and in Canada?

Trying to summarize this series on the potential for an expansion of an LCFS policy in the western US and Canada also got much more difficult since the election. It seems abundantly clear that California, Oregon, Washington and British Columbia (BC) are aligned at the macro-level in their legislative efforts to limit carbon emissions. Whether these policies focus on greenhouse gas (GHG) emissions in general or the more specific GHG emissions from the transportation sector, which comprises anywhere from 25 – 50% of overall GHGs, there is no turning away from the very strong policy directives.

Since the election of Mr. Trump, however, it would seem that the expansion of carbon policies in general are far less likely, at least for the next 2-4 years. Beyond these four state and provincial policies we know that much of Canada is looking at similar reduction goals. There is also broad support in the US, but the leadership that had helped lead to the Paris Climate Accord after some 20 years of negotiation is no longer in place.

Possible actions of a more protectionist Congress may also run into the complexities associated with north-south feedstock and biofuel flows, and energy flows generally. Canada is a net importer of US biofuels, yet its producers do benefit from US policies, albeit on a relatively minor level. The possible shift to a biodiesel producers credit may bring some instability to the free flow of product in both directions, and with policies under development in Canada that could expand the demand for more feedstocks and fuels, both countries may see an incentive to adopt a more continental approach.

We know that California’s LCFS has demonstrated that the overwhelming majority of GHG reductions have come from the biofuels sector (greater than 90% since the program’s inception). We also know that well over half of those biofuels have come from out of state and overseas. All of this has happened while state regulators seem to have taken a more ideological path in support of zero-emission vehicle (ZEV) technologies including electrification and hydrogen fuel cells.

Meanwhile, much of the biofuels have come from the US heartland, even while California in-state production has gradually increased. Some might argue that there is generally more support for biofuels outside of California, even as demand for biofuels in the Golden State has increased dramatically due to the LCFS program. This may seem paradoxical to California regulators who had been hoping to influence national and even global policy. But after the outcome of this national election, we would guess that compromise might be in store as we move forward.

On a regional level, the ballot failure of the WA carbon pricing initiative, I-732, could set the stage in the next election cycle for a revisit of some of the low carbon fuel policies that would have been a bigger lift had a carbon price been in place. We do know that a carbon tax and an LCFS can co-exist as they do in BC, but the political will needs to be big enough to carry both.

We know that biofuels work to lower carbon, and we know that the best near-term biofuel solution appears to be biodiesel. There are 1.3 billion gallons of unutilized biodiesel production capacity across the US waiting for some pragmatic leadership to take hold. Many had thought that leadership would come from President Hillary Clinton, but the biggest surprise may be that it comes from President Donald Trump. The question is whether we now have the political will to reach across the aisle and make it happen.