BILL ANALYSIS �
AB 1992
SENATE COMMITTEE ON ENVIRONMENTAL QUALITY
Senator Jerry Hill, Chair
2013-2014 Regular Session
BILL NO: AB 1992
AUTHOR: Quirk
AMENDED: June 5, 2014
FISCAL: Yes HEARING DATE: June 18, 2014
URGENCY: No CONSULTANT: Rebecca Newhouse
SUBJECT : VERY LOW CARBON TRANSPORTATION FUELS
SUMMARY :
Existing law , under the California Global Warming Solutions Act
of 2006 (Health and Safety Code �38500 et seq.):
1) Requires the California Air Resources Board (ARB) to determine
the 1990 statewide greenhouse gas (GHG) emissions level and
approve a statewide GHG emissions limit that is equivalent to
that level, to be achieved by 2020, and to adopt GHG emission
reduction measures by regulation, and sets certain
requirements in adopting the regulations.
2) Authorizes the ARB to include the use of market-based
compliance mechanisms in the regulations.
3) Requires that before the inclusion of any market-based
compliance mechanism, that the ARB do all the following:
a) Consider the potential for direct, indirect, and
cumulative emission impacts from these mechanisms,
including localized impacts in communities that are already
adversely impacted by air pollution.
b) Design any market-based compliance mechanism to prevent
any increase in the emissions of toxic air contaminants or
criteria air pollutants.
c) Maximize additional environmental and economic benefits
for California, as appropriate.
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This bill :
1) Authorizes the ARB to require transportation fuel providers to
include minimum percentages, ranging from one-quarter of one
percent to two percent of their in-state fuel sales, of "very
low carbon transportation fuel."
2) Defines "very low carbon transportation fuel" to mean a liquid
or gaseous transportation fuel having no greater than 50
percent the carbon intensity of the closest comparable
petroleum fuel for that year, as specified.
3) Defines "indirect land use change emission" to mean the carbon
emissions associated with changes in agricultural activity
that result from the market-mediated effects of using an
agricultural commodity that is a good.
4) Specifies that the bill does not replace or modify any
existing fuel standards or requirements imposed under the
Low-Carbon Fuel Standard regulation.
5) Makes findings and declarations regarding low-carbon
transportation fuels.
COMMENTS :
1) Purpose of the bill . According to the author, "The LCFS seeks
to reduce the GHG emissions from the transportation sector by
reducing the carbon intensity of the fuels used in
transportation. This had two main elements, first the policy
directly capped average GHG emissions from the entire fuel
sector and second, the credit trading mechanism was meant to
incentivize the use of very low carbon fuels. The early
results from the program indicate that the second element,
promoting very low carbon fuel technology, has not occurred at
the desired rate. While the state has met its initial 1% GHG
reduction commitment, it has done so primarily using corn and
sugarcane ethanol and soybean biodiesel. These fuels reduce
GHGs by 10-30% compared to their petroleum equivalents, which
suffices in the short term but will not allow the state to
achieve its long term GHG reduction goals. A very small
fraction of the CA fuel market (around three quarters of one
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percent) is currently satisfied by fuels made from waste
products. These fuels have a very low carbon footprint but
there is an insufficient supply of useful waste products in
the state to meet broader GHG reduction goals.
"The main obstacle preventing other very low carbon fuels from
entering the market is access to capital. Building a
commercial-scale low carbon fuel production facility requires
hundreds of million dollars of capital. The market for low
carbon fuels is uncertain due to fluctuations in the petroleum
markets, changes in the regulatory landscape and the inherent
uncertainty involved when deploying new technology. Also,
current LCFS requirements can be met using cheap corn or
sugarcane ethanol or soybean biodiesel. Many prospective
producers have technology which has been demonstrated in the
lab or at small scale, but cannot obtain capital to build a
commercial-scale facility to demonstrate the viability of
their technology.
"AB 1992 seeks to increase the availability of capital for
prospective low-carbon fuel producers by guaranteeing that a
small fraction of the state's fuel market will be met with
very low-carbon fuels (defined as having no more than 50% the
GHG emissions as their closest comparable petroleum fuel, on a
per-unit-of-energy basis). This will signal to capital
providers that there will be a market for low carbon fuels,
even if they are not cost competitive in the short term."
2) Background .
LCFS . In January 2007, Governor Schwarzenegger issued
Executive Order S-01-07 in which he ordered the establishment
of a statewide goal of reducing the carbon intensity (CI) of
California's transportation fuels by at least 10% by 2020 and
ordered ARB to establish a low-carbon fuel standard (LCFS) for
the state. ARB adopted the LCFS regulation in April 2009, and
it took full effect a year later. In May 2009, ARB adopted its
AB 32 Scoping Plan to map out how to achieve the reduction in
GHG emissions by 2020, as required by AB 32. The Scoping Plan
included the LCFS as an early action measure and projected the
program to result in 15 million metric tons (MMT) of emissions
reductions, or about 20% of the GHG emissions reductions
needed to reach the 2020 GHG emissions target of 427 MMT.
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ARB staff designed the LCFS to reduce GHG emissions by
reducing the CI of transportation fuels used in California by
an average of 10% by the year 2020. The LCFS achieves a 10%
reduction in average CI by establishing an initial intensity
level for specified providers of transportation fuels
("regulated parties") and incrementally lowering the allowable
CI in each subsequent year. For example, modest targeted
reductions of 0.5 and 1.0% are required for 2012 and 2013,
respectively. The reductions become more substantial with
each year, such that by 2020, the 10% average reduction is
achieved. This reduction makes room for low-CI fuels to enter
the market. A regulated party needs to meet each year's
specified target, taking into account all of its
transportation fuels. If the reduction in intensity exceeds
the target, the provider earns a credit, which can be sold or
carried forward. The LCFS allows fuels like electricity,
hydrogen, and natural gas, which already meet the CI standards
through 2020, to generate LCFS credits that may be sold.
Regulated fuel providers, therefore, can meet their annual CI
levels through several compliance strategies: making low-GHG
fuels, such as biofuels made from waste products; carrying
forward credits from previous years from their own production
process; buying credits from other fuel producers; or reducing
the amount of fuel they sell.
A fuel provider meets the requirements of the LCFS if the
amount of credits at the end of the year is equal to, or
greater than, the deficits. A provider determines its credits
and deficits based on the amount of fuel sold, the CI of the
fuel, and the efficiency by which a vehicle converts the fuel
into useable energy. Under the LCFS, a regulated party's
compliance with the annual CI requirements is based on
end-of-year credit/deficit balancing.
Carbon intensity . Carbon intensity (CI) is a measure of the
direct and indirect GHG emissions associated with each of the
steps in the full life-cycle of a transportation fuel (also
referred to as the "well-to-wheels" for fossil fuels, or "seed
or field-to-wheels" for biofuels). The overall GHG
contribution from each particular step in the production and
delivery process is a function of the energy that step
requires. Thus, if a fuel that requires little energy to
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create, and produces low carbon emissions when consumed, has
to be transported significant distances for use, it may still
have a high life-cycle CI because of the high energy
requirements of transport.
For each fuel pathway, the LCFS requires the analysis of both
direct effects and indirect effects when determining the CI of
the fuel:
Direct effects: Direct effects take into account farming
practices (e.g., frequency and type of fertilizer used), crop
yields, harvesting practices, transportation of the feedstock,
the type of fuel production process used, its efficiency and
fuel use, the value of co-products generated, and the
transport and distribution of the fuel. Biofuels that are
energy-intensive to produce and distribute will have higher CI
values and be of less value when complying with the LCFS
standards.
Indirect effects: An indirect effect that generates
significant quantities of GHGs is land use change. A land use
change effect is initially triggered by a significant increase
in the demand for a crop-based biofuel. For example, when
farmland devoted to food and feed production is diverted to
the production of that biofuel crop, supplies of the displaced
food and feed crops are reduced. Supply reductions cause
prices to rise, which, in turn, stimulates increased
production. If that production takes place on land formerly
in non-agricultural uses, a land-use-change impact results.
The specific impact consists of the carbon released into the
atmosphere from the lost cover vegetation and disturbed soils
in the periods following the land use conversion.
These effects that are currently factored into the LCFS
program result in ethanol produced from food having a
significantly higher CI value than biofuels produced from
waste products or other types of fuels that are not crop or
fossil fuel based.
As of the 2nd quarter (Q2) of 2013, there were 25 percent more
LCFS credits than deficits on the market. Of the credits
available in Q2 of 2013, most were generated by low CI ethanol
(78 percent), with the next highest fractions generated from
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natural gas (10 percent) and biodiesel (8 percent).
Federal Fuel Standard. Enacted in 2005 as part of the Energy
Policy Act, the
Renewable Fuel Standard (RFS) is the nation's primary
renewable fuel policy. It requires conventional fuel refiners
to meet annual targets for renewable fuels. The RFS was
amended in 2007 to require 36 billion gallons of biofuel to be
used throughout the nation's transportation fuel supply by
2022 (RFS2). The RFS2 sets different volume requirements for
different classes of biofuel: conventional, advanced, and
cellulosic. In addition, under RFS2, each type of biofuel must
also achieve specific greenhouse gas reductions relative to
conventional fuels. Conventional ethanol (such as corn
ethanol) from new facilities must be 20% better than
conventional petroleum fuel on a greenhouse gas basis,
although much ethanol was grandfathered in and exempted from
meeting this requirement. Advanced biofuel must achieve a 50%
reduction relative to petroleum while cellulosic biofuel must
achieve a 60% greenhouse gas reduction.
3) LCFS lawsuits . In 2009 and 2010, three lawsuits were filed
against the LCFS by ethanol interests: two in federal court
and one in state court. The federal lawsuits were brought by
trade associations of ethanol producers and refiners who claim
that the LCFS is preempted under the Energy Independence and
Security Act of 2007 and violates the Commerce Clause of the
U.S. Constitution (e.g., by assigning corn ethanol from the
Midwest a CI value above that of corn ethanol made in
California). The combined federal lawsuit (Rocky Mountain
Farmers Union v. Goldstene) was heard by the Ninth Circuit
Court of Appeals, which considered ARB's appeal of several
adverse rulings and a preliminary injunction that were issued
by the lower federal court in Fresno in December 2011. In
April 2012, the Ninth Circuit granted ARB's request for a stay
of the preliminary injunction, which allowed ARB to resume
enforcement of the LCFS during the pendency of the lawsuit.
In September 2013, the Ninth Circuit ruled that the LCFS
provisions were not facially discriminatory, leaving the LCFS
in place while the plaintiffs petition for review by the U.S.
Supreme Court.
The state lawsuit (Poet, LLC v. California Air Resources
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Board), brought by a major ethanol producer, alleges that ARB
did not fully comply with the Administrative Procedure Act
(APA) and the California Environmental Quality Act (CEQA) when
adopting the LCFS regulation. In November 2011, the Fresno
Superior Court ruled in favor of ARB on all 14 causes of
action raised by the plaintiffs. Plaintiffs then appealed the
case to the Court of Appeal in Fresno, which found both APA
and CEQA defects with ARB's process of adopting the LCFS. As
a result, ARB has proposed adopting an alternative regulation
for diesel and readopting the LCFS regulation to comply with
the court's instructions. Meanwhile, the LCFS is frozen at its
2013 (1.0 percent CI reduction) level.
In addition to revising the regulation to comply with the
Court of Appeal ruling, ARB has proposed several other
modifications related to adjusting compliance schedules,
determining CI, cost containment in the credit market, and
other assorted issues.
4) What fuels are we talking about ? Biofuels can be produced
using various feedstocks and technologies. The most common
biofuels include ethanol produced from sugar or the starch
portion of plants (e.g. corn, sugarcane, and sugar beet)
Ethanol can also be produced from lignocellulosic materials,
such as green and agricultural waste products, and when
produced in this way, is termed cellulosic ethanol. The
commercialization of cellulosic ethanol has been significantly
constrained due to technical barriers including high costs of
pretreatment, necessary biochemical catalysts and conversion
processes. The US EPA recently lowered the amount of
cellulosic ethanol required in 2013 to meet the federal
Renewable Fuels Standard mandate for cellulosic ethanol from 6
million gallons to just over 800,000 gallons.
Another type of biofuel, biodiesel, is produced from used
cooking oil, corn oil by-product, or tallow. The primary
challenge of scaling up biodiesel production is the
availability of cropland for oil production to produce enough
biodiesel that would significantly replace fossil fuel
consumption.
Very low carbon fuels, as defined in AB 1992, capture liquid
or gaseous transportation fuels having no greater than 50
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percent the carbon intensity of the closest comparable
petroleum fuel for that year, as measured by LCFS Regulation.
According to the ARB, approved fuel and production pathways
that would qualify as very low carbon fuels under the bill
include renewable diesel produced from used cooking oil, corn
oil by-product, tallow, or fish oil, biomethane from
landfills, dairy digesters, and food and green waste digesters
and ethanol produced from molasses by-product.
Fuels meeting the AB 1992 definition made up .95% of the total
volume of fuels produced in 2013.
AB 1992 authorizes ARB to require transportation fuel
providers to supply anywhere from 0.25 to 2 %, as determined
by the ARB, of very low carbon fuels.
5) Closest comparable petroleum fuel . AB 1992 defines "very low
carbon transportation fuel" to mean a liquid or gaseous
transportation fuel having no greater than 50% the carbon
intensity of the closest comparable petroleum fuel for that
year. This definition is highly ambiguous regarding what
baseline low carbon fuels would be compared to in order to
qualify under this definition. Does "closest comparable
petroleum fuel" refer to the emissions, the composition, the
use, or other characteristics of the fuel? Natural gas,
although a fossil fuel, is not considered a petroleum-based
fuel. Would renewable natural gas be compared to fossil fuel
natural gas, or a petroleum product? Would fuel blends, with a
significant fraction primarily of a petroleum based fuel, be
considered a "closest comparable petroleum fuel" for the
purposes of this definition?
6) Policy questions . According to the author, the problem this
bill is trying to address is that advanced, low-carbon fuels
are struggling to come to market because they cannot obtain
capital to develop commercial scale facilities, and they
cannot obtain capital because there is too much uncertainty in
this area for financiers to be willing to lend or invest. This
bill attempts to address that issue by authorizing ARB to
require transportation fuel providers supply some fraction of
these very low carbon fuels.
If ARB should choose to implement the provisions of the bill,
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however, several policy questions arise. Specifically:
a) How will this bill fit within the structure of the
existing LCFS program? Will this program complement the
existing LCFS, or result in more complexity without
commensurate benefit, by creating a hybrid program, part
fuel mandate and part performance-based standard?
b) LCFS was adopted through regulation by the ARB pursuant
to their authority under AB 32 and has not been codified in
statute, although there have been several attempts. AB 1992
potentially creates a low carbon fuels program distinct
from the LCFS regulation. Should this bill be chaptered,
could the provisions of AB 1992 serve as justification for
further legal challenges for the removal or replacement of
the LCFS?
c) AB 1992 specifies that the provisions of the bill do not
replace or modify any existing fuels standards or
requirements imposed under the LCFS regulation. Does this
provision interfere with ARB's ability to potentially
incorporate AB 1992's program into their existing
regulatory scheme under AB 1992?
d) LCFS currently provides incentives to produce low-carbon
transportation fuel, since the lower the carbon intensity,
the more credits the producer can generate and then sell to
other entities that are unable to produce fuels with the
requisite carbon intensity. Will a 0.25 to 2% mandate be
sufficient to provide an additional market push for very
low carbon fuels, above and beyond LCFS?
e) There are numerous examples of mandates to achieve
certain environmental goals that have resulted in
unintended consequences. For example, MTBE as an additive
in gasoline to improve air quality, but was later found to
seep into soil and water requiring extensive cleanups. As
another example, biofuels mandates to reduce fossil fuel
consumption, like the federal RFS and other similar
international policies, have been implicated in numerous
articles as potential contributors to deforestation and
food shortages, since crops are diverted for fuel purposes,
and other land is adapted to accommodate additional crops
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for consumption.
Are there unintended consequences in mandating the use of a
certain percentage of a very-low carbon transportation fuel
without other provisions requiring the program consider and
ensure environmental, social and economic sustainability?
7) Double Referral to Senate Transportation and Housing
Committee . If this measure is approved by the Senate
Environmental Quality Committee, the do pass motion must
include the action to re-refer the bill to the Senate
Transportation and Housing Committee.
SOURCE : Author
SUPPORT : California Biodiesel Alliance
California Electric Transportation Coalition
Clean Energy
The Coalition for Renewable Natural Gas
Environmental Defense Fund
Natural Resource Defense Counsel
OPPOSITION : California Manufacturers and Technology
Association
Western States Petroleum Association