California LCFS ruling to go to wire

Felicity Carus

A bitter and long-running legal challenge to block a world-first standard to reduce the carbon intensity of transport fuels will be ruled on by a Californian appeals court this summer...

But what started as a skirmish between energy industry heavyweights on the western flank of the U.S., threatens to break out into an all-out brawl across the country.

Clean energy champions at the California Air Resources Board (Carb) are in one corner and lobbyists for petroleum refiners and Midwestern ethanol producers are the challengers.

Former Governor Arnold Schwarzenegger first threw down the gauntlet to the energy industry when he enacted the Global Warming Solutions Act in 2006.

The so-called AB32 legislation aims to reduce greenhouse gas emissions in the world's eighth largest economy by 25% by 2020 and two key mechanisms were developed to achieve these goals: a cap and trade programme and the Low Carbon Fuel Standard.

California's LCFS was designed to reduce transportation emissions by at least 10% by 2020 and spark investment in advanced biofuels, electric vehicles, natural gas and hydrogen and proponents now hope it will kick-start the Golden State's now-flagging economy.

Professor Daniel Sperling, director at the Institute of Transportation Studies, UC Davies, who helped design the standard, said:

"The goal is to stimulate investment and innovation in low carbon alternatives and to leave it to industry and the market to figure out what types of innovation and investment are most cost effective and desirable."

But refiners and corn ethanol producers outside California claim that the standard places "burdens interstate commerce by effectively closing the California markets to corn ethanol from other States" and will not result in "any measurable reduction of the effects of global warming".

"We don't like this programme and we don't want to see it implemented," said Michael Whatley, executive vice president at the Consumer Energy Alliance, one of the lobbying organisations behind the legal action. "California already has the highest gas prices in the country and the LCFS would double prices and bring the economy to its knees."

Carb estimates that the standard will see an estimated capital investment of $8.5bn for construction of biorefineries by 2020 and reduce emissions by 16 million tonnes from the transportation sector, which accounts for around 38% of the state's emissions.

But the Consumer Energy has joined forces with the Rocky Mountain Farmers Union, Redwood County Minnesota Corn and Soybean Growers and the American Petrochemical & Refiners Association and American Trucking Associations to challenge that claim.

The CEA commissioned a study last year from IHS CERA and IHS Global Insight research to prevent the progressive adoption of a Clean Fuel Standard (CFS) in north-eastern states similar to California's.

The report found that proposals for a Clean Fuel Standard (CFS) similar to California's for the New England and Middle Atlantic states are "critically flawed".

It also cited a National Academy of Sciences report that claimed cellulosic biofuels would only be economic at a crude oil price of US$191/barrel or at a carbon price of approximately US$120 per metric tonne.

High costs of compliance and the lack of supply of advanced biofuels could send prices of gasoline skyrocketing between 90% and 170% by 2025, said Whatley.

"Although we strongly support using advanced biofuels and natural gas in vehicles and EVs, when the marketplace is not there, no matter what the incentives are, if it's not going to be there in the volumes necessary to meet the standard, setting up a programme like California's is really a problem."

In the latest round of sparring between the two sides, an injunction granted by Judge O'Neill was lifted last month, which will allow Carb to continue implementation of the standard.

The lifting of the injunction was far from a sucker punch landed on the lobbyists, but it was certainly a black eye as it suggests a final ruling in the agency's favour.

Chris Malins, clean fuels analyst at the International Council on Clean Transportation, said: "The ruling was taken as a positive sign. Clearly if this judge thought Carb had no case, he would have been unlikely to have lift the injunction. It's a clear indication that there is a serious and important case to be heard."

In early 2010, energy industry petitioners first launched their "commerce clause" legal challenge against the LCFS on the grounds that it discriminated against out-of-state petroleum and ethanol suppliers.

Last December, Judge Lawrence O'Neill agreed with the plaintiffs that the LCFS: "impermissibly discriminates" in favor of California corn ethanol and crude oil and against ethanol and crude oils from outside of California.

He also agreed that Carb was over-reaching its authority by attempting to regulate out of state businesses because the agency included "well to wheel" and "seed to wheel" emissions from transport into the state and the electricity sources used in the production of fuels.

Carb's calculations give Midwest corn ethanol made with 100% coal-fired electricity a carbon intensity score of 120.99 gCO2e/MJ, whereas its Californian counterpart, which uses natural gas-fired electricity, scores 88.90 gCO2e/MJ. The model would also make Canadian tar sands too expensive to import into California - a de facto economic prohibition that refiners are keen to resist.

The model also plays to this home advantage as California's electricity grid is predominantly gas-powered with fewer emissions than coal-fired Midwestern states.

David Pettit, director of the southern California air programme for the Natural Resources Defense Council, dismisses claims of discrimination:

"It sounds good as a soundbite but when you look at the science, it is a phony issue. The one single thing that most separates the Midwest corn ethanol folks from California is the energy mix that they use in the Midwest to fuel and power their plants – and it's largely coal based.

"But the model doesn't discriminate between one state or another. It assigns high score to facilities that are run by coal because of the way global warming gases work it doesn't really matter where they're emitted in California, Iowa or Russia."

But not all sectors of the energy industry agree with the powerful consortium of petitioners. A major reason for the lifting of the injunction last month was the pushback from lower-carbon fuel companies.

Those who complained of disruptions in demand and investment due to uncertainty created by the injunction included advanced biofuels company Solazyme, Inbicon, a biomass ethanol subsidiary of Dong Energy in Denmark, biodiesel producer Propel Fuels, Natural Gas Vehicle (NGV) company Clean Energy Renewable Fuels, Iogen, a cellulosic biofuels producer and Imperium Renewables, which makes low carbon biodiesel from canola and soybean.

In a written submission to appeal the injunction Imperium Renewables told the court that it could be forced to cut its workforce and ambitions to supply 45% of its production capacity into California this year after raising US$155m in private equity.

"LCFS has been and continues to be a major component of the justification for this investment… [the injunction] negatively affect[s] both the existing businesses and potential to bring new and more viable advanced biofuels to the market in California, and to the nation as a whole."

If California's standard survives legal challenge, other states are preparing to follow.

"In terms of the national importance of the LCFS for this type of regulation," said Malins, "you can't really overstate how important the successful implementation of the California standard is as the leading example of this type of standard."

Oregon last week took the lifting of the injunction as a signal that it was safe to proceed with its proposals, while Washington state watches the legal action closely.

Eleven north-east and Mid-Atlantic states had also joined together to develop clean fuel standards similar to California's. But a political shift since the mid-term elections in November 2010 has seen Pennsylvania, Maine, New Hampshire and New Jersey distance themselves from the standard. Beyond US borders, EU policymakers are also closely watching what happens in California this summer as they develop the EU Fuel Quality Directive.

Under Chairwoman Mary Nichols, Carb very often punches above its weight when it comes to pioneering energy regulations. But even if Carb is declared champion by the courts this summer, the agency may be called back to slug it out again as the Consumer Energy Alliance and co-petitioners have promised to take their challenge to the supreme court.

But Sperling predicts that Carb is very likely to win overall: "Maybe California will have to make some minor adjustments in how the rules were structured, but I just can't imagine that they would disallow the whole programme.

"Whenever you try to incentivise or motivate or require new technologies or regulations there is going to be some affect on the market and cost. It's a very complex dynamic that is difficult to anticipate.

"But certainly those that are able to produce lower carbon energy at a good cost are going to be winners. And those that can't will be losers."

Share this article

More services


This article is featured in:
Policy, investment and markets




21 May 2012
One option not mentioned is moving to methanol, at first made from natural gas (with a 5-7% CO2 reduction), but then increasingly made using biogas from California's dairy, and pig, and chicken farms. Methanol made this way is carbon neutral. Furthermore, if natural gas is mixed with CO2 (for example the natural gas from the wells near Bakersfield naturally contains CO2), or if biogas (methane + CO2) is used in reactors heated by concentrating the sun's energy, the methanol produced from the resulting syngas will be carbon negative and have 30% more energy than the methane input. California has had a very positive experience using methanol in vehicles. It can do it again. The amount of bio-methanol can gradually be increased in the methanol that is distributed. It will be a big win for farmers with waste problems, for motorist as the cost of the fuel will be less, for all the residents of California because of the cleaner air, and for the world's GHG issues. And it will be a major contributor to jobs in the state. This approach can be planned to meet and/or exceed the LCFS timeline.

Note: The majority of comments posted are created by members of the public. The views expressed are theirs and unless specifically stated are not those Elsevier Ltd. We are not responsible for any content posted by members of the public or content of any third party sites that are accessible through this site. Any links to third party websites from this website do not amount to any endorsement of that site by the Elsevier Ltd and any use of that site by you is at your own risk. For further information, please refer to our Terms & Conditions.