The California Low Carbon Fuel Standard

Reducing the greenhouse gases (GHGs) associated with fuels used in a jurisdiction should help lower GHG emissions. That is the aim of a low carbon fuel standard (LCFS), an approach being widely adopted throughout North America as part of the climate change initiatives of state, provincial and other governments.

Low Carbon Fuel Standards

An LCFS is a performance standard that prescribes a reduced GHG emission intensity overall for fuels used in a jurisdiction. Usually GHG emissions are calculated for LCFS purposes using a full fuel cycle analysis, sometimes referred to as a “wells-to-wheels” analysis; this takes into account GHGs at all stages in each fuel's lifecycle, including the production (extraction, processing or refining), transportation, distribution and use of the fuel.¹ LCFS would set an overall maximum allowable level of GHG emissions per unit of fuel energy produced, and generally incorporates flexibility mechanisms allowing for the trading of emissions credits among fuel suppliers which are below or above that level. The allowable level of GHG emissions are to be reduced each year as required to meet the overall GHG emission reduction objective. It is hoped that by adopting an LCFS, overall emissions can be lowered on a cost efficient basis.

The California LCFS

The California LCFS was initiated through Executive Order S-1-07, issued on January 18, 2007. The Order calls for a reduction in the carbon intensity of California's transportation fuels by at least 10 percent by 2020. The California Air Resources Board (ARB) is tasked with putting the new LCFS into effect through regulation. The California LCFS is to be measured on the full fuels cycle basis referred to above, “and may be met through market-based methods by which Providers exceeding the performance required by a LCFS shall receive credits that may be applied to future obligations or traded to Providers not meeting the LCFS.”²

On April 23, 2009, the ARB approved a regulation to implement the California LCFS. The Regulation will apply to any transportation fuel that is sold, supplied or offered for sale in California, and to any person who, as a regulated party (defined in s. 95481 and specified in s. 95484(a)) is responsible for a transportation fuel in a calendar year. The types of transportation fuels to which the LCFS applies include (see s. 95480.1(a)) California reformulated gasoline, California diesel fuel, fossil compressed natural gas (CNG) or fossil liquefied natural gas (LNG), biogas CNG or biogas LNG, electricity, compressed or liquefied hydrogen, a fuel blend containing hydrogen, a fuel blend containing greater than 10 percent ethanol by volume, a fuel blend containing biomass-based diesel, denatured fuel ethanol, neat biomass-based diesel, and any other liquid or non-liquid fuel.

Certain alternative fuels—electricity, compressed and liquefied hydrogen, a hydrogen blend, fossil CNG derived from North American sources, biogas CNG, and biogas LNG (see s. 95480.1(b))—are presumed to be compliant with the carbon intensity standards set out in the regulation through December 31, 2020, but may opt-in to the LCFS if they choose to generate credits. By opting-in, a party becomes a regulated party and must meet the LCFS reporting obligations and requirements.

The regulation uses 2010 as a base year but the only requirements for 2010 are to report. Carbon intensity reduction requirements begin in 2011 with a required one-quarter-percent reduction over 2010 levels in that year, and then gradually increasing to a 10-percent reduction over 2010 levels by 2020 (meeting the 2020 target).

LCFS Adoption and Implementation in California

The ARB has identified the LCFS as an early action item with 2010 as the implementation target. The current timeline is as follows:

January 1, 2010 – LCFS Regulation comes into effect, requiring all regulated parties to meet reporting standards that year including quarterly progress reports (May 31, August 31, November 30, February 28), as well as annual compliance reports (due on April 30th following the reporting year) for 2010 and each year thereafter. There will be no reduction requirements until 2011.

January 1, 2011 (and for each year thereafter) – Regulated parties must meet the average carbon intensity requirements set forth in Table 1 and Table 2 of s. 95482 (as described above) for their transportation gasoline and diesel fuel, respectively, in each calendar year.

Implications of the LCFS for Canada's Oil Sands

The California LCFS could have significant impacts on Canada's oil sands. In an April 2009 letter to California Gov. Arnold Schwarzenegger, Canadian federal Natural Resources Minister Lisa Raitt said the state's LCFS “discriminated” against oil sands and “could be perceived as an unfair trade barrier” between the two countries.³ The lifecycle emissions of oil sands crude is higher than conventional oil,⁴ perhaps by up to 30 percent on a “wells-to-wheels” basis, creating a barrier for the Canadian oil sands industry to send its product to the American market. The actions to introduce an LCFS in California may be followed in other jurisdictions.⁵ These LCFS actions could force oil sands producers to divert their exports to markets that do not have such standards, or to invest in expensive abatement technology, beyond what Canadian federal and provincial rules demand.⁶

What can be done?

Canadian oil sands producers and other interested persons are canvassing alternatives including lobbying both in California, federally in the U.S., at other state and industry levels and with Canadian governments and industry participants. As well, legal challenges on a constitutional basis in the United States or by the Canadian government under the WTO or NAFTA rules or even a case under Chapter 11 of NAFTA by one or more aggrieved plaintiffs are possible. We will continue to monitor these developments.

Notes

1. Full Fuel Cycle Assessment Well to Wheels Energy Inputs, Emissions, and Water Impacts (February 2007), online: http://www.energy.ca.gov/2007publications/CEC-600-2007-004/CEC-600-2007-004-D.PDF
2. Office of the Governor of the State of California, Executive Order S-01-07, online: http://gov.ca.gov/executive-order/5172/ 
3. Lisa Raitt quoted in Sheldon Alberts', “U.S. low-carbon bill could put whammy on oilsands” CanWest News. Don Mills, Ont.: Apr. 28, 2009.
4. Ibid.
5. Members of the Midwest Governors Association have signed an “Energy Security and Climate Stewardship Platform and Greenhouse Gas Accord” that includes the development of low carbon fuel standards. Signatories include: Wisconsin, Minnesota, Illinois, Indiana, Iowa, Michigan, Kansas, Ohio, South Dakota, and Manitoba.
   
   A group of northeastern states has agreed to reduce greenhouse gas emissions from transportation fuels and other sources by developing a regional low carbon fuel standard. Participating are: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont.
   
   Both British Columbia and Ontario have committed to developing an LCFS in line with California's.
6. Shawn McCarthy, “California rule could hit oil sands producers” The Globe and Mail. Toronto, Ont.: Apr. 25, 2009. pg. B5.