The Low Carbon Fuel Standard Climate Policy Connections

The Low Carbon Fuel Standard Climate Policy Connections Briefing Series California Institute for Federal Policy Research September 14, 2007 Alex Farrell Dan Sperling Energy and Resources Group UC Berkeley aef@berkeley. edu Institute of Transportation Studies UC Davis dsperling@ucdavis. edu 1

GHG emissions depend on how fuel is made 2

Climate change strategy has three overarching goals 1. Deploy near-term technologies to cut emissions in the near term 2. Stimulate innovation & investment in new technologies needed to meet climate stabilization targets by mid-century 3. Contribute to related objectives – Economic growth – Air quality – Affordable energy prices – Diversity of energy sources – etc. 3

To ensure innovation in fuels, a LCFS should be added to a national cap and trade policy • Multiple market imperfections in transportation create the need for complements to economy-wide policies – Inadequate R&D; Market power; Network effects; Infrastructure; High private discount rates • Technological innovation is needed in every sector, which economy-wide policies cannot achieve • Implications of a $25/ton CO 2 price – Nuclear + renewable electricity – Integrated gasification combined cycle with carbon capture and storage (IGCC+CCS) – Natural gas combined cycle (NGCC) – Pulverized coal (PC) – Gasoline – Corn ethanol $0. 01/MWh $02. 50/MWh $12. 50/MWh $20. 00/MWh $0. 22/gallon $0. 11 to $0. 23/gallon 4

Principles Underlying LCFS • Provide durable framework for orchestrating near and long term transition to low-carbon alternative fuels – Send consistent signals to industry and consumers to reduce GHGs • Stimulate technological innovation • Use performance standard, with tightening over time • Government does not pick winners (or losers!) – Provides industry with flexibility in how they respond • Use lifecycle approach • Rely on measurable data as much as possible • Be consistent/compatible with other states, US, EU, Japan, China, others • Start slowly (to allow for institution learning) 5

LCFS basics • Carbon intensity must be measured on a lifecycle basis – Average Fuel Carbon Intensity (AFCI) measured in g. CO 2 e/MJ – Adjusted for inherent drivetrain efficiency: Gasoline = 1. 0 by definition, Diesel = 0. 78, Electricity = 0. 20, H 2 = 0. 47 – AFCI must decline by at least 10% by 2010 • Compliance by manufacturers or importers of fuels (mostly oil refiners) • Additional to vehicle performance standards • Overcompliance creates credits that can be traded or banked • Similar to emerging European approach to biofuels 6

Default and opt-in approach • Fuel providers (oil refineries) meet a declining average carbon fuel intensity target • Default: all fuel inputs are assigned a carbon intensity – Fuel inputs must be categorized – Highest value in common use is the default value – Encourages opt-in and focuses management attention • Opt-in: suppliers with low carbon intensity are certified – Requires protocol development and data collection – Certifiers are needed • Example of one set of defaults: – Gasoline: conventional oil, heavy oil, tar sands, coal – Diesel: conventional oil, heavy oil, tar sands, coal – Ethanol: U. S. corn, Brazilian sugar, U. S. switchgrass 7

There are several ways to comply with the LCFS 1. Improve energy efficiency or lower upstream CO 2 emissions (e. g. , eliminate flaring) 2. Blend in fuels with lower carbon intensity (e. g. , biofuels) 3. Sell fuels with low carbon intensity (e. g. , electricity) 4. Buy credits from other fuel providers 8

Congressional direction will help the emerging global LCFS serve our national interests • United Kingdom: Renewable Transportation Fuel Obligation (like a RFS) requires GHG monitoring in 2007 • Germany: Sustainability requirements for biofuels in 2009 • European Union: monitoring in 2009, reductions in 2011 • California: LCFS regulations to be in effect 2010 • Consideration by other states and provinces: AZ, BC, CT, DE, MD, MA, MN, NH, NJ, NY, ON, OR, NM, RI, VT, WA… • Federal regulations: Proposed rule in November 2007 • Federal bills: Boxer, Feinstein, Obama, Inslee, Dingle-Boucher, etc. 9

The Low Carbon Fuel Standard could be hugely important • Yes, there is uncertainty and some complexity. • Yes, more research is needed. • But… – This is the most important policy initiative in transportation fuels, perhaps ever (in the US)! – It could have major economic, environmental, and national security implications – It is a durable and flexible framework for guiding rational investments in alternative fuels. • We need to make this work. 10

Thank You • S. M. Arons, A. R. Brandt, M. A. Delucchi, A. Eggert, B. K. Haya, J. Hughes, B. M. Jenkins, A. D. Jones, D. M. Kammen, S. R. Kaffka, C. R. Knittel, D. M. Lemoine, E. W. Martin, M. W. Melaina, J. M. Ogden, M. O’Hare, R. J. Plevin, B. T. Turner, R. B. Williams, C. Yang • Stakeholders • CARB and CEC staff • This research was supported by grants from the National Science Foundation and the Energy Foundation. 11

Some key issues and questions • Basis of competition Electricity Rate-of-return regulation All emissions capped (? ) Local “Ratepayer subsidies” Oil Competitive Intensity target Global “Capital at risk” • Including “upstream” emissions for oil production • Rationalization (aka “leakage”) • LCA methods and compliance tools – Better data, transparency, better tools, land use change • Compliance schedule and time for innovation/investment • Complementary regulations and government actions • Availability of offsets, interactions with cap and trade • Land use change 12

GHG emissions depend on how the fuel is made 13