California adopts first low-carbon fuel standard to reduce greenhouse gas emissions from transportation fuels

On April 23, 2009, the California Air Resources Board (CARB) approved the first low-carbon fuel standard (LCFS) in the nation. Designed to help meet the greenhouse gas emission (GHG) targets established by the Global Warming Solutions Act (AB 32), beginning in 2011, the regulation requires producers and importers of transportation fuel to reduce the average carbon content of fuel sold in California on an annual basis, with a total reduction of at least 10 percent by 2020.

Fuels and Providers Subject to the Regulation

The LCFS applies to most types of transportation fuels sold in California, including gasoline, diesel, biofuels, natural gas, hydrogen, and electricity. Specific alternative fuels that inherently meet the applicable standards through 2020, including electricity and hydrogen, are not required to meet the LCFS requirements, but producers or importers can opt into the LCFS in order to obtain the right to generate credits under the regulation. Certain research fuels and low volume niche fuels are exempt entirely.

As a general rule, the LCFS regulates upstream producers and importers, not downstream distributors and fueling stations. However, in certain circumstances, a regulated party can transfer its compliance obligations, together with the right to generate and sell credits, to another party.

Compliance Obligations

The LCFS goes into effect in 2010, but the first year is a reporting year only. According to CARB, this "break in" year is designed to allow regulated parties and staff time to adjust to the technical requirements of the LCFS and identify aspects of the LCFS that require improvement.

Beginning in 2011, regulated parties must meet an average declining carbon intensity standard. Separate standards are established for gasoline and diesel, with reformulated gasoline mixed with corn-derivative ethanol at 10 percent by volume the baseline for gasoline and low sulfur diesel fuel the baseline for diesel. The carbon intensity of biofuels, natural gas, hydrogen and electricity will be measured against either the gasoline or diesel standard, depending on the vehicles such alternative fuels are used in.

Regulated parties can comply with the LCFS by demonstrating that the average carbon intensity of the mix of fuel they produce or supply in California during a particular year does not exceed the LCFS standard for that year, or by applying LCFS credits acquired during previous years or from other regulated parties within the LCFS market. The development of a market for trading such credits is seen as an opportunity to promote the development of low-carbon fuels in California through market-based incentives.

The carbon intensity standards are back-loaded, with gradual reductions in the early years, and accelerating reductions as 2020 approaches. CARB noted that this approach will allow for the development of new technologies to satisfy the LCFS requirements over time, but some critics have suggested that such new technologies may not prove viable alternatives, and that regulated parties will have no option to comply with the LCFS without a significant increase in fuel costs in California.

Determination of Carbon Intensity Values

In order to compare the carbon content of the various regulated fuels, the LCFS establishes carbon intensity values, which measure of GHG emissions per unit of fuel energy delivered. Since the goal of the regulation is to reduce overall GHG emissions, the carbon intensity values are determined on a "lifecycle" basis – also known as "well-to-wheels" for petroleum-based fuels, and "seed-to-wheels" for biofuels – which considers GHG emissions associated with each step of the production, transportation and use of the fuel.

One of the more controversial aspects of the LCFS, this lifecycle analysis considers not only direct emissions during the full lifecycle, but also significant indirect emissions. While CARB notes the possibility that most or all transportation fuels generate varying levels of indirect GHG emissions, CARB staff has identified only one indirect effect as a significant contributor to GHG emissions: land use changes triggered by increasing demand for biofuels. According CARB, increased dedication of farmland to biofuel production leads to the conversion of non-farmland for agricultural production, which in turn leads to increased GHG emissions from lost cover vegetation and disturbed soils.

Some industry groups have objected that the indirect land use component unfairly penalizes certain biofuel producers – particularly corn-based ethanol producers – by inaccurately estimating GHG emissions from land use changes associated with biofuel production. Meanwhile, some environmental groups have argued that the estimate of GHG emissions from such land use changes are actually understated.

As a result of the controversy surrounding the indirect land use component, CARB directed staff to form an expert workgroup to assist in evaluating and refining the land use and indirect effect analysis on an accelerated basis. This review could result in changes to the indirect analysis before reductions are required, beginning in 2011.

Potential Impact on other Jurisdictions

The newly-adopted LCFS may have impacts far outside California's borders. A coalition of Northeastern states have agreed to develop a plan to adopt a low-carbon fuel standard by the end of the year, and a group of Midwestern states are also considering similar policies. A federal standard is also possible. The environmental group at Sheppard Mullin is well positioned to help you understand the potential impacts on your business, in California and beyond.