A low carbon fuel standard in California should create opportunities for cellulosic ethanol producers, even as the federal government moves to reduce the amount of renewable fuels that must be used nationwide in motor vehicles.

The California program could be copied in other states.

The US Environmental Protection Agency proposed in November to reduce the amount of renewable fuels that must be blended into the US transportation fuel supply in 2014 from 18.15 billion gallons to 15.21 billion gallons. It proposed reducing the amount of cellulosic biofuels that must be blended from 1.75 billion gallons to a meager 17 million gallons.

This proposal has created significant doubt about the federal government’s long-term commitment to renewable fuels and has also spurred significant criticism and negative reaction from the renewable fuels industry, including existing ethanol producers and developers of advanced biofuels. Existing producers and developers of new projects rely heavily on the federal mandates to provide a guaranteed demand for their products and assure investors of the future viability of their businesses.

A final decision on the 2014 federal mandates is expected soon.

Regardless of the outcome, producers of cellulosic and other advanced biofuels have been provided a lifeline by California. The low carbon fuel standard in California and proposed similar programs in other states will provide ample demand for advanced biofuels in the near future.

California Standard

The California standard ― called “LCFS” for low carbon fuel standard as opposed to the federal “RFS” for renewable fuel standard ― requires a 10% reduction in the carbon intensity of transportation fuels used in the state by 2020. California Governor Arnold Schwarzenegger imposed the standard in 2007 in Executive Order S-01-07.

Carbon intensity is measured as the average emissions produced over the life cycle of a fuel based on the amount of energy that is produced. The life cycle of the fuel starts upon extraction of the fuel, whether it is from a well or farm, and runs through consumption of the fuel to power a vehicle. The life cycle is often referred to as “seed-to-wheels” or “well-to-wheels.” The process that the fuel source goes through from extraction to consumption is called the “pathway” of that fuel. The LCFS program is regulated in California by the California Air Resource Board or CARB.

In order to achieve a 10% carbon intensity reduction by 2020, the LCFS requires a gradually increasing percentage reduction in the carbon intensity of gasoline each year as illustrated in Table 1.

Table 1

Gasoline and Fuels Used as a Substitute for Gasoline

Year

Average Carbon Intensity

% Reduction

2010

REPORTING ONLY

N/A

2011

95.61

0.25%

2012

95.37

0.5%

2013

94.89

1.0%

2014

94.41

1.5%

2015

93.45

2.5%

2016

92.50

3.5%

2017

91.06

5.0%

2018

89.62

6.5%

2019

88.18

8.0%

2020 & Beyond

86.27

10.0%

The LCFS is a “market-based” policy. The focus is on “regulated parties,” who are required to produce fuel that meets the carbon-intensity level of that particular year.

Regulated parties are the importers and producers of transportation fuels, fuel blendstocks and substitutes. Producers of electricity, hydrogen, hydrogen blends, compressed natural gas, biogas CNG, and biogas LNG are eligible to opt in as regulated parties. Opt-in regulated parties do not have to comply with the LCFS but may choose to opt into the LCFS program to generate credits that can be traded in the marketplace.

Regulated parties generate credits by producing fuel that is below the required carbon-intensity level and deficits by producing fuel that is above the required level. Regulated parties must have a net zero balance for credits and deficits annually. A regulated party can balance any deficits by purchasing credits in the market.

The LCFS was designed to be a flexible market-based policy. The flexibility in the LCFS comes from allowing regulated parties to determine the most market-efficient pathways to achieve compliance. In California, regulated parties must report the carbon intensities of the fuel they provide to the market by using a “lookup table” provided by CARB. The lookup table consists of pre-approved fuel pathways and sub-pathways. Additionally, any entity, whether a regulated party or not, may petition for approval of new pathways or sub-pathways. If approved, any new pathways or sub-pathways will be added to the lookup table and, thus, become available to any regulated party for reporting standards going forward. The structure of the program allows regulated parties to achieve compliance by creating more carbon-efficient pathways for standard fuels or by blending larger volumes of low-carbon intensity biofuels into the fuel supply.

The carbon intensity of fuels can vary depending on the location and sources of the particular fuel sources. While the carbon-intensity levels announced by CARB may vary due to the different pathways associated with each individual producer, the general carbon-intensity levels associated with gasoline and its substitute products can be seen in Table 2.

Opportunity for Producers

As Table 2 illustrates, sugarcane ethanol and cellulosic ethanol have far lower carbon intensities than petroleum and conventional corn ethanol. Therefore, the increasingly stringent standards under the California LCFS will incentivize regulated parties to blend increasing levels of advanced low-carbon biofuels into the fuel supply in the near future. California uses 11% of the nation’s transportation fuel supply. The effect on demand for advanced biofuels could be significant.

When first imposed, the California LCFS, like the federal RFS, was based on an aggressive assumption about the amount of cellulosic ethanol that would be available in the California market over the course of the program. In reality, cellulosic ethanol has fallen far short of these estimated levels despite a viable national market. For example, in 2012, only 20,269 gallons of cellulosic ethanol were produced for sale nationwide in the United States even though there was a federal mandate requiring 8.65 million gallons to be mixed into the national fuel supply.

The current lack of cellulosic ethanol supply means that, in the short run, there will continue to be a strong market for sugarcane ethanol in California. The main producer of sugarcane ethanol is Brazil. The shortfall in demand leaves a large potential opening for several cellulosic ethanol projects currently under development.

 

 

Other States

Thirteen US states, including 11 in the Northeast and mid-Atlantic region and Oregon and Washington in the Pacific Northwest, are studying or considering implementing LCFS programs.

States have been hesitant to move forward because of the risk that an LCFS could increase the price of fuel for consumers and because California has faced significant litigation from both the ethanol and petroleum industries. The California program seems to have withstood the most serious legal challenge after a favorable decision recently in the 9th circuit US court of appeals. Many states appear to be waiting to see where gasoline prices move as the LCFS ratchets up in California. The most significant step cellulosic ethanol producers could take to help themselves in other states is to make sure there is an ample supply of cellulosic biofuel in California as the state requires ever larger quantities to be mixed in California motor fuels.