BILL ANALYSIS �
SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: AB 1992
SENATOR MARK DESAULNIER, CHAIRMAN AUTHOR: Quirk
VERSION: 6/5/14
Analysis by: Nathan Phillips FISCAL: YES
Hearing date: June 26, 2014
SUBJECT:
Very low-carbon transportation fuels
DESCRIPTION:
This bill permits the California Air Resources Board (ARB) to
establish a very low-carbon fuel (VLCF) market program, in which
transportation fuel providers could be required to include in
their sales a specified percentage of VLCFs, defined as having
no greater than 50% the carbon intensity of the closest
comparable petroleum fuel.
ANALYSIS:
AB 32
State law assigns the ARB with primary responsibility for
implementing California's air quality and greenhouse gas (GHG)
emission policies. State law gives ARB authority to control
mobile source air pollution, including the adoption of rules for
the reduction of harmful vehicle emissions and the specification
of vehicular fuel composition. In 2006, the Legislature passed
and the governor signed AB 32 (N��ez and Pavley), Chapter 488,
to establish a statewide GHG emissions limit such that by 2020
California shall reduce its GHG emissions to the level they were
at in 1990.
AB 32 requires the ARB, among other things, to:
Inventory GHG emissions in California. (ARB's measurement
shows that transportation accounts for 38% of GHG emissions in
the state.)
Implement regulations and impose fees that achieve the maximum
feasible and cost-effective reduction in GHG emissions.
Identify and adopt regulations for discrete early actions to
reduce GHG emissions.
AB 1992 (QUIRK) Page 2
ARB has initiated multi-faceted GHG emissions strategies since
the 2006 enactment of AB 32. Those strategies combine
market-based regulatory approaches, other regulations, voluntary
measures, fees, policies, incentives, and programs, including
nine discrete early actions.
Low-Carbon Fuel Standard
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 of California's
transportation fuels by at least 10 percent 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. The LCFS consists of two
elements: a cap on total GHG emissions from the entire fuel
sector, and a carbon credit-trading mechanism that incentivizes
the production and use of low-carbon fuels.
ARB staff designed the LCFS to reduce GHG emissions by reducing
the carbon intensity (CI) of transportation fuels used in
California by an average of 10% by the year 2020. CI is a
measure of the direct and indirect GHG emissions associated with
each of the steps in the full fuel-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 produce results in low
carbon emissions when consumed, but has to be trucked a long way
to market, it can still have a high fuel-cycle CI because of the
high energy requirements of getting it to market.
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
alternative fuels to enter the market.
A regulated party's overall CI for its transportation fuels
AB 1992 (QUIRK) Page 3
needs to meet each year's specified CI level target. 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
Reducing the amount of fuel they sell
A fuel provider would meet the CI 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. Fuel providers may retain and trade
credits so that they can meet their assigned obligations.
Under the LCFS, a regulated party's compliance with the annual
CI requirements is based on end-of-year credit/deficit
balancing.
This bill:
1)Authorizes ARB to require transportation fuel suppliers to
include minimum percentages ranging from 0.25% to 2%, in
energy equivalent units, of VLCF
2)Defines VLCF as fuel having a CI no greater than 50% of the
closest comparable petroleum fuel for that year, as measured
by the LCFS methodology
3)Requires CI to include the indirect land-use emissions of GHGs
that result from changes in agricultural activity due to
production of VLCFs
4)Provides that the bill shall become inoperative five years
after ARB determines that VLCFs have reached 2% of state
transportation fuel sales
AB 1992 (QUIRK) Page 4
COMMENTS:
1.Purpose . This bill is intended to provide an initial stimulus
to make a VLCF market viable and self-sustaining in the face
of market uncertainty and barriers to entry. By guaranteeing
a market share for very low-carbon fuels, the intent of this
bill is to encourage capital investments that allow
technologies to deploy at a scale that allows them to
establish, grow, and compete successfully within the broader
low-carbon fuels market.
2.How much of a production nudge is needed ? This bill specifies
a sales mandate of between 0.25% and 2.0% to stimulate the
VLCF market. According to ARB, VLCFs have already achieved
0.95% of the total volume of fuels produced in the state in
2013, implying that sales of VLCF has already quadrupled the
lower limit of this bill's VLCF sales mandate. This is not a
strictly correct comparison because the figure cited for 2013
is on a volume basis, whereas this bill specifies mandated
sales percentages on an energy-content basis. Nevertheless,
considering the volumetric energy densities of biodiesel,
ethanol, and liquefied biomethane compared to gasoline, the
energy contribution of VLCFs may have already exceeded the
0.5% - 0.75% range, two to three times greater than the lower
sales limit specified in this bill. According to ARB, the 2%
limit specified in this bill is likely to be achieved within
the next two years. This raises a question of whether this
bill, with the percentages of VLCF sales as specified, is
necessary, and the degree to which existing incentives are
already stimulating a VLCF market in the way envisioned in
this bill.
3.Complications of LCF and VLCF regulation . Lawsuits are
complicating implementation of the LCFS program, even as it
has passed the halfway point of its period of effect. This
makes for an uncertain time in which to introduce a new class
of low-carbon fuels. Evidencing the potentially inconvenient
timing and complications presented by this bill, ARB has
recently proposed, in draft form, reformulated fuel pathways,
revisions, and re-arrangement of LCFS regulatory language.
Proposed draft LCFS reformulations include different tiers of
fuel pathways that cross-cut the VLCF categories proposed in
this bill. Although the author has taken an amendment that
declares that provisions in this bill do not replace or modify
provisions of the LCFS, it is not clear how VLCFs can be
cleanly separated from their current and potentially changing
AB 1992 (QUIRK) Page 5
role in the LCFS. Moreover, should the LCFS be reformulated
based on responses to lawsuits or for other reasons, a VLCF
standard could potentially come into conflict or competition
with the LCFS.
4.Different technologies scale differently . Cellulosic biofuel,
biogas, and biodiesel are all VLCF candidates, but potentially
deploy successfully at different scales. Biogas (refined as
bio-methane) and biodiesel tend to be more inherently scalable
technologies, partially because the feedstocks are diverse,
can be collected and aggregated from small to large scales,
and originate in and around population centers. Cellulosic
biofuel production, on the other hand, requires a relatively
larger minimal scale to be economically and technically
viable, and a large agricultural setting. Successful market
scalability may be achieved at lower levels of mandated
production for biogas or biodiesel than for cellulosic
biofuel. This bill does not distinguish among VLCFs in this
respect, which may have the consequence of favoring more
inherently scalable VLCFs that least need the market
guarantee. While policies that are agnostic in 'picking
winners' have merit, if the author's intent is to include
cellulosic biofuels among the VLCFs to be guaranteed market
entry, it may be necessary to spell out specific mandates for
that technology.
5.Why isn't electricity a VLCF candidate ? This bill defines
VLCFs as "liquid or gaseous," but the ARB LCFS includes
electricity, raising a question of why electricity should not
be included in this bill as a candidate VLCF. Moreover, the
author effectively invites electricity into consideration as a
VLCF by determining fuel amounts based not on volume, but on
energy-equivalent units, so that the CI associated with a
kW-hour of electrical energy can be directly compared with the
CI associated with an equivalent kW-hour of any other fuel.
Support letters for this bill from electric vehicle advocates
were contingent on an amendment (which was taken) to make
clear that this bill's provisions do not interfere with LCFS
regulations, and this support indicates that this bill does
not appear to undercut the state's incentives and promotion of
electricity as a vehicle fuel through its LCFS program.
However, to the degree electricity succeeds as a vehicle fuel,
it will tend to suppress the market share of this bill's
electricity-excluding VLCFs. This bill asymmetrically
excludes electricity from consideration as a VLCF, while
implicitly including it in the total state vehicle fuel
AB 1992 (QUIRK) Page 6
production that it seeks to penetrate.
6.Legislating regulation or legislative intention ? ARB, having
been granted broad authority by the Legislature, created the
LCFS as a regulation, and already has authority to include the
provisions of this bill within the LCFS, or to create the VLCF
program proposed in this bill. This bill is thus not
necessary as a legislative directive. However, that does not
mean that this bill is not beneficial as a statement of
legislative intent. The bill's finding that existing
incentives have not resulted in sufficient development of LCFs
may have validity with respect to cellulosic ethanol
production, if not for the other VLCFs. This bill may serve a
beneficial purpose in declaring the legislature's intent to
stimulate a broader class of VLCFs than are currently
succeeding under the existing LCFS.
7.Technical Amendment . By most definitions, including that of
the federal Energy Information Administration, petroleum is a
liquid fossil fuel. This bill defines VLCFs in relation to
petroleum fuels, which is problematic for the consideration of
gaseous VLCFs. The author may wish to amend this bill to
replace "petroleum" with "fossil."
Assembly Votes:
Floor: 47-26
Appr: 12-5
Nat Res: 5-3
AB 1992 (QUIRK) Page 7
POSITIONS: (Communicated to the committee before noon on
Monday,
June 23, 2014.)
SUPPORT: California Biodiesel Alliance
California Electric Transportation Coalition
Clean Energy
The Coalition for Renewable Natural Gas
Environmental Defense Fund
Natural Resources Defense Council
Western States Petroleum Association
OPPOSED: California Manufacturers and Technology
Association
Western States Petroleum Association