June 6, 2017
by Kendra Seymour
Last week President Trump withdrew the U.S. from the historic Paris Climate Agreement, signaling a lack of commitment at the federal level to combatting climate change. Many states, municipalities, and companies, however, have voiced continued support for the Paris Agreement and have affirmed their intention to fulfill the tenets of the Agreement. Sub-national governments will be leading the way in U.S. climate policy for the near term at least.
California has been on the front lines of the state-level battle against climate change for more than a decade. Since the Global Warming Solutions Act of 2006 (AB 32) was enacted, California was the first state in the U.S. to mandate a reduction in GHG emissions statewide. AB 32 set GHG reduction mandates for 2020, that would reduce California’s GHG emissions at 1990 levels. Ten years into the program AB 32 was extended and expanded by SB 32, which established a 40% GHG reduction requirement below 1990 levels by 2030, and AB 197, which established environmental justice (EJ) and legislative oversight provisions. The combination of AB 32, SB 32, and AB 197 provides the legal underpinnings for California’s wide range of regulations aiming to decrease GHG emissions.
The California Air Resources Board (CARB) – the agency with authority over the state’s GHG regulations – is responsible for planning how to achieve the mandated reductions, measuring progress, and administering the Low Carbon Fuel Standard (LCFS). CARB lays out its forecasts and plans for how it will achieve reductions in its Climate Change Scoping Plan. According to AB 32, the Scoping Plan must “identify and make recommendations on direct emission reduction measures, alternative compliance mechanisms, market-based compliance mechanisms, and potential monetary and nonmonetary incentives” to achieve the established goals. It also must achieve “the maximum technologically feasible and cost-effective GHG emission reductions” in 2020 and beyond. The Initial Scoping Plan was presented in 2008 with an update in 2014. The most recent Scoping Plan draft includes CARB’s plan to achieve California’s 2030 goals, namely the reduction of GHG emissions by 40% below 1990 levels.
To date, California has succeeded in reducing GHG emissions by 10% from the state’s historic highs in the early 2000s and is in line to meet the 2020 goal of 1990 emission levels, but much work remains to reach the 2030 targets. The 2030 Scoping Plan draws input from numerous stakeholders and the Environmental Justice Advisory Committee which was formed under AB 197, and one of the key messages received from this input was the need to place more emphasis on large stationary sources of GHG emissions (i.e. refineries and fossil fuel burning power plants). That feedback is reflected in the Scoping Plan.
Overall, the Proposed Plan relies on existing programs, such as the LCFS, paired with an extended and more ambitious Cap-and-Trade Program and new refinery regulations to achieve the state’s emissions reduction and air quality improvement goals. In addition to these measures in the transportation fuels sector, the Proposed Plan includes (but is not limited to) a 50% Renewables Portfolio Standard (RPS) which would increase production of renewable and clean electricity, doubling energy efficiency savings by 2030, efforts to reduce short-lived climate pollutants (SLCPs) such as methane and hydrofluorocarbons, measures to reduce emissions of black carbon, Sustainable Communities Strategies, and the development of an Integrated Natural and Working Lands Action Plan with the goal of securing the state’s land base as a net carbon sink. The focus of this article is the overall framework and major changes proposed in the transportation fuels sector, setting aside the other industry sectors addressed in and affected by the Scoping Plan.
Achieving California’s 2030 statewide target emissions level of 260 million metric tons (MMT) carbon dioxide equivalent (CO2e) requires a shift in the statewide and global economies, and that shift is already underway given private investment and legislative guidance. The Plan acknowledges that a careful balance must be struck between immediate, mid-term, and long-term solutions. While the Proposed Plan offers CARB’s methodology for how it intends to achieve the 2030 target, additional momentum would be required to reach the state’s 2050 target of 80% below 1990 levels. To that end, the Plan aims to achieve short term goals with an eye toward the longer-term.
CARB’s Scoping Plan proposes a framework of nine approaches to achieve the state’s established goals; five of these apply directly to the transportation sector:
- LCFS: Increase stringency to 18% reduction in carbon intensity (CI) from initial 10% goal
- Stationary Sources Strategy: 20% reduction in GHG emissions from refinery sector by 2030 compared to 2014 levels
- Mobile Source Strategy: Maintain existing GHG standards, put 4.2 million zero-emission vehicles (ZEVs) on the road, increase ZEV buses, delivery, and other trucks
- Sustainable Freight Action Plan: Improve efficiency, maximize use of near-ZEV and renewable energy, deploy more than 100,000 zero-emission trucks
- Post-2020 Cap-and-Trade Program: Extended program, declining caps, continued link with Québec and added link to Ontario, explore opportunities to strengthen program
The three significant changes for the transportation sector in the Proposed Plan are the 8% increase in CI reduction through the LCFS, a post-2020 Cap-and-Trade program, and the addition of the GHG emissions reduction regulation for refineries. For their part, the change to the LCFS and Cap-and-Trade programs look to be a straight-forward ratcheting down of the same standards to achieve a more ambitious target. The proposed new mandate for refineries, however, merits a bit more explanation.
Stationary Sources Strategy
For refineries, emission reductions are assumed to start in 2020 and increase linearly to 20% by 2030. The post-2020 Cap-and-Trade program and the new refinery measure would need to delivery 221 MMTCO2e in cumulative GHG emissions reductions from 2021-2030 to meet the 2030 reductions goal. Though a post-2020 Cap-and-Trade program with declining caps and scalability would carry a heavy load on the road to achieving the 2030 reductions goals, the refinery measure is estimated to account for 30 MMTCO2e from 2021 to 2030. That sector’s new benchmark would require all refineries to be as efficient as the most efficient existing refinery on a simple barrel basis by 2030. Rather than limiting mass GHG emissions from refineries, the proposed measure would require facilities to implement any combination of actions – fuel switching, boiler electrification, onsite investments, use of lighter crude slates etc. – to become more efficient.
Modeling Proposed and Alternate Scenarios
The Scoping Plan models six different scenarios using the PATHWAYS model which models GHG emissions while recognizing the interconnectedness of the industrial, economic, and energy sectors. The scenarios included in the Scoping Plan include a business as usual (BAU) Reference Scenario with no modifications to existing policies. The Reference Scenario shows “continuing but modest reductions followed by a later rise of GHG emissions as the economy and population grow.” Clearly additional measures would need to be put in place to achieve additional emissions reductions by 2030. To that end, CARB proposes its Scoping Plan in addition to four alternative plans which were considered in the Plan decision-making process.
The other scenarios are:
- Proposed Scenario: Cap-and-Trade is extended, the LCFS ratchets down another 8% to achieve an 18% CI reduction by 2030, and the refinery sector is mandated to reduce GHG emissions by 20%.
- Alternative 1: No Cap-and-Trade extension, LCFS ratchets down another 15% to achieve a 25% CI reduction, and California institutes a renewable diesel credit of $0.34 per gasoline gallon equivalent (GGE).
- Alternative 2: Carbon Tax puts price on carbon instead of Cap-and-Trade program
- Alternative 3: All Cap-and-Trade, no refinery measure, and LCFS remains at 10%
- Alternative 4: Cap-and-Tax. Declining cap on industry, natural gas, and fuel suppliers while requiring them to pay a tax on each ton of GHG emitted.
All four alternatives to the Proposed Scenario have been dismissed by CARB for various reasons on which we will not elaborate here. Their presence in the Scoping Plan serves to demonstrate that other options were considered, but the only scenario CARB considers viable is the Proposed Plan. We will, therefore, only address that Plan here.
Effects on Fuels and Feedstocks
Various fuels will be affected in different ways under the Proposed Plan. CARB’s models project that the state’s biodiesel (BD) demand will be 265 million gasoline gallons equivalent (GGE) in 2020 under both the BAU scenario and the Proposed Plan, up from 183 million GGE in 2016. In later years, however, biodiesel demand would increase more rapidly under the BAU scenario, reaching 806 million in 2030 while projected to reach 741 million in 2030. CARB forecasts that renewable diesel (RD) will experience more rapid growth in California than BD. In 2020, RD demand is projected to be 740 million GGE in both scenarios, up from 263 million GGE in 2016. Under the BAU scenario, RD increases to 843 million in 2025, then drops down to 548 million in 2030 while under the Proposed Plan, RD demand increases to 1.2 billion in 2025, and 1.1 billion in 2030. On the hot topic of alternative jet fuel (AJF), CARB is evaluating a proposal brought forward by Airlines for America (A4A) and a group of fuel producers to expand the LCFS program to enable AJF uploaded in California to generate credits on an opt-in basis. As this regulatory change is only in proposal status, AJF has not yet been integrated into the Scoping Plan.
Regarding feedstocks, which are sold at a premium in California’s LCFS market, under the Proposed Plan in 2020, BD is anticipated to be derived 100% from waste feedstocks under both scenarios, and RD is 83% waste-derived. By 2030, under the BAU scenario, feedstock remains at about half waste oil for BD and RD. With a more robust LCFS, there are higher waste oil feedstock penetration for both fuels.
If there’s no such thing as a free lunch, there’s also no such thing as a free transition from fossil fuels to a low carbon fuel industry. As modeled within PATHWAYS and the Regional Economic Models, Inc. (REMI) Policy Insight Plus model, the 2030 Target Scoping Plan shows that the overarching cost of transitioning to a lower carbon economy are small, though those costs fall unevenly. Typically, reducing GHG emissions requires capital expenditures for more expensive equipment, so areas of the fuels industry in which these expenditures will be required will feel these estimated incremental capital investments of $5.1 billion per year in 2030. These costs would presumably be passed through to the consumer, but would be offset by the estimated annual fuel savings of $4.1 billion in 2030. Overall, the transportation sector would see a net cost increase from the implementation of the proposed prescriptive measures.
Regarding LCFS credit pricing, the Reference Scenario assumes the BAU 10% carbon intensity (CI) reduction goal, and an LCFS credit price of $10/ton in 2030 while the Proposed Plan assumes an 18% CI reduction from 2020 to 2030 and a credit price of $80/ton in 2030. The Reference Scenario assumes there will be 552 million gallons of advanced biofuels (such as cellulosic ethanol, renewable gasoline, and RD) in the transportation fuel by 2030 while the Proposed Plan assumes more than double that: 1,165 million gallons.
As noted before, the Proposed Plan depends upon the continued Cap-and-Trade Program; its aggregate emissions cap ensures that California’s emissions targets will be met by 2030 even if GHG emissions through prescriptive measures fall short. The uncertainty in how heavily California will need to lean on Cap-and-Trade makes it difficult to quantify the cost of that program, but the Scoping Plan’s modeling show that the Floor Price will likely rise from $15.40 in 2020 to $25.20 in 2030 while the Reserve Price will likely rise from $72.10 in 2020 to $78.40 in 2030. These prices are the lower and upper bounds of the cost of reducing GHG emissions to achieve the targets set by SB 32. By multiplying the allowance price by the GHG emissions reductions required, we get the total estimated cost of those reductions. Under a low fuel price sensitivity, the net incremental cost would be $4 billion in 2030, while under the high fuel price sensitivity there would be a net savings of $5 billion in the same year.
One of the regulatory uncertainties noted in the Scoping Plan and felt across the industry is the viability of the Cap-and-Trade program in the short and long term. If Cap-and-Trade falls prey to court battles or political turmoil, many other actions would be required to make up for the gap in emissions reductions. The options proposed in the scoping plan are:
- Enhanced RPS, energy efficiency, LCFS, and refinery measure.
- New GHG prescriptive regulations for industry requiring a 25% reduction in the sector by 2030.
- Enhanced GHG prescriptive regulations for refineries requiring a 30% reduction in the sector by 2030.
- A low-emission diesel standard.
- Additional deployment of ZEVs.
- Incentive programs for early retirement of vehicles and heating, ventilation, and air conditioning systems.
- Increased VMT reductions.
- Increased electrification of the residential sector.
- Increased utilization of renewable natural gas.
California’s 2030 Scoping Plan is ambitious and thorough. It presents what CARB understands to be technologically feasible and cost-effective methods for achieving GHG emission reductions. The transportation fuels industry will shoulder a great deal of the burden in helping the state decrease GHG emissions and improve air quality throughout the state. If enacted as proposed, the 8% increase in CI reduction through the LCFS, a post-2020 Cap-and-Trade program, and the addition of the 20% GHG emissions reduction regulation for refineries will undoubtedly have economic and systemic effects on the industry. These prescriptive policies will require capital expenditures which will be passed on to consumers, translating into an estimated increased annual cost of $30 – $215 per household. This investment, however, has the potential of reducing GHG emissions from California by 40%, which CARB sees as a critical step in containing the rise of global air temperatures to below 2 degrees Celsius. The actions proposed in California’s most recent Scoping Plan are significant and will have a large impact on the state’s petroleum industry. We will likely see more climate policy leadership like this at the state level in the coming years. Industry needs to be prepared for the changes.
Stillwater will follow the progress as the Scoping Plan is reviewed, adjusted based on feedback, and implemented. To keep up to date with all our analysis, especially pertaining to the Low Carbon Fuel Standard, subscribe to our LCFS Newsletter!