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.

Wyoming Outdoor Council’s lead attorney on air quality

EDF and Wyoming Outdoor Council are teaming up to protect air and water quality from oil and gas development in the Cowboy State. One of the first efforts in this partnership surrounds strengthening air quality regulation for the oil and gas industry in Pinedale, WY where persistent ozone pollution threatens the health of local residents. EDF’s Natural Gas Media Director, Lauren Whittenberg, recently sat down with Bruce Pendery, Wyoming Outdoor Council’s lead attorney on air quality issues, and Jon Goldstein, EDF’s Senior Energy Policy Manager, to learn more about this partnership.

Lauren Whittenberg: Can you tell me about the pollution problems in Pinedale?

Bruce Pendery: Well, first and foremost, this pollution is a public health issue. Monitoring of air quality in the Upper Green River Basin in western Wyoming near Pinedale started to show dangerous levels of ground level ozone pollution in 2006. Ground level ozone (also known as smog) is created by a complicated interaction between two different forms of air pollution, oxides of nitrogen and volatile organic compounds. Oil and gas development in the Pinedale area is the main source of both. Since the problem was identified, the Wyoming Outdoor Council has been heavily engaged with regulators, local citizens and industry to seek a way to reduce this harmful pollution to protect the local citizens and gas field workers.

LW: What problems does ozone pollution cause?

Jon Goldstein: Ozone is a toxic air pollutant widely known to cause a host of respiratory problems. Exposure to ozone pollution, even in low concentrations, can cause serious health problems, including permanent damage to the lungs. To address some of these concerns, EPA introduced rules – for the first time – that established federal emission standards for natural gas well sites, as well as tightened existing standards for other aspects of gas processing and distribution. EPA’s clean air measures are important to reduce air pollution from the oil and gas sector. It’s also interesting to note that EPA – in part – based these federal standards on state level rules that have been in place in Wyoming for several years. However, a big opportunity exists to further strengthen federal and state regulations and reduce air pollution for communities dealing with poor air quality.

LW: What is the plan to address this harmful pollution?

BP: On January 10, the Wyoming Department of Environmental Quality (DEQ) announced its plan to address air pollution issues in the Pinedale area’s Upper Green River Basin. This plan is based on recommendations the department received from the Upper Green River Basin Air Quality Citizens Advisory Task Force,  a broad group of local citizens, elected officials, oil and gas industry and environmental representatives brought together by the department. I served on this task force and helped formulate the ten consensus recommendations we provided to the DEQ.

LW: What were the recommendations?

BP: These are very practical, common sense efforts to reduce emissions from oil and gas operations. Things like monitoring, investigating and plugging leaks from faulty oil and gas production equipment, reducing emissions from produced water tanks and ponds, and developing legal efforts to better regulate existing sources of pollution.

LW: You mentioned that these recommendations were “consensus.” What does that mean?

JG: That is what is so encouraging about this effort. Each of the ten recommendations has the buy in of every member of the task force – a very broad group of local citizens and elected officials as well as industry and environmental groups like Wyoming Outdoor Council. These practical recommendations followed nine months of deliberations by the task force and six lengthy meetings.

That such a broad group could reach consensus on ten methods to improve local air pollution is a testament to their dedication. This hard work will be well worth it when these ideas are made a regulatory reality, and air quality issues in the region begin to improve.

LW: What’s next?

JG: This action plan is a key first step; the DEQ has offered an outline that, if implemented quickly and completely, will help put us on the path toward cleaner, healthier air. But now is a crucial time in this process. It is now up to the DEQ to make these ideas a reality and implement them through regulatory processes as quickly as possible.

And we aren’t stopping with these ten items. We have advocated for additional efforts to improve air quality, including better measures to monitor maintenance activities such as liquids unloading, extending the state’s strong Presumptive Best Available Control Technology (P-BACT) requirements throughout the ozone nonattainment area, and ensuring that existing and grandfathered emissions sources are controlled.

A lot is at stake. Inaction or inadequate action will not improve air quality or protect the health of local residents.

LW: How will Wyoming Outdoor Council and EDF keep this momentum going?

BP: We will remain involved in this process to ensure that the DEQ follows through as quickly as possible. We plan to be very active in the formal regulatory development and adoption processes that will kick off in the coming months. And we hope that all Wyoming citizens will stay involved in this effort. Wyoming has a strong history of leadership in regulating air emissions from the oil and gas sector. Our plan is to defend this hard-earned reputation and protect people and our air quality in the process.

LW: What other efforts are on tap in Wyoming?

JG: Because of both the strong regulatory tradition that Bruce mentioned, and Wyoming’s status as one of the largest sources of domestic oil and gas resources, Wyoming is one of our target states for EDF’s natural gas work. We are working on a number of opportunities to raise the bar on air and water quality regulations and also improve drilling protections on federal lands. This includes adoption of strong new federal rules around the venting and flaring of natural gas. You will hear more about these efforts in coming months, but we are very happy to have a partner as well respected and experienced as Wyoming Outdoor Council  to help us make them a reality.

LW: Thank you both.

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).