Energy Exchange

In the past two weeks, California’s California Low Carbon Fuel Standard (LCFS) received a heavy dose of positive news: strong support from major companies to develop cleaner transportation fuel options and solid evidence to prove the standard is working.

On April 2^nd, major business interests and non-profit organizations across the state filed four separate briefs supporting the LCFS in the state Appeals Court in Fresno. The briefs, filed in response to a letter from the court in February, say definitively that the LCFS is a necessary program for California because it creates a market signal for new, cleaner fuels and solutions that can grow California’s economy and improve air quality.

The impressive diversity of interests weighing in is a who’s-who list of energy giants, including the nation’s largest supplier of natural gas for vehicles (Clean Energy), a 108-year old utility with 15 million customers (Pacific Gas & Electric), a consortium of alternative diesel companies (National Biodiesel Board and the California Biodiesel Alliance), and a coalition of five environmental organizations.

Notable excerpts from the briefs include:

With the impetus of the LCFS, the biodiesel industry in California is poised to triple in the next few years with substantial investments and new jobs in many of California’s most economically disadvantaged areas.

– The National Biodiesel Board/California Biodiesel Alliance

Companies with the potential to exceed this target… can sell credits to regulated entities who can’t…creating a strong financial incentive for lower-carbon fuel innovation.

This is why the LCFS is so important- it provides a long term investment signal to create a robust alternative fuel market in a reasonable timeframe.

– Clean Energy

PG&E supports the California Air Resources Board (CARB) in its efforts to preserve the LCFS…the LCFS is an important part of the overall California strategy to reduce greenhouse gas emissions, contributing 16 million metric tons of reductions…with a significant disruption to the LCFS program, it will make it less likely that California will reach its GHG emission reductions goals.

– Pacific Gas & Electric

The LCFS encourages companies to invest in low-carbon fuels to meet increasingly stringent performance targets. Based on statements from alternative fueling industries and the CARB LCFS Fourth Quarterly 2012 Update, even at this early stage of implementation, the LCFS has resulted in rising quantities of lower carbon fuels being consumed in California and the market is rewarding investments in cutting edge, low-carbon fuels.

– NGO Coalition that includes American Lung Association, Coalition for Clean Air, Conservation Law Foundation, EDF, and the Sierra Club

In addition to the legal filings, California also released its latest progress report on LCFS implementationin March showing growth in low carbon fuel deliveries to the state. Credits from the cleanest biofuels have grown by 300% in just nine months, and the data shows that regulated companies have over-complied with the standard by 45% — that’s more than a million tons over the past two years.

Reports have also begun surfacing that major deals for bulk volumes of low carbon fuels are on the horizon. For example, Neste Oil submitted a letter to the California State Senate stating they have already delivered commercial volumes of renewable diesel from tallow (an ultra-low carbon fuel) to California and “expects to deliver approximately a hundred million gallons of NExBTL renewable diesel fuel into California this year.”

In a similar story, San Diego-based Sapphire Energy recently entered into its first commercial agreement for “green crude” (made from algae) sales – an agreement with oil giant Tesoro. According to Sapphire’s president, “This moment is enormously important for the industry as it validates the benefits and advantages of [our] crude, and confirms its place as a market-viable, refiner-ready, renewable crude oil solution.” In a story on Sapphire’s website, the new partnership with Tesoro was described as potentially helping supply clean energy to meet the demand created by new fuel standards, including California’s Low Carbon Fuel Standard.

Implementation of the LCFS is still in the early stages, but in just over two years the standard has started to deliver tangible economic and environmental benefits. The regulation is poised to change a fossil-fuel dependent transportation system that has been developed over the last one hundred years and that costs California drivers almost one hundred billion dollars every year – most of which leaves our state (and nation) the moment it’s spent.

Using Californian ingenuity and the American entrepreneurial engine, we can change the status quo – toward a more sustainable system that doesn’t poison the air and pinch our pocketbooks.

Three months ago California officially opened its world class cap-and-trade program for greenhouse gas pollution – establishing the first ever carbon price in the Golden State and leading the nation on a path toward true climate change action.

Earlier this week, California’s march toward meeting emissions reduction goals was bolstered with a second auction of carbon allowances in the cap-and-trade program, and just today, the results of that auction were released. All signs point to marked success for the program in the second auction, and suggest California is on its way toward fully realizing the goals of the Global Warming Solutions Act of 2006 (AB 32).

As shown by the results released at noon today, overall participation in the February 19, 2013 auction was high, with almost 2 ½ times more credits bid on than were sold. Initial reports show this has beaten all market expectations, and the clearing price of $13.62 suggests a strong belief in the longevity of the overall program.

By selling more than 7 million state-controlled carbon allowances, California’s second auction also raised about $83.5 million – money that will be used to advance the goals of AB 32. Furthermore, since recent legislation was passed in 2012 that requires at least 25% of the auction proceeds to benefit disadvantaged communities, this auction will inspire more than $20 million in investments that can benefit Californians in need.

With respect to who participated in the auction, market statistics show there was approximately a 25% increase in the number of qualified auction participants as compared to the last auction. This increased participation was no doubt partly responsible for the fact that 2013 credits were purchased by a diverse array of bidders (as opposed to credit purchases being concentrated in a few entities). This diversity of participation, coupled with the strong regulatory oversight being used by state agencies and expert market monitors is an important guard against market manipulation and is yet another example of how this market looks to be strong and diverse, a good sign moving forward.

In addition to auctioning off credits that can be used for emissions obligations in 2013, California’s second auction also offered advance vintage credits that can be used for compliance starting in three years (2016). Based on the sales volume of these credits (greater than 4.4 million sold), there continues to be moderate demand going forward for future vintage credits, another indication of the belief of the programs longevity.

A California carbon price opens the door for cleaner energy and clean air, as the State finally has an ongoing cost that can be attributed to carbon pollution. California’s next auction will occur in 3 months, though investments made now can be assured their carbon reduction value can be both calculated and counted on. As shown by today’s auction results, while much of the nation has waited to take concrete action against climate change, California’s train is out of the station and picking up steam every day.

California’s landmark clean energy bill AB 32 received a big boost today from the San Francisco California Superior Court in the case Citizen’s Climate Lobby et. al., v. California Air Resources Board.

The Court’s decision offered unequivocal support for the legality of the offsets portion of AB 32’s cap-and-trade program, a huge shot in the arm for momentum going into the second greenhouse gas allowance auction on February 19th. Similarly, by finding that the state’s offset program is in alignment with AB 32, a bright green light has been given for further investment in projects aimed to reduce pollution both in California and outside our borders.

In this suit, EDF joined as an official party to assist the State of California’s defense. Also joining in the defense was a collection of entities including The Nature Conservancy, the Climate Action Reserve and a collection of business interests. This broad spectrum of support for AB 32 shows that offset investments can deliver on multiple levels for the state.

First, offsets create new opportunities to fund upgrades and pollution reduction in sectors, including agriculture, forestry and industrial gases, that may not otherwise be covered under mandatory emissions limits. Pollution reduction in these sectors enables a greater overall response to climate change, which means positive impacts on the climate and human health.

Second, allowing high quality offsets ensures that a diversity of cost-effective pollution reduction projects can qualify for cap-and-trade compliance. This reduces overall program costs while maintaining the environmental integrity of the program.

As more projects and ideas develop under the AB 32 offsets program, California will be better able to transition to a low-carbon economy. In short, the decision of the Superior Court has authorized the continuation of a program that will be an integral part of California’s climate change goals, spur investment in a clean economy, and maintain California’s position as a leader in the fight to combat climate change.

California drivers and policy makers should be breathing an extra sigh of relief this week with the release of a new study by the California Electric Transportation Coalition (CalETC). The study, an evaluation of electricity use within the state’s Low Carbon Fuel Standard (LCFS), clearly shows that electrification benefits are on the horizon and oil industry funded analyses have yet again over-dramatized the difficulty of meeting one of the state’s landmark environmental laws.

In the study, CalETC shows that using electric passenger vehicles (both battery electric and plug-in hybrid vehicles), and electric off-road equipment (forklifts and trains), has the potential to generate a significant amount of creditable greenhouse gas reductions in the LCFS.

According to CalETC, three electrification solutions can cut up to 4 million tons of greenhouse gases per year by the year 2020, a significant portion of the total reductions required under the law. What’s more, since electricity as a fuel source costs one to two dollars per equivalent gallon less than gas and diesel, once the vehicles are on the roads and rails, the LCFS can actually save drivers a significant amount of money at the pump.

Prior industry reports on the LCFS like the one funded by the Western States Petroleum Association have lamented that compliance with the LCFS isn’t possible without oil companies going out of business or charging consumers significantly more at the pump. However, a plain reading of oil company cost analyses shows they purposely avoid consideration of the benefits of widespread deployment of alternative electric vehicles (EVs) in their research.

Not the first, probably not the last

Of course, this isn’t the first time industry cost estimates of environmental regulations, and specifically the LCFS, have emerged as highly suspect. For example, in September 2012, the non-partisan business group Environmental Entrepreneurs (E2) published a report showing how well positioned the US biofuel industry is to meet demand under the California standard – a direct counterpoint to recent oil industry estimates that say biofuels simply aren’t available.

In that E2 report, researchers found that 1.6 to 2.6 billion gallons of advanced biofuel will likely be produced in 2015, with increasing volumes thereafter, meaning LCFS compliance can be achieved solely through blending low carbon biofuels in the short, medium, and potentially long term. This blending will allow for compliance over and above what the electrification opportunities provide.

Similarly, for natural gas vehicles, the industry modeling of compliance scenarios assumes natural gas technologies won’t be sufficiently ready for widespread consumer use to be counted as a legitimate LCFS compliance opportunity. However, consistently low natural gas prices along with recent investments and R&D from companies like Chesapeake Energy Corp., Clean Energy, General Electric, Whirlpool and 3M have all been aimed at increasing the availability of natural gas as a fuel for passenger vehicles and heavy duty trucks.

In yet another analysis of LCFS compliance, it was found that “significant inaccuracies and faulty assumptions” led to the results of oil industry funded studies.

A first of its kind strategy whose time has come

California’s first-of-its-kind LCFS strategy for cutting climate change pollution from transportation fuel is designed to work alongside the state’s landmark cap-and-trade regulation between now and the year 2020, facilitating the transition of California’s transportation sector towards one which is lower carbon and is powered from an array of resources.

As Elisabeth Brinton, head of the Sacramento Municipal Utility District’s retail business, so aptly puts it, the California LCFS is “a great idea whose time has come.”

For more information about entities that support the California LCFS, (read here).

The results of California’s first ever auction for greenhouse gas (GHG) emissions allowances are public, marking the start of a new era for stimulating innovative solutions to combat climate change. Coincidentally, earlier today new atmospheric data was released by NOAA showing that 2012 is on pace to be the warmest year, eclipsing the mark set only two years ago.

By establishing a hard cap on emissions and creating a carbon price through a trading mechanism, California’s comprehensive GHG program complements, and is fine-tuned based on experiences from the world’s other climate change cap-and-trade mitigation programs. For example, lessons learned from the world’s largest cap and trade program in the European Union have shown that emissions of GHGs can actually decrease while the economy grows. Similarly, as shown by the Analysis Group’s report of the cap-and-trade program in the Northeastern United States, in addition to creating a strong signal for innovation, money generated through an auction can be invested in ways to cut GHGs even further.

Based on today’s results, California’s program is performing according to the expectations of economic experts and policy makers. The market price ($10.09) for credits that can be used in 2013 was slightly above the floor price of $10 dollars. Also, there were more bids for 2013 credits than credits sold, with 97% of allowances going to covered entities. Put simply, regulated businesses are taking this market seriously and believe they can cut greenhouse gas emissions even more cheaply than anticipated. This is a very good thing for California.

At the same time as the California carbon auction sold 23 million allowances for use starting in 2013, the market also sold 5.5 million allowances for use in 2015 and beyond. This is a clear signal that investors see this as a lasting program, and provides an important signal that the 9 billion plus dollars of clean tech investment made in California since 2006 has strong backing.

A California carbon price opens the door for cleaner energy and clean air, as we finally have an “official” cost of pollution. We are marching more resolutely than ever into an economically and environmentally sustainable future.

Like most legislative sessions in California’s recent history, the session that ended last Friday at midnight included a flurry of activity up until the final minute. For California’s AB 32 though, Friday’s closing moments were not just exciting, they were groundbreaking for climate policy.

After nearly 2 years of deliberation – the Legislature charted a clear path toward full implementation of the state’s landmark cap-and-trade regulation by resolving a contentious debate over whether and how to wisely invest the proceeds of the regulation’s permit auction. That debate, whether cap-and-trade should raise money in a greenhouse gas (GHG) permit auction process, was brought back to life when a letter from 56 prominent economists to Governor Brown urging him to not delay or scale back the auction was met with a similar letter from several state legislators taking the opposite position. Friday’s legislative action appears to have resolved that issue – meaning all signs are go for launch of the state’s comprehensive climate change regulation in November.

The legislature passed two bills, AB 1532 and SB 535, establishing a framework for deciding how to distribute the proceeds from the state’s upcoming auction of GHG permits. A core part of the approach, laid out in detail in AB 1532, is ensuring that all money raised in the auction be used to further the goals of the law (to reduce climate change pollution), and that spending decisions be made transparently, and in consultation with state agencies. SB 535 stipulates that some of the money must be used to the benefit of disadvantaged communities who already share the large brunt of California’s degraded air quality.

Though any legislative proposal is potentially subject to veto by the governor, EDF expects and is actively urging Governor Brown to sign both AB 1532 and SB 535 into law as quickly as possible.

By passing a comprehensive bill package that sets out how expenditure decisions are developed and made, and also ensuring that those decisions be in compliance with established legal standards, the legislature has put to rest the question over whether to move forward with the program as planned. Now, with AB1532 and SB535, the legislature has decided how to move forward with the program – giving a clear signal that cap-and-trade is intended to proceed in November 2012.

More detail on AB 1532, SB 535 and use of AB 32 auction proceeds:

AB 1532, sponsored by Assembly Speaker Perez, establishes a 3-year investment plan process for investing auction proceeds in projects that reduce GHGs through activities like renewable energy and energy efficiency, advanced vehicles, water and natural resource conservation, and waste reduction. These investments are scheduled to start in the 2013-14 fiscal year. The bill requires the investment plan be developed though a specified agency consultation process that includes public participation.

SB 535, sponsored by Senator De Leon, requires a minimum of 25% of CARB’s auction proceeds to be used in ways that benefit disadvantaged communities, either directly or indirectly. It also requires a minimum of 10% of auction proceeds directly fund projects within those communities.

Use of AB 32 auction proceeds – Wise investment of cap-and-trade auction proceeds can be an integral part of achieving these AB 32 emission reduction goals. As detailed in our June 2012 report, Invest to Grow, targeted investment of AB 32 proceeds can bolster California’s green energy economy, creating jobs and providing a new wave of customers to California businesses operating in sectors providing clean energy solutions. In addition, investment of auction proceeds into energy efficiency and clean energy will reduce air pollution, thereby improving health and air quality, fill gaps created by reduced state and federal funding, accelerate energy independence, and save businesses money by reducing energy demand.