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California Approves Low-Carbon Fuel Standard

Beveridge & Diamond, P.C., January 15, 2010

The California Air Resources Board’s (“CARB”) Low Carbon Fuel Standard (“LCFS”) was approved on January 12, 2010, bringing into effect new “carbon intensity” requirements for motor vehicle transportation fuel providers in the state.  Developed and adopted by CARB in 2009 (see Beveridge & Diamond, P.C., “California Adopts First Low-Carbon Fuel Standard, available here), implementation of the LCFS was delayed for several months pending final approval by the California Office of Administrative Law (“OAL”).  The final version of the LCFS can be viewed here.

A.  California’s New Low Carbon Fuel Requirements

The LCFS aims to reduce “greenhouse gas emissions by reducing the full fuel-cycle, carbon intensity of the transportation fuel used in California.”  The final LCFS regulations require transportation fuel producers and importers in California to reduce incrementally the average carbon intensity of their fuels every year from 2010 until 2020, at which point the fuels must reflect 10 percent less carbon intensity than the 2010 baseline.  The standard is designed to achieve 16 million tons of greenhouse gas (“GHG”) emission reductions over the same period.

The standard utilizes a credit-trading system similar to “cap-and-trade” to ensure compliance.  It establishes a carbon intensity baseline derived from the intensity of E10 Gasoline (gasoline containing 10 percent ethanol).  Companies that produce fuels with less carbon intensity than the E10 baseline receive credits which then can be sold to those regulated parties producing fuels with higher carbon intensities.  Ultimately, fuel providers must demonstrate that the mix of fuels they supply meets the LCFS intensity standards for each annual compliance period.  If a company fails to meet the standard for two consecutive years, it will be subject to penalties.

Controversially, California’s carbon intensity standards take into account “indirect” land-use changes resulting from increased domestic demand for biofuels — including land use changes abroad — in addition to lifecycle GHG emissions associated with farming practices, energy used to harvest and transport biofuel crops, energy used in the conversion of crop sugars into biofuels, and distribution, delivery and use of the finished fuel by the consumer.  Under the LCFS analysis, most corn-based ethanol will have a carbon intensity that is comparable to — or even higher — than the E10 baseline, prompting serious alarm about impacts of California’s new requirements on the domestic ethanol industry.  Renewable fuel industry along with state and local farm groups filed a federal lawsuit in December 2009 to block implementation of California’s regulations, charging that the LCFS violates the U.S. Constitution.  Rocky Mountain Farmers Union, et. al. v. Goldstene, Case No. 1:09-cv-02234-LJO-DLB (E.D.C.A. filed December 23, 2009).  The case is pending.  A copy of the complaint is available here.

B.  Other U.S. Renewable Fuel Initiatives

Adoption of the LCFS in California comes as the U.S. Environmental Protection Agency (“EPA”) prepares to promulgate its final regulations under the federal Renewable Fuel Standard (“RFS”) program.  EPA sent its regulations to the White House Office of Management and Budget (“OMB”) for final review on December 19, 2009.  Required by the Energy Independence and Security Act of 2007 (“EISA”) to have the new rules in place by December 19, 2008, EPA’s proposal was delayed in large part due to the complexity of adding lifecycle assessments to the eligibility determination for renewable fuels. (For more information about the federal RFS program, see Beveridge & Diamond, “EPA Proposes New Renewable Fuel Standard Regulation Using Lifecycle Greenhouse Gas Analysis,” available here.)

At the same time, 11 Northeast and Mid-Atlantic states — the ten members of the Regional Greenhouse Gas Initiative (“RGGI”), as well as Pennsylvania — are committing themselves to the development of their own low carbon fuel standard.  The RGGI states signed a Memorandum of Understanding on December 30, 2009, agreeing to include indirect land use changes in their evaluation of lifecycle carbon intensities similar to California’s and planning to develop a proposed framework by early 2011.  While the agreement doesn’t set forth specific carbon intensity targets, it expresses a commitment to “monitor” low carbon fuel standards in other states and may very well be shaped both by the California LCFS and the pending court challenge.  A similar regional low carbon fuel standard is also under consideration by Midwestern states.

For a printable PDF of this article, please click here.

For more information, please contact Nico van Aelstyn at (415) 262-4008, nvanaelstyn@bdlaw.com, Alan J. Sachs at (410) 230-1345 asachs@bdlaw.com, or Daniel M. Brian at (415) 262-4016, dbrian@bdlaw.com.  

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