A Plan B for Air Quality
News broke recently that the U.S. Environmental Protection Agency and Department of Transportation would jointly be moving to revoke the waiver that California has used to set stricter auto emissions than the U.S. government. The only shock was that the action had taken so long to materialize. Long a leader in environmental protection, California put rules and procedures in place to manage air pollution before the Feds caught up with the Clean Air Act of 1970. California was awarded for its foresight: the bill enshrined a pathway for California to maintain continued dominion over its air through a waiver process. The Trump administration’s decision to rescind that special position was the least surprising development in the long running feud between Trump and the Golden State. As the news exploded across the newswire and prompted to-be-expected reactions from both sides in the twitterverse, I felt a smirk come across my face… Trump may be claiming victory (possibly prematurely!), but California has the upper hand in this war: California’s LCFS program will naturally respond to Trump’s actions, limiting the impact.
The stricter auto emissions standards currently under attack are just one quiver in use by California and its allies in the fight to reduce carbon emissions. Another tool in the arsenal, the Low Carbon Fuel Standard (LCFS), is proving to be equally powerful and, more importantly, durable. But for all the attention that our national media is heaping on the auto-emissions waiver, few are aware of the LCFS program or the work it is doing to enable a cleaner future.
LCFS is a state-run program enacted in 2006 under Governor Schwarzenegger through AB32 that is administered by the California Air Resources Board. Adopted in 2009 and implemented in 2011, the regulations underpinning LCFS require the producers of refined road-ready fuels to reduce the “carbon intensity” of their fuels, with ratcheting targets that continually require further reductions year-over-year. Using a scientifically-derived and technology-neutral process, the LCFS program awards credits to fuel producers who make liquid fuels that produce less CO2 (or CO2-equivalents) over their lifecycle, as compared to conventional methods. These fuels, which are less carbon intensive, lower the total CO2 emitted by the transportation sector when blended into the fuel stock. Fuel producers can reach their mandated carbon-intensity through new technologies and processes, or by buying LCFS credits from third-parties with more efficient processes in place.
The beauty of the LCFS regime is that it does not pick winners or losers. Unlike the investment and production tax credits that have helped wind and solar run down the cost curve and compete without subsidy, the LCFS program is not technology specific. Any method that produces a cleaner gallon of fuel (so long as it’s sold in California) or that sequesters CO2 is eligible for credits under the program. May the best technological solution win!
Can you make a biofuel from plants or plant wastes? You qualify for credits since a portion of the carbon is non-fossil. Can you pull CO2 out of the air and bury it underground? That process is carbon negative and you qualify for LCFS credits, as well. Did you build a solar farm that will be used to power EVs? Congrats, have some credits. As the carbon-intensity target under LCFS rules gets stricter over time, producers must create even more climate-friendly fuels or buy still more credits to compensate for their conventional fossil products, which increases the demand for cleaner solutions and supports the price of the credit.
So, how is this program working? LCFS is the major driver of revenue for several innovative, first-of-a-kind facilities being built around the United States right now. Without this subsidy, these projects would not be economically viable; as with wind and solar, the LCFS program is helping these technologies get to market, and their success at scale will help reduce prices and further enhance the economics of alternative fuel sources. Meanwhile, investors are stepping up to support these projects, assuming the risk that future LCFS prices will remain stable and attractive. Their confidence is well-founded: generators of LCFS credits today are banking a portion of their credits for future years, betting that future prices will be higher than today and justifying a ‘hold’ approach on the asset. Billions of dollars of credits now sit unused in savings, waiting for a future where their value is even greater. Other regions have taken notice of this success, and proposals to replicate California’s system are gaining traction in the Pacific Northwest and Canada. The demand for credits is expected to grow substantially over the next decade as more states come online with their own programs.
The great irony for the Trump administration, and all those fighting against California’s clean-air waiver, is that if they “succeed” and auto fuel-economy stagnates, the resulting increased demand for liquid fuels will further enhance the value of the LCFS credit. This provides more financial incentive for new technologies and developers to enter the space and reduce the carbon footprint of transportation fuels. Perhaps this is not the shortest route to decarbonizing the transportation sector, but it’s not a bad Plan B. When it comes to the future of carbon, California is playing for keeps.