California GHG reporting obligations extend to ethanol

By Graham Noyes, Keyes, Fox & Wiedman LLP | February 26, 2015

California has embarked upon the most aggressive greenhouse gas (GHG) reduction program in the world.  As a result of California’s Mandatory Reporting of Greenhouse Gas Emissions program (the MRR), biofuel producers, position holders, and companies that import ethanol into California are subject to reporting obligations. The California Air Resources Board has aggressively pursued enforcement actions against companies that failed to timely report in other sectors.  This article is intended to alert ethanol market participants of possible reporting obligations but does not provide legal advice and only summarizes one aspect of the MRR program. 

California has taken a leadership position among the states regarding the reporting, tracking, and control of GHG emissions. Broadly speaking, California reporting obligations in the transportation sector far exceed reporting obligations to the U.S. EPA under federal law.  The California Global Warming Solutions Act of 2006, better known as AB 32, authorized ARB to adopt regulations to require the reporting of statewide GHG emissions. ARB first approved regulations for the MRR in 2007. In 2010, ARB initiated a rulemaking to amend the MRR and revise the classification system to include three broad categories of reporting entities: stationary sources, suppliers (including suppliers of transportation fuels), and electric power entities.  ARB further amended the MRR in 2011, 2012, and 2013. The most recent revisions to the MRR were submitted to the Office of Administrative Law on Nov. 14, 2014, and were approved by the OAL Dec. 31, 2014.  The new MRR regulations became effective on Jan. 1, 2015.

 

MRR reporting requirements for biofuel importers

ARB has not yet released a final version of the new regulations. However, the following unofficial version was provided as part of the OAL rulemaking package. 

Section 95101(c) imposes MRR reporting obligations on fuel suppliers including biofuel importers, position holders, and biofuel production facilities.

 

§ 95101. Applicability.

(…)

(c) Fuel and Carbon Dioxide Suppliers. The suppliers listed below, as defined in

section 95102(a), are required to report under this article when they produce, import and/or deliver an annual quantity of fuel that, if completely combusted, oxidized, or used in other processes, would result in the release of greater than or equal to 10,000 metric tons of CO2e in California, unless otherwise specified in this article:

(1) Position holders at terminals and refiners delivering petroleum fuels and/or

biomass-derived fuels, as described in section 95121;

(2) Enterers that import transportation fuels outside the bulk

transfer/terminal system, as described in section 95121, and biofuel

production facilities that produce and deliver transportation fuels outside the

bulk/terminal system, as described in section 95121;

(…)

 

Under this regulatory system, ARB intends to track all significant quantities of ethanol that are utilized in the state of California. 

Under the MRR, regulated parties must track and report ethanol sold and delivered in California based on specified thresholds.  These thresholds are established by the GHG emissions that will result from the combustion or oxidation of the ethanol by the end user.  The first threshold for reporting is GHG emissions greater than 10,000 metric tons of carbon dioxide-equivalent (CO2e).  For ethanol, this equates to roughly 975,000 gallons within a calendar year. To the extent a company must report, the report must be filed by April 10.  There is significant preparation time required so the report should be commenced much sooner. ARB has a general policy not to grant time extensions.

The second reporting threshold is GHG emissions greater than 25,000 metric tons of CO2e. If total imputed GHG emissions exceed 25,000 metric tons, companies are required to obtain third-party verification services of the reporting and ensure that the third party submits a verification statement to ARB by Sept 1.  The 25,000 MT threshold is equivalent to approximately 2.4 million gallons of ethanol. Verification requires additional time and expense to complete.

 

Distinction between cap-and-trade and the MRR 

It is widely and correctly understood in the ethanol industry that the vast majority of the tailpipe GHG emissions attributable to ethanol do not trigger allowance obligations under California’s Cap-and-Trade program.  Even though no allowance obligation accrues, ARB mandates the reporting of ethanol’s imputed GHG emissions under the MRR. Prior to the recent amendments, this MRR reporting obligation was less clearly established. Nonetheless, ARB has taken the position in guidance documents and the rulemaking that the regulatory changes did not create new obligations but only provided clarifications to existing fuel supplier obligations.

Ethanol market participants that have MRR reporting obligations for 2014 must also consider whether the company had similar obligations in prior years. This process should be conducted with the assistance of internal or external counsel to benefit from attorney-client privilege and to enable a well-informed compliance strategy.